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2 APPEARANCES:
ACCURATE STENOTYPE REPORTERS, INC. 3
ACCURATE STENOTYPE REPORTERS, INC. TRUSTEES/INTERNAL IMPROVEMENT TRUST FUND 4 2 (The agenda items commenced at 9:51 a.m.) 3 GOVERNOR BUSH: Board of Trustees. 4 MS. ARMSTRONG: Sir -- 5 GOVERNOR BUSH: Eva. 6 MS. ARMSTRONG: -- good morning. 7 Real quick, we had an item that was 8 scheduled to -- specifically for this Cabinet 9 meeting. It was a request from the Department 10 to revoke a submerged land lease, and we're 11 asking that it be deferred to January 29th, to 12 give our attorneys and his, a little more time 13 to see if they can come to an agreement to 14 resolve it. 15 TREASURER GALLAGHER: I make a motion on 16 the -- make a motion on the minutes first. 17 GOVERNOR BUSH: On the minutes? 18 MS. ARMSTRONG: I don't know -- I don't 19 think we have -- 20 TREASURER GALLAGHER: That -- 21 MS. ARMSTRONG: -- minutes on this one this 22 week. 23 TREASURER GALLAGHER: I'm in the wrong 24 place. 25 MS. ARMSTRONG: But thank you for being ACCURATE STENOTYPE REPORTERS, INC. TRUSTEES/INTERNAL IMPROVEMENT TRUST FUND 5 2 TREASURER GALLAGHER: I apologize. 3 Move to defer to November 27th? 4 MS. ARMSTRONG: January 29th. 5 TREASURER GALLAGHER: January 29th. 6 ATTORNEY GENERAL BUTTERWORTH: Second. 7 GOVERNOR BUSH: That's -- moved and 8 seconded. 9 Without objection, it's approved. 10 Thank you. 11 (The Board of Trustees of the Internal 12 Improvement Trust Fund Agenda was concluded.) 13 * * * 14 15 16 17 18 19 20 21 22 23 24 25 ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 6 2 can stay. 3 TREASURER GALLAGHER: Anybody that wants to 4 switch with me -- 5 GOVERNOR BUSH: Anybody that wants to 6 leave, can leave, too. 7 ATTORNEY GENERAL BUTTERWORTH: Watch it on 8 TV, Governor. 9 TREASURER GALLAGHER: Watch CNN. 10 GOVERNOR BUSH: It's riveting. 11 TREASURER GALLAGHER: I'm sure you will. 12 I bet you will. 13 COMMISSIONER BRONSON: We'll be thinking of 14 you. 15 GOVERNOR BUSH: Thank you. 16 (Commissioner Bronson and 17 Attorney General Butterworth exited the room.) 18 GOVERNOR BUSH: Item 1. 19 TREASURER GALLAGHER: Motion on minutes. 20 COMPTROLLER MILLIGAN: Second. 21 GOVERNOR BUSH: Moved and seconded. 22 Without objection, it's approved. 23 MR. HERNDON: Item Number 2 is approval of 24 a fiscal determination of an amount not 25 exceeding eleven million five hundred and ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 7 2 Housing Finance Corporation housing revenue 3 bond for Mission Bay Apartments in 4 Brevard County. 5 COMPTROLLER MILLIGAN: Move the resolution. 6 TREASURER GALLAGHER: Second. 7 (Commissioner Crist exited the room.) 8 GOVERNOR BUSH: Moved and seconded. 9 Without objection, it's approved. 10 (Secretary Harris exited the room.) 11 MR. HERNDON: Item Number 3 is 12 consideration of recommendations by the SBA 13 staff and by the SBA Advisory Councils 14 regarding the role of bundled providers in the 15 Public Employee Optional Retirement Program. 16 Governor, and members, as you'll recall, we 17 have been working diligently for the last year 18 or so, heading toward at least this one 19 destination, among others, in terms of trying 20 to resolve the question of the actual makeup of 21 the investment line-up in the Public Employee 22 Optional Retirement Program. 23 And before I get into the body of the 24 specific recommendations themselves, I thought 25 it might be worthwhile to give you a little bit ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 8 2 presented to the Aides, and to the joint 3 advisory councils the other day. So I think it 4 helps to set the stage a little bit. 5 And the first thing that we have for you is 6 a little chart that captures the experience of 7 Tony. And Tony is a twenty-five year old 8 parole officer. 9 He is a persona that was constructed, along 10 with five others, by Ketchum, our media firm, 11 and is based on the results of the research 12 that was done through the employee surveys. 13 If you'll recall, we did 5,000 employee 14 surveys, and we constructed six different 15 personas that are representative -- as you 16 might expect, there are still 17 generalizations -- but are representative of 18 our work force. 19 And we picked Tony because there's been 20 some questions about what happens to the 21 employee when he starts into the enrollment and 22 the education process. 23 So if we -- if you're willing, we'll follow 24 Tony along for a few moments. You'll recall in 25 the videotape that we showed you last time, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 9 2 that he was worried about what was -- he was 3 going to do this weekend, and that was as far 4 as he was thinking about. 5 And all the six personas were in the 6 videotape, and you'll see throughout the 7 literature that we're going to show you today, 8 the other personas as well. 9 But Step number 1, Tony receives in the 10 mail, from the Florida Retirement System, a 11 personalized benefit statement. It contains a 12 detailed brochure that provides him with his 13 estimated ABO; his PIN number to access the 14 websites and so forth; how to sign up for 15 workshops; and the form to make the choice, if 16 that's what he would like. 17 Now, that personalized benefit statement is 18 quite detailed. And, in fact, just last night, 19 was another one of the focus groups that we've 20 been running with the help of our media folks, 21 trying to get that benefit statement designed 22 and structured in such a fashion that it really 23 communicates the information in as -- as 24 powerful a way as possible. 25 The second step for Tony then is to attend ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 10 2 recall that Ernst & Young is the independent 3 education firm that we've hired to provide both 4 employer and employee workshops. But the 5 employee workshops don't start until late in 6 February of next year. 7 I might add parenthetically, and some of 8 you may be aware of this, that the employer 9 workshops are underway now, and are going on 10 throughout the state of Florida. We have 11 30 workshops scheduled for employers. And 12 there's one here in Leon County today, as a 13 matter of fact, as there was yesterday 14 afternoon. 15 But the employee workshops that 16 Ernst & Young puts on, there are 3,000 of them 17 scheduled over the course of next year, where 18 Tony gets the details on both plans, he gets 19 information on investing, he gets information 20 on retirement planning basics, and he gets 21 quite a bit of information on how to use the 22 educational resources and tools. 