Innovation in Plan Design - Interview with Steven Montagna, City of Los Angeles

Can you summarize the basic plan design of the City of LA’s DC plan?

The City of Los Angeles Deferred Compensation Plan (DCP) is an Internal Revenue Code Section 457 plan. As of 12/31/21 the DCP had $9.3 billion in assets and over 53,000 participants.

The DCP is governed by a Board composed of nine members, including one elected representative from each of the City’s three pension plans; three positions overseeing the three pension plans; the Personnel Department General Manager; a retired participant representative; and a labor organizations representative. The DCP is staffed by the City’s Personnel Department.

Key plan design features include Roth 457, pre-tax 457, Catch-Up, accrued leave contributions, active and retired loans, hardships, purchase of service credit, and rollovers. The DCP does not presently offer investment advice or managed account services. The DCP is in the process of implementing a Deemed IRA as an adjunct to the 457 plan.

Program eligibility is a function of membership in one of the City’s three defined benefits plans: contributing members of the Los Angeles City Employees’ Retirement System (LACERS), the Los Angeles Fire and Police Pensions (LAFPP), or the Water and Power Employees’ Retirement Plan (WPERP) are eligible to participate in the DCP.

The Board has contracts with the following entities for key DCP services:

• Voya Institutional Plan Services (VIPS) and Voya Trust Company to provide administrative, recordkeeping, communications, self-directed brokerage, and trustee services.
• Bank of the West and East West Bank to provide FDIC-insured savings accounts.
• Galliard Capital Management to provide stable value fund management services.
• Mercer Investment Consulting to provide investment consulting.
• Segal Consulting to provide administrative and regulatory consulting.
• Crowe LLC to provide auditing services

What are your thoughts on the most appropriate size range of the investment line-up? What are some pros and cons, in your views, for both a more complicated one and for a more consolidated one?

The DCP has a streamlined investment menu of 12 options including:

• FDIC Insured Fund
• Stable Value Fund
• Five Risk-Based Asset Allocation Funds
• Large-Cap Fund
• Mid-Cap Fund
• Small-Cap Fund
• International Fund
• Self-Directed Brokerage Window (full menu)

When we developed a plan for our consolidated fund line-up we wanted to anchor it around the participant’s relationship to risk and reward. To do that, it was critical to meet a few essential objectives. First, we wanted to make sure that we branded the investment choices by major investment asset classes that have distinct risk/reward characteristics. Second, we wanted to make sure that we eliminated any redundancy, so that we’re not, for example, including multiple large-cap offerings. And finally, we wanted that list to be small, because the more choices you provide the more difficult you’re making it for participants to make their risk/reward assessment. Including our five risk-based asset allocation funds, and our Self-Directed Brokerage Window, that’s twelve options. But the reality is that most of our new participants select one of the asset allocation funds, so they’re really choosing from a list of five, and whatever that choice is, they’re achieving diversification. In my mind, it’s pretty hard to argue with the success of that. They can change those risk designations over time if they want to, but we’re not pre-determining that choice for them (as we would if were offering target-date funds). Many of our participants want to maintain moderate or aggressive risk nearing and through retirement, and given the income they receive from our defined benefit plans, that’s entirely reasonable. For participants who want a more active engagement with risk/reward, they can use the brokerage window. Over 12% of our participants use the brokerage window, which contains 14.5% of our assets. What this means is that who want more choices have everything under the sun available to them, but the 88% in the core menu are perfectly content, and well supported by, a simpler set of options. So the motto is – simplicity in service of supporting the individual participant’s relationship to risk/reward.

There is an increasing trend among plan sponsors to address the need for customization and dynamic advisory services for participants, what is your view on the best way to incorporate these features into a DC plan?

We’re still reviewing the question of advisory services. Investment advice is another potential tool to address the fundamental task of supporting the individual participant’s relationship to risk/reward. The theoretical value is that advisory services engage the participant with that risk/reward assessment, either through automation or personalized advice, but we have to make sure the services offered are available to those who want them and aren’t re-solving a problem that many of them have already addressed. For example, if a participant has already achieved diversification by selecting an asset allocation designation based on that individual’s unique relationship to risk/reward, then the advisory service would not only be redundant, it would add an unnecessary cost. On the other hand, personalized investment advice of the type where a participant has someone they can talk to, particularly at moments when they’re making critical choices in reaction to their considerations of risk and reward, can be valuable, but the rewards and controls need to be carefully vetted by the plan sponsor.

Any reflections on your career dealing with running and managing a DC plan? What have been some of the standout innovations in your views, especially pertaining the plan design?

I have so many reflections, and front of mind for me these days are thoughts around succession, governance, process, and the hard work of driving success. So if I can be a little philosophical about it, I would repeat something I heard once in an interview of a small business owner, who commented that the mantra she has for her employees is, “iteration, not perfection.” What she meant by that is that she didn’t want her workers trying to be perfect because it could make them reluctant to change out of fear of being “imperfect.” I think those of us in the public sector can learn a lot from that, because our organizations have a tendency to push us towards living in established policies, rules, and processes. Some of the words I dread hearing the most are, “But that’s what we did the last time.” Or even worse: “But that’s not what you said the last time.” I might have been wrong the last time! Or I might have been right for the moment, but wrong for a greater possibility. Typically our past innovations – e.g. early adoption of loans and Roth savings, creating custom risk-based funds for our asset allocation menu options, incorporating participant goals and outcomes strategies into our program DNA – had to confront some conventional wisdom and to some degree go against the tide. So if I have any guidance of any value to offer others, it would be this – question everything, especially your own thinking. Don’t go with the crowd until you’re convinced that’s where you belong. Test, refine, improve, and evolve. Don’t worry about being wrong. Doing something better than you did it before is what makes this job fun.