23 He also has the opportunity, if the oppor-- 24 if the time permits, to talk with the 25 Ernst & Young staff that are there at that ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 11 2 Tony can then call the MyFRS Financial 3 Guidance Line, which is manned by Ernst & Young 4 financial professionals. These are 5 credentialed employees hired by Ernst & Young, 6 and has unlimited access, at any time that the 7 hot line is open, and as much time as they -- 8 as Tony would like, to talk to Ernst & Young 9 about the issues related to choice and 10 retirement planning and investing, and so on 11 and so forth. 12 He can certainly access at any point along 13 the way the MyFRS website, use software that is 14 being constructed by Financial Engines, you'll 15 recall the other vendor that we have hired in 16 this regard. 17 They have a tremendously powerful tool that 18 we'll look at a little bit -- in a little bit 19 of detail, because I think it's quite 20 informative. 21 It really allows you to do a lot of 22 personalized what-if modeling. You can move 23 the toggle switch that's on the software back 24 and forth, and you can change your salary 25 expectations, you can change your retirement ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 12 2 GOVERNOR BUSH: My salary -- 3 MR. HERNDON: -- if -- if that's -- if 4 that's your expectation is that you're going to 5 have a higher salary, you can do those kinds of 6 things, and it gives you different kinds of 7 outcomes based on your built-in set of 8 expectations. 9 You can at that point on the website also 10 use the website to sign up for the choice that 11 you make electronically, you can do it by hard 12 copy, you can also do it by phone. So you have 13 a fairly broad number of ways that you can make 14 those choices. 15 Now, if Tony decides at that point to stay 16 in the pension plan, he's essentially finished. 17 He doesn't really need to make any more 18 decisions about investment choices and 19 so forth. 20 But CitiStreet, the third party 21 administrator that has been hired, will mail a 22 confirmation letter to Tony; and notify the 23 Division of Retirement; and Tony's employer, 24 whomever that may be -- in this case, the -- 25 the parole system -- of his decision. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 13 2 plan, then he'll have an opportunity, again 3 through the use of Financial Engines software, 4 to start looking at individual products. And 5 those products will be presented to him, based 6 on the final selections that you all make as 7 Trustees for the system in an impartial, 8 nonsales related message. 9 And you heard the comment that 10 Maurice Helms from the Division of Retirement 11 made the other day, our purpose in this program 12 is to tell, and not sell. We're not trying to 13 sell any particular product or program, but 14 rather to give Tony, and all the rest of the 15 folks in the system, the best information that 16 we can provide them with. 17 Ultimately, Tony makes some decisions, he 18 makes an asset allocation decision, he makes a 19 decision about which particular product or set 20 of products he wants to invest his money in, 21 and communicates that. 22 Again, he can do it in written form, in 23 e-mail, and so forth, and CitiStreet starts to 24 execute those arrangements. And you'll see, as 25 we've outlined on Step 7, CitiStreet then ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 14 2 processes, the most critical of which are 3 certainly to notify his employer of Tony's 4 decision to make sure that the investment firms 5 themselves are aware that Tony has decided to 6 invest money with them, that -- how much money 7 is coming, sets up the accounts, and all the 8 rest of the administrative work that's 9 associated with that kind of ongoing process. 10 At the same time, the asset transition 11 broker that we are working with, 12 Morgan Stanley, and others, begin to put 13 together as people start to make these 14 decisions, what will be the first in a series 15 of nine separate movements of money, nine 16 separate tranches, starting each month. 17 Throughout the nine-month period of 18 enrollment, we'll move money each month to fill 19 the bucket of the employees who've made their 20 investment choices. 21 And so we'll be buying and selling 22 nine different times over that -- that course 23 of time. And that's what Morgan Stanley will 24 be helping us to do. 25 And Tony's employer, of course, has ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 15 2 changing their payroll. We're very 3 appreciative of the Division of Retirement's 4 help in this regard. They are going to be on 5 the front end of this processing system. 6 It made very little sense to us it seemed 7 to have separate movement of money going for 8 the DB plan, or the DC plan, since we already 9 had one front-end processing system in place. 10 So the Division of Retirement is going to 11 continue to -- to do that. And -- and we're 12 pleased with the way that has worked out. 13 The investment providers, of course, get 14 their notification of Tony's decisions, and 15 start to get their money, and the Division of 16 Retirement starts to get the proper 17 notifications that all of these things have -- 18 have taken place. 19 Now, this is obviously a simplification, 20 but it's really intended to just give you a 21 sense of what happens to a typical employee as 22 they go through the course of this process. 23 I don't want to short-circuit any 24 questions, but I -- I am mindful of your time, 25 and I also want to spend a moment, if we can, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 16 2 is in front of you, and the color brochure and 3 on the screens, because I think it also tends 4 to reenforce some of the critical points that 5 need to be made with respect to the employer 6 and employee education. 7 And you can see across the top, a calendar 8 in -- in multicolors -- 9 GOVERNOR BUSH: Where -- where -- 10 I'm sorry. 11 MR. HERNDON: I'm sorry. 12 I beg your pardon. It's this form right 13 here. 14 TREASURER GALLAGHER: We didn't get that. 15 GOVERNOR BUSH: The little one. It's 16 underneath that -- 17 TREASURER GALLAGHER: Oh, that one. 18 Thank you. 19 MR. HERNDON: Sorry. 20 And it's also in the screen up in front of 21 you. I appreciate it's a little difficult to 22 read that. 23 But the employer education period is what I 24 mentioned. As you'll see in the calendar 25 across the top of the box is what we're in ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 17 2 800 employers out there to try and make sure 3 that they're educated about what it is that 4 we're asking them to do. 5 And in many respects, they are the 6 frontline troops. I mean, we recognize full 7 well, there an awful lot of employees that are 8 going to go to their HR offices and so forth to 9 talk to them about what to do. 10 In addition to that, they have the 11 day-to-day kind of mechanical side of things. 12 I don't mean to -- to minimize it, but the 13 payroll processing side of things that they 14 have to do. 15 So we want to make sure that they're 16 comfortable on both -- on both sides of those 17 things. And those are, as I indicate, going on 18 right now. 19 We also have available for the employers, 20 an Employer Briefing Kit, which we've put in 21 your packet for you to glance at at your 22 leisure, including a comparison of the pension 23 plans, the two -- pension plan and the 24 investment plan, frequently asked questions, 25 some additional guidance, and so on and ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 18 2 And I would just commend that to you at 3 your leisure. 4 And you will see, by the way, the -- the 5 same branding that we talked about earlier. 6 We've branded a new logo, new faces, a new 7 color scheme, and everything else for the FRS 8 that we think, based on the focus groups and 9 the research and everything that was done, is 10 really going to be quite popular and quite 11 readable by the -- by the members. 12 The employer portion of the MyFRS.com 13 website is up and running, and is available to 14 employers. It's up now, and is running now, 15 and is available to them to access at their 16 convenience, as -- as well as I mentioned, 17 the -- the seminars. 18 Now, starting in December, not very far 19 away actually, we will be mailing to every 20 employee essentially what amounts to an 21 awareness kit talking about the program itself, 22 what's coming, and a road map, somewhat similar 23 to the kinds of information that you're seeing 24 today, although obviously in -- in a more 25 condensed form, describing what's going to be ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 19 2 going to be made available to them. 3 The preview version of MyFRS.com website 4 for employees is also up and available now on 5 the site, and we're going to show you that in 6 just a moment. Unfortunately, this room 7 doesn't have the technology to let us go live 8 to the site, as we were able to do the other 9 day. 10 While we have some -- 11 TREASURER GALLAGHER: Semantics. 12 MR. HERNDON: -- we have some capacity 13 problems, but -- but we'll be able to show you 14 a few of the slides just in snapshot form, just 15 to give you some sense of it. 16 And I would encourage you, if you get the 17 opportunity, to -- to go to the site and take a 18 look at it. I think you'll find it to be quite 19 worthwhile. 20 And we have the Employee Outreach Kit 21 that's going to be mailed starting at the end 22 of February, which is the kit that I mentioned 23 as the first step that tells him the -- which 24 is that personal benefit comparison that shows 25 him his accumulated benefit obligation, how ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 20 2 and the -- the choices are, and why they exist. 3 All the investment fund preview information, 4 you know, keys to successful retirement 5 planning, and so forth. 6 And one of the things that I really want to 7 stress here, because I think it's -- it's 8 especially critical, and you, and the 9 Legislature deserve a lot of credit for this, 10 prior to the existence of the defined 11 contribution plan, of course, the pension plan 12 didn't really have a choice built into it. It 13 was a -- you were a member of the defined 14 benefit plan, and that was it. 15 Well, now, with the choice, members will 16 get as part of the program, and as part of 17 being a member of the Florida Retirement 18 System, a very sophisticated and powerful 19 education program that teaches them about 20 investing, and about retirement planning. 21 And these are just wonderful tools for 22 employees to have. And they really don't exist 23 in an awful lot of -- of cases around the 24 country. 25 And it's something that I think the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 21 2 of, to be able to offer that service to our 3 employees. 4 So I would encourage you to take a look at 5 those websites at your convenience. 6 Well, you see the end of February and the 7 first part of March, the State employee 8 outreach period beginning. 9 Then the choice period begins for State 10 employees in June. And you'll recall, this is 11 kind of a rolling three-month process. You do 12 education, and then enrollment. 13 And while you're doing the enrollment, 14 you're doing the education of the second group, 15 and so on and so forth. And that goes on 16 through the spring of 2003. 17 Throughout this time, of course, you can 18 access the websites, you can access the 19 financial counselors through MyFRS Financial 20 Guidance hot line, the toll free line at 21 1-866-44, dash, MyFRS, and get as much 22 information as you would like on the choice 23 that is confronting you, and the investments, 24 and -- and so on and so forth. 25 Of course, concurrent with all of that are ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 22 2 described that will begin a little bit later on 3 in the spring. 4 And there again, it is an Ernst & Young 5 finance professional -- credentialed 6 professional who is providing that information 7 to you in the form of a one-on-- one to some 8 number -- 100 seminar in the way of -- of 9 information. 10 We are extending the service of 11 Financial Engines and Ernst & Young and 12 CitiStreet, and all of these organizations as 13 widely and as deeply into the employee pool as 14 we possibly can, because we think it is 15 absolutely essential that they have access to 16 this information. 17 And there's been quite a bit of discussion 18 about the fact that the program is going to 19 charge $200 per hour for financial counseling. 20 And I think it's important to take a moment and 21 clarify just exactly what is contemplated here. 22 Everything that you've seen up till this 23 point is free to the employee: Unlimited 24 access to certified and credentialed 25 Ernst & Young counselors; unlimited access to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 23 2 workshops, however many they want to attend; 3 access to CitiStreet; and on and on. 4 What we're not providing in the program, 5 and I sus-- suspicion that very few 6 organizations anywhere in the world provide, is 7 personal financial planning, distinct from 8 making a choice about the DB/DC plan, or about 9 which investment options do they make within 10 the DC plan. 11 And that's what is being offered to the 12 employees at a $200 per hour fee. And it was 13 our belief that that's a very valuable service 14 to have. But an awful lot of our employees 15 don't want that, and will not pay for that. 16 And so why should we charge everybody in 17 the program for it. So it's set up on a fee 18 for service basis. 19 GOVERNOR BUSH: Commissioner -- 20 MR. HERNDON: And for those who wish it -- 21 Yes, sir. 22 TREASURER GALLAGHER: Can the payment of 23 this -- in other words, you get the service, 24 can this come from the pension money like other 25 services are being paid? Or do I have to pay ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 24 2 MR. HERNDON: It would come from after tax 3 dollars. I mean, it's your personal -- 4 TREASURER GALLAGHER: I have to write -- 5 MR. HERNDON: -- payment. 6 TREASURER GALLAGHER: -- a check. 7 MR. HERNDON: That's right. 8 TREASURER GALLAGHER: I can't make a 9 decision to go get that, and have it paid for 10 out of my pension money, because it's advice 11 about my pension. 12 MR. HERNDON: It's about your personal -- 13 TREASURER GALLAGHER: Isn't there a 14 window -- 15 MR. HERNDON: -- it's about your personal 16 financial situation in its -- in its totality. 17 TREASURER GALLAGHER: And -- 18 MR. HERNDON: It would include your pension 19 information. 20 TREASURER GALLAGHER: So you don't -- 21 there's not a way that you could have this be a 22 pension cost so it would be a -- 23 MR. HERNDON: Well, if the program wanted 24 to bear the cost of making that service 25 available for everybody, then I think we ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 25 2 But it was our suggestion that it made more 3 sense to do it on a fee for service basis for 4 those individuals who wanted to avail 5 themselves of that service. 6 TREASURER GALLAGHER: I'm between the two. 7 MR. HERNDON: Right. 8 TREASURER GALLAGHER: I'm a fee for 9 service, but it comes out of my pension 10 money -- my personal pension money, instead of 11 me writing a check. 12 MR. HERNDON: Right. 13 TREASURER GALLAGHER: Is there -- 14 MR. HERNDON: I -- I don't know of any way 15 that that can be done. I mean, we could 16 certainly look into it. 17 I don't know if the folks who are here, 18 who've had experience doing this may have an 19 answer. And we'll -- we'll let them think 20 about it and give you an answer in a moment if 21 they've -- if they've got any-- 22 But I'm not aware of any way that that 23 could be done to draw it out of your personal 24 account. And that -- 25 TREASURER GALLAGHER: Well, it would be ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 26 2 MR. HERNDON: Yeah. I mean, it's -- it's a 3 distribution out of a tax deferred account. 4 Presumably it would be taxable at your point of 5 receipt -- 6 TREASURER GALLAGHER: Well, it's a ser-- 7 I guess because it's an individual service, I 8 have a problem. 9 MR. HERNDON: Yeah. Exactly. 10 TREASURER GALLAGHER: If it was a service 11 that would -- that everybody would get, it 12 wouldn't matter. 13 MR. HERNDON: I think that's right. And 14 I'm -- 15 TREASURER GALLAGHER: And I don't think 16 it's probably very fair to -- 17 MR. HERNDON: -- I don't know if -- 18 TREASURER GALLAGHER: -- have everybody pay 19 for the few people that are going to go and 20 want to do this -- 21 MR. HERNDON: Right. 22 TREASURER GALLAGHER: -- when you're going 23 to get -- be able to do almost all of it 24 on line. 25 MR. HERNDON: Right. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 27 2 Ernst & Young, I mean, they may have a -- an 3 answer to your question more directly. 4 I'm not aware that there's a way that it 5 could be done as you suggest. But -- but 6 perhaps there is. 7 GOVERNOR BUSH: You don't charge them 8 200 bucks per hour, does it -- do they do it 9 like lawyers? If it's 15 minutes, it's 10 200 bucks, or -- 11 TREASURER GALLAGHER: That's a good 12 question. 13 MR. HERNDON: I don't know the answer. 14 We -- we'll ask Ernst & Young to give you an 15 answer to that. I think -- 16 GOVERNOR BUSH: Sorry, Jim. 17 TREASURER GALLAGHER: You're right. With 18 my assets, I wouldn't need more than 19 15 minutes. 20 GOVERNOR BUSH: Exactly. I mean -- 21 MR. HERNDON: Remember, this is full 22 financial -- 23 GOVERNOR BUSH: I'm curious -- 24 MR. HERNDON: -- counseling. 25 GOVERNOR BUSH: -- about the question. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 28 2 GOVERNOR BUSH: I mean, is it -- 3 MR. HERNDON: -- this is about, you know, 4 insurance, home mortgages, autos. I mean, this 5 is a full financial counseling -- 6 GOVERNOR BUSH: Do they charge by the -- do 7 they -- does anybody know? 8 MR. HERNDON: Bill -- Bill Arnone is here 9 from -- 10 MR. ARNONE: It's the -- it's the price per 11 session. It's been our experience, Governor, 12 everyone takes full advantage of the time for 13 the -- 14 GOVERNOR BUSH: So -- 15 TREASURER GALLAGHER: You get an hour. 16 MR. ARNONE: You -- 17 GOVERNOR BUSH: You get an hour if you 18 spend 15. 19 MR. ARNONE: We haven't had anyone to spend 20 15. 21 TREASURER GALLAGHER: It's hard to spend 22 15, unless you're me. 23 MR. HERNDON: Well, that -- that briefly 24 walks you through the education program. I 25 don't want to again give short shrift to any of ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 29 2 questions that you might have. 3 But I know you've got a lot of -- of 4 territory to cover today. And I thought it 5 would be worthwhile to give you that. 6 We do have -- 7 TREASURER GALLAGHER: Let me -- let me just 8 clarify something. 9 MR. HERNDON: Yes, sir. 10 TREASURER GALLAGHER: That's to go in the 11 office and talk to a financial advisor. 12 MR. HERNDON: That's correct. 13 Face-to-face. 14 TREASURER GALLAGHER: You can talk to them 15 as much as you want free any time -- 16 MR. HERNDON: That's correct. On the 17 phone. 18 TREASURER GALLAGHER: And -- and get your 19 questions answered, or anything else. 20 MR. HERNDON: That's right. 21 TREASURER GALLAGHER: Okay. 22 MR. HERNDON: Yes, sir. 23 I -- I appreciate you making that point, 24 because that's an important point. 25 I mentioned the -- MyFRS.com website. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 30 2 facts about it being open to employers on 3 November 1st, and open to employees on 4 November 1st. 5 Here are some of the web pages. This is 6 the preview version of the MyFRS.com website 7 for employees. 8 As you'll see, we have 112 days left till 9 countdown as it -- as it ticks off. And we're 10 not going to belabor this. 11 We have some of these screen shots 12 available for you. And, again, the -- the site 13 is up and running, and you can access it live 14 if you'd care to -- 15 TREASURER GALLAGHER: And you go -- can you 16 go in and begin to log in and get the 17 information that you have -- that's available 18 now on your FRS employment, and the things that 19 I see in here, your -- what if you stay in a 20 pension plan type things, and what if -- is 21 that -- 22 MR. HERNDON: Some of the -- 23 TREASURER GALLAGHER: -- there -- 24 MR. HERNDON: -- information is in there 25 and loaded. But an awful lot of it is not yet. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 31 2 live in the full sense, and giving you all of 3 that employee specific information till later 4 on in the spring. 5 TREASURER GALLAGHER: Okay. 6 MR. HERNDON: You'll see here, employee 7 log-in. Remember, every employee's getting a 8 PIN number. Passwords, those are things that 9 are being communicated to them. 10 And here is where they -- the program 11 actually -- the software actually splits at 12 this point, and moves over to the 13 Financial Engines side of things, which now 14 starts to say, all right, you know, we've -- we 15 know what the investment choices are, which is 16 one of the major missing links, Commissioner, 17 that -- that you're concerned about. 18 We don't have those decisions made at this 19 point, so we really can't fill in a lot of 20 these blanks. And -- and here's how you start 21 to evaluate the relative merits and so forth of 22 these various choices that are available to 23 you. 24 And descriptions about what if you stay in 25 the pension plan. And you'll see the estimates ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 32 2 the plan experience is over time. 3 And as I mentioned before, I think it may 4 be the -- the next slide that shows it -- 5 perhaps it's a little bit further on -- there 6 are in one of these slides a series of toggle 7 switches, as I mentioned before, that allows 8 you to toggle back and forth and change the 9 assumptions -- and maybe this is it coming up 10 here -- that lets you set specific choices for 11 compensation and years of service and so on and 12 so forth. 13 Again, I don't want to spend a lot of time 14 on this. I think the website is -- is quite 15 interesting, and -- 16 There's -- there's the toggle switches that 17 I was talking about. Creating your own 18 strategy -- 19 TREASURER GALLAGHER: That's cool. 20 MR. HERNDON: -- listing some of the 21 information that's available on the site. 22 It's a very, very powerful tool, and it'll 23 be highly useful. And, again, recognize that, 24 Commissioner, where you were talking about 25 being able to access this information on the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 33 2 Ernst & Young counselors, and they will have 3 access to the same information that you see in 4 the Financial Engines website, and can walk you 5 through it. 6 If you're not comfortable understanding the 7 website, they can walk you through it so that 8 you understand just exactly what you're seeing, 9 and what it's telling you, so that it's clear. 10 TREASURER GALLAGHER: Let me ask you a 11 question. 12 If -- this is probably as powerful and as 13 good as there is out there. I know you spent a 14 lot of time trying to find it. 15 If we end up with bundled providers that 16 are going to also provide an educational 17 service, are we going to mandate that they take 18 advantage of this for -- for individuals when 19 they go talk to them? 20 MR. HERNDON: The law is very clear that -- 21 and it says that the bundled providers are 22 limited to providing education about their 23 investment products. 24 I mean, it specifically uses -- I think the 25 word "its" investment products, meaning it -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 34 2 So it's our expectation that almost all of 3 this generic information is the branded FRS 4 educational information and program and 5 so forth. 6 Now, we don't want to stop a bundled 7 provider who has good investment planning 8 information, or retirement planning 9 information, from providing that kind of 10 generic information. 11 I think you have to be very careful not to 12 get conflicting messages impacting the members, 13 and also not getting information that is -- 14 that one vendor is -- is espousing about 15 another vendor's products and so forth. 16 And the -- 17 TREASURER GALLAGHER: Right. 18 MR. HERNDON: -- and the law is very clear 19 that you can't do that. 20 GOVERNOR BUSH: Tom, I mean, if -- 21 TREASURER GALLAGHER: I understand that. 22 But I'm nervous that now what the law says is 23 that the only thing a vendor can do is go in 24 and tell -- tell our employees that -- about 25 their products. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 35 2 TREASURER GALLAGHER: Well, some of them 3 aren't going to have a full range of products. 4 So -- 5 MR. HERNDON: Well, we don't know that. 6 But -- but -- 7 TREASURER GALLAGHER: I mean, I know -- 8 MR. HERNDON: -- I mean -- 9 TREASURER GALLAGHER: -- some have 10 different offerings, and some have a wide 11 variety, and some have a few less -- 12 MR. HERNDON: That's correct. 13 TREASURER GALLAGHER: So -- 14 MR. HERNDON: And some -- some may have a 15 full range, and some may have less than a full 16 range -- 17 TREASURER GALLAGHER: Right. 18 MR. HERNDON: -- of offerings, that's 19 right. 20 But the program -- 21 GOVERNOR BUSH: So the Financial Engine -- 22 the -- the Financial Engine they use will be 23 designed for the offerings that they receive. 24 I mean, if -- 25 TREASURER GALLAGHER: Well, let me ask you ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 36 2 GOVERNOR BUSH: Isn't that right? 3 MR. HERNDON: Yes, sir. 4 GOVERNOR BUSH: And would those 5 Financial Engine results -- if you said, I 6 needed -- you know, I'm -- I'm making 40,000, 7 and I aspire to make 80,000, and I'm 8 forty-eight years old, and I intend to work 9 another 12 years, or 20 years, or whatever it 10 is, you give them all the information, and 11 they -- will the FRS Financial Engine come out 12 with more or less the same suggestions on asset 13 allocation as the -- as the financial 14 institutions that will be selling a bundled 15 product? 16 MR. HERNDON: Not necessarily. And that's 17 one of the concerns that I think everybody has, 18 is that you do find yourself in a situation 19 where some asset allocation models, and some 20 overall investment models are more or less 21 sophisticated than others. And so you can get 22 different results. 23 GOVERNOR BUSH: Marginally different or -- 24 MR. HERNDON: Dramatically different in 25 some cases. I mean, you can -- you can clearly ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 37 2 that you get. 3 And that's one of the concerns that -- that 4 we have, and one of the things that we're 5 proposing to talk to the bundled providers 6 further about, is to try and make sure that 7 there is at least some consistency of message 8 where it's appropriate; and where there's 9 appropriate divergence, that you also cultivate 10 that as well. 11 GOVERNOR BUSH: Tom? 12 TREASURER GALLAGHER: Can the -- well, I 13 don't know how to -- I -- can the educator from 14 a bundled provider bring up Financial Engines 15 for the individual retirement person's account, 16 and sort of show them how it works? 17 MR. HERNDON: I'm not sure. I don't know 18 the answer to that question. 19 Let me -- let me ask -- 20 MR. ARNONE: Yeah. I'm not -- 21 MR. HERNDON: -- Bill -- 22 MR. ARNONE: -- not with Financial Engines. 23 I'm with Ernst & Young. 24 But clearly the Financial Engines tool, 25 just as Ernest & Young, could use it to counsel ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 38 2 to anyone who wants to use it in that capacity. 3 GOVERNOR BUSH: Could you say who you are, 4 just for the -- 5 MR. HERNDON: Yeah. This is Bill Arnone 6 with Ernst & Young. 7 Jim -- Dr. Francis is here, and has been 8 involved in an awful lot of the education 9 program. 10 Would you comment on that question, too? 11 TREASURER GALLAGHER: You know, I'm -- I'm 12 sort of looking at it that it -- they may want 13 to do it if they run some scenarios and find 14 out that their product's the one that it 15 recommends, and they may not want to do it if 16 it recommends somebody else's. 17 So -- but I don't know whether it would 18 even go that far to recommend individual 19 products. 20 DR. FRANCIS: The -- the tool definitely 21 does recommend individual products, and -- 22 and -- and that is, I -- I think, ultimately 23 the issue. 24 The -- the tool may not recommend a high 25 cost product. The tool may well not recommend ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 39 2 another. 3 So it's a question of whether we have an 4 accord on both sides, whether the bundled 5 provider is willing to use this tool, and 6 explain this tool in the first instance. 7 The second interest -- instance is, I -- I 8 don't have the answer. I will go back and 9 check the contract. 10 We simply have to make sure that 11 Financial Engines is in agreement that it's 12 appropriate for these parties to use that 13 particular tool. 14 TREASURER GALLAGHER: Now, remember, 15 they're using the tool with one of our 16 employees sitting there. So it's the employee 17 using it. This person's basically -- 18 DR. FRANCIS: Right. 19 TREASURER GALLAGHER: -- with it is the way 20 I -- 21 DR. FRANCIS: Under -- 22 TREASURER GALLAGHER: -- understand it. 23 DR. FRANCIS: -- those circumstances, sure, 24 it's -- it's -- 25 TREASURER GALLAGHER: Yeah. I'm not sure ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 40 2 up everybody's stuff -- 3 GOVERNOR BUSH: They've got to have -- 4 TREASURER GALLAGHER: -- before they -- 5 GOVERNOR BUSH: -- the call number. So -- 6 TREASURER GALLAGHER: Right. 7 They should -- well, they will after they 8 sit down with them once. 9 DR. FRANCIS: Right. I -- 10 GOVERNOR BUSH: No. 11 TREASURER GALLAGHER: Well, they shouldn't 12 be using it. But -- 13 Okay. So there may not be an advantage -- 14 DR. FRANCIS: Yeah. I thought you were 15 speaking of the -- 16 TREASURER GALLAGHER: -- to the -- 17 DR. FRANCIS: -- the bundled provider 18 saying, we offer this service from 19 Financial Engines. You know, we -- we -- 20 TREASURER GALLAGHER: No. I was thinking 21 that -- Financial Engines is there. And if you 22 want us to go through it with you, we can. 23 MR. HERNDON: Yeah. 24 COMPTROLLER MILLIGAN: Let me, if I may, 25 Governor, follow up on that a little bit. And ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 41 2 here, which you didn't talk much about. 3 And in particular, the second choice tool 4 to help members considering changing plans. 5 How will that piece be activated? 6 If, for example -- for example, now 7 we're -- we're years into this process -- 8 MR. HERNDON: Uh-hum. 9 COMPTROLLER MILLIGAN: -- and one of the 10 members is investing in a -- in a low 11 performing product, and -- and the second 12 choice tool, he or she can obviously try to 13 determine that. Or is there some obligation in 14 terms of ongoing support for the FRS, or 15 someone, to -- to bring that to the person's 16 attention? 17 DR. FRANCIS: Yes, indeed. We -- we will 18 certainly be bringing the second choice to 19 people's attention early on in the process. 20 The second choice tool becomes available to any 21 participant at the close of their initial 22 election window. 23 So, for example, for -- 24 COMPTROLLER MILLIGAN: Well, yeah. 25 I -- I understand that. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 42 2 process now, and -- and there's a low performer 3 out there, and -- who will -- who will alert 4 this person, if anyone, the investor, to this 5 low performance? 6 DR. FRANCIS: There'll be at least two 7 ways, and we're hoping three ways that that's 8 going to happen. 9 Number one, if the person has used the tool 10 at least once, and that person has entered 11 their e-mail address into the system, which 12 they're asked to do, they will get an automatic 13 e-mail from Financial Engines whenever 14 Financial Engines has new advice for that 15 person, new information on how they can better 16 arrange their asset allocation and their 17 choices of investment. 18 COMPTROLLER MILLIGAN: Okay. 19 Good. 20 Now, does that apply to someone who has 21 opted -- if we have bundled providers, does 22 that apply to someone who has opted to invest 23 through a bundled provider? 24 DR. FRANCIS: Yes, indeed. It -- it 25 covers -- this tool covers all the choices -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 43 2 contracts that may be evolving with the bundled 3 provider would be the proviso that some 4 independent third party can recommend to an 5 investor in the bundled provider's product pool 6 that that's a bad product, and they ought to 7 change. 8 DR. FRANCIS: Yes, indeed. 9 TREASURER GALLAGHER: Let -- let me just 10 add one other thing to that. 11 If you had your own mutual fund that was in 12 there, and it was starting not to perform 13 right, it's going to send you an e-mail about 14 that, too. 15 DR. FRANCIS: Indeed. If you've -- 16 TREASURER GALLAGHER: So it's going to be 17 any investment you have that it -- 18 COMPTROLLER MILLIGAN: Yeah. I -- well, 19 I -- I -- I wanted to clarify particularly if 20 there were bundled providers -- 21 TREASURER GALLAGHER: Well, remember now, 22 we're -- most everybody has -- and I guess 23 we're going to have to make a decision here. 24 But what pretty much everybody's done at 25 this point -- and we haven't finalized it one ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 44 2 But I know the State Board of 3 Administration staff and the Advisory Board has 4 basically said, no -- no longer are they really 5 bundled in the manner that they are the 6 recordkeepers. Pretty much the recordkeeping 7 by the bundled providers has been removed -- 8 COMPTROLLER MILLIGAN: Well, I understand 9 that. 10 TREASURER GALLAGHER: Okay. So with that, 11 then -- 12 COMPTROLLER MILLIGAN: Well, I -- I just 13 wanted to clarify. You know, there's a lot of 14 legal ramifications here of telling someone who 15 has invested in Bundle Provider A, that A has 16 got you in a bad product, and you ought to 17 change. 18 TREASURER GALLAGHER: Well, I don't think 19 it's going to do that. It's just going to say 20 that it's performing lower than other options 21 that you would have. 22 COMPTROLLER MILLIGAN: Well, any way you 23 want to couch it. 24 MR. HERNDON: Well, and let me make -- let 25 me make one other comment with respect to -- to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 45 2 We committed, and -- and it is built into 3 our policy document that guides this plan, that 4 on an annual basis, we will evaluate -- 5 stepping back from an individual member point 6 of view, but on an annual basis, we will look 7 at the performance of products in the 8 aggregate, and make sure that they are not only 9 performing up to expectations, but they're 10 performing in a manner that is consistent with 11 the basis for which -- 12 COMPTROLLER MILLIGAN: Okay. And that 13 includes if there were bundled providers. 14 MR. HERNDON: Absolutely. 15 COMPTROLLER MILLIGAN: And -- 16 MR. HERNDON: Absolutely. 17 COMPTROLLER MILLIGAN: -- and then what 18 action could you take, if you had bundled 19 providers, and they weren't performing at a -- 20 at a specific -- or a considered level? 21 MR. HERNDON: Well, there's the rub. As 22 you -- as I suspect you're very well aware. 23 COMPTROLLER MILLIGAN: That's what I'm 24 trying to get to -- 25 MR. HERNDON: Right. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 46 2 MR. HERNDON: You have some limited choices 3 in that respect. 4 And Commissioner Gallagher's probably 5 experienced this through the deferred 6 compensation program, because it's a somewhat 7 similar phenomenon. 8 You can cap that product at that point, 9 stop it from future enrollment, you can attempt 10 to jawbone folks out of it and into a similar 11 product if you -- if you can do that. 12 We're not at all sure -- and I don't know 13 what Commissioner Gallagher's experience has 14 been, but we're not at all sure that you can 15 forcibly remove people from some of these 16 products once they're in them, even if they are 17 presented with the evidence that it's not the 18 best -- in their best interest. 19 But we certainly will make all of those 20 efforts -- 21 COMPTROLLER MILLIGAN: But it is largely 22 jawboning. 23 MR. HERNDON: To a degree it's jawboning. 24 Now, you can prevent future enrollment -- 25 COMPTROLLER MILLIGAN: Yes. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 47 2 is one of the first things that you would do. 3 But you may not be in a position to enforce 4 that -- that dictum ultimately. 5 GOVERNOR BUSH: Can we -- can we have a 6 pause just -- 7 I'm sorry. Go ahead. 8 COMPTROLLER MILLIGAN: Well, how about in 9 things like fees and controlling costs, what 10 amount -- I know what you can do on the 11 institutional side. 12 What can you do on the bundled side, if 13 there were bundled providers? 14 MR. HERNDON: Well, we will do our utmost 15 in the course of the contract negotiations; and 16 not only in the course of ultimately the 17 contract negotiations, if there are any, but 18 also in the negotiations that have taken place, 19 and will likely take place, to get fees down 20 as -- as far as we can, and as reasonable for 21 the -- 22 COMPTROLLER MILLIGAN: Well, again -- 23 MR. HERNDON: -- the services we -- 24 COMPTROLLER MILLIGAN: -- I'm not talking 25 about what you might do in any further ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 48 2 But I'm talking about two years from now. 3 MR. HERNDON: Right. 4 Well, it would be our hope that we'd build 5 into the contract, to the extent that there is 6 flexibility in the product offering itself, 7 break points for lowering costs as dollar 8 volume increases, and those kinds of things, as 9 costs are reduced by virtue of most favored 10 nation clauses, and those kinds of things, that 11 we benefit from all of those opportunities as 12 well. 13 So we'll do our utmost to build all of 14 those safeguards in. But I'm not -- 15 COMPTROLLER MILLIGAN: Well, those -- 16 MR. HERNDON: -- sure if that's exactly -- 17 COMPTROLLER MILLIGAN: -- yeah. Well, 18 you're gett-- you're kind of getting at my 19 concern. 20 We haven't really in -- in terms of your 21 negotiations thus far with the series of 22 bundled providers that have been involved, you 23 haven't really gotten down into some of those 24 discussions at least to the extent where -- 25 MR. HERNDON: That's correct. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 49 2 been made. 3 And it would appear to me that if we were 4 to choose to go forward and -- and do some 5 additional negotiations, which is kind of your 6 Part II recommendation, that it ought to be 7 clear that we are -- really need to look hard 8 at how we control costs, how we handle low 9 performance in terms of products within the 10 bundled provider, as well as performance 11 overall by a bundled provider, and how you -- 12 you can them, if you have to can them, besides 13 jawboning. 14 That we ought to drive, I think, a very 15 hard bargain in terms of the clout that we 16 would have, as similar to the clout that we 17 would have over the institutional products. 18 And that we ought to drive an extremely hard 19 bargain. 20 And that would -- 21 MR. HERNDON: No, you're absolutely right. 22 COMPTROLLER MILLIGAN: -- comment. 23 MR. HERNDON: And -- and, in fact, one of 24 the -- one of the concepts that we are 25 contemplating employing, and I'm sure the -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 50 2 is coming, is stacking fees so that if the 3 DB plan and the DC plan both happen to use the 4 same vendor, for example, then we want to take 5 advantage of the cumulative price break that's 6 available to us -- 7 COMPTROLLER MILLIGAN: Sure. 8 MR. HERNDON: -- by virtue of both of them 9 using that -- that fee. 10 And so -- 11 GOVERNOR BUSH: Tom, can we pause here just 12 for a second -- 13 MR. HERNDON: I'm sorry. 14 GOVERNOR BUSH: -- to recognize a group of 15 young men and women from the -- the 16 Youth Challenge, the Florida National Guard 17 program. 18 They're -- they're visiting us, I guess 19 from Camp Blanding; is that right? 20 MEMBER OF THE AUDIENCE: Yes, sir. 21 GOVERNOR BUSH: We're delighted to have you 22 here. And you're future State employees, so 23 you may want to sit and listen about the 24 options that you'll have. 25 Future leaders of our state, and we're ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 51 2 Welcome. 3 (Applause.) 4 GOVERNOR BUSH: This is a -- this is the 5 exciting Florida Cabinet. It's the -- 6 TREASURER GALLAGHER: Oh, yes. 7 GOVERNOR BUSH: -- State Board of 8 Administration part of it. 9 TREASURER GALLAGHER: Sure, it is. 10 That's why they make it only three people 11 have to be here. 12 MR. HERNDON: Well, I'm not going to go 13 into this particular portion of the 14 presentation a great deal further. 15 Again, I would just encourage you -- 16 GOVERNOR BUSH: That's an -- 17 MR. HERNDON: -- to take -- 18 GOVERNOR BUSH: -- exciting chart. 19 MR. HERNDON: -- go to the -- go to the 20 website. 21 This one, I apologize, is -- is also 22 difficult to read. But I did want to at least 23 give you this information. I'm not going to go 24 into it at all. 25 But there was a concern about how ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 52 2 unbundled version versus the three firms that 3 provided it on a bundled basis, which would be 4 Fidelity, VALIC, and TIAA-CREF. 5 And so we simply tried to give you a little 6 synopsis of the key factors that -- that 7 entered into at least part of the 8 recommendation, not the least of which is cost. 9 And I understand that TIAA-CREF has pointed 10 out to us a -- a correction that we have made 11 to this. It does not affect the bottom line of 12 this chart, but it does affect the way 13 something was labeled. 14 And I want to make sure that that's on the 15 record. 16 TREASURER GALLAGHER: And that was? 17 MR. HERNDON: It was just the way we were 18 characterizing an administrative and services 19 fee. It doesn't -- as I say, it doesn't affect 20 the -- 21 TREASURER GALLAGHER: Yeah. 22 MR. HERNDON: -- the bottom line. 23 The -- the next chart that I want to just 24 briefly touch on is, again, to give you a 25 sense -- there's been a lot of questions about ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 53 2 you're very sensitive to the fact that you've 3 got an ongoing program education component, and 4 that this huge movement through the system of 5 all 600,000 employees that are -- that are 6 benefiting from this education. 7 And so this table is simply to -- there to 8 try and give you a sense of the costs 9 associated with the services that are being 10 provided, and how they're being billed. 11 They're either on a flat fee, on a fee for 12 service basis, on a usage basis, and so forth. 13 So this takes some of the major program 14 components, and simply kind of ticks them off, 15 and says, here's the fees that we're paying to 16 the respective vendors, and here's how they're 17 being billed out, and comes up with the -- with 18 the total package. 19 And -- and that's really all I'm going to 20 say about it, except just to commend that to 21 you for -- for future reference. 22 GOVERNOR BUSH: Tom, one of the things 23 that -- that I've been frustrated with as it 24 relates to technology projects -- a lot of this 25 is technology based -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 54 2 GOVERNOR BUSH: -- is that we don't -- 3 and -- and a lot of the vendors here are the 4 same vendors in other parts of government. 5 There's a group of maybe ten really good, 6 competent consulting technology firms, and we 7 keep buying stuff off the rack. 8 And then another state will probably follow 9 our lead on this, and they'll -- they'll -- the 10 same vendors will go to them, and -- and buy 11 that off the rack again. And we -- these 12 comp -- I think there's, like, a reconstruction 13 every time of a -- of a -- of a service that 14 basically would apply in California, or around 15 the world as it applies here. 16 Has there been any thought of -- of sharing 17 the -- the benefits of -- if we're the first -- 18 and we're not the first to do this -- but as a 19 state perhaps we might be the -- the largest, 20 has there been any thought about benefitting 21 from this going forward so that we can lower 22 some of those costs? 23 Because they're pretty extraordinary. 24 TREASURER GALLAGHER: Especially Ketchum. 25 MR. HERNDON: Yes, sir, Governor. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 55 2 information is in the public domain that is 3 available for us to provide to other interested 4 parties, other states, and other jurisdictions. 5 Some of it is proprietary based on the 6 specific financial modeling and so on and 7 so forth that -- that companies have. 8 And we've tried in each one of our 9 contracts to give us as much flexibility as we 10 can to take advantage of -- of benefits like 11 you're describing. 12 It isn't always feasible. There are some 13 propriety elements here that are protected. 14 But an awful lot of the information is 15 available, an awful lot of the technology's 16 available, and can be exported if -- if there 17 are other interests. 18 And we -- we do get contacted from time to 19 time by other parties, and -- and we're happy 20 to provide them with that information -- 21 GOVERNOR BUSH: But you -- you haven't 22 ventured with any of our vendors -- 23 MR. HERNDON: We have not made a specific 24 venture arrangement, no, sir. 25 TREASURER GALLAGHER: Well, what I'm ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 56 2 they're going to do a web system Enter-- 3 infrastructure development, hardware, software, 4 maintenance and repairs. And management fees, 5 and the single sign on, directory service, and 6 everything. We're paying four million bucks 7 for this, and they're designing it for us. 8 Do we have some kind of ownership of that, 9 and other people can use it, and we get a fee? 10 I think that's where the Governor was 11 coming from. 12 MR. HERNDON: We have ownership of it. I 13 don't know how much utility there is for other 14 folks to use it. But we have ownership of much 15 of this program, not -- not all of it. 16 And, again, I want to -- I want to stress 17 that not all of it is owned by -- by us, or at 18 least it's -- it's co-owned, if that's a fairer 19 way to -- to phrase it. And we can remarket 20 some of it if -- if that's of interest at some 21 future date. 22 TREASURER GALLAGHER: Well, let's say 23 Ketchum, you know, because of their doing it 24 here, gets a contract to do it somewhere 25 else -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 57 2 TREASURER GALLAGHER: -- and obviously they 3 take what they designed for us -- 4 MR. HERNDON: Right. 5 TREASURER GALLAGHER: -- and going to tweak 6 it a little bit -- I mean, they get to charge 7 the next guy four million bucks. 8 Well, you know, I think we covered the 9 first of it. That's where I'm coming from. 10 MR. HERNDON: I understand. 11 And I don't know the specifics as it 12 relates to the Ketchum contract. I mean, if 13 you -- we can -- we can get into that at a 14 later time if you like, and we'll come back and 15 visit with you if that would be convenient, and 16 talk about some of those contracts 17 specifically. 18 GOVERNOR BUSH: I'd be interested, 19 because -- 20 MR. HERNDON: Okay. 21 GOVERNOR BUSH: -- this is a common problem 22 that -- that we face across-the-board. 23 I mean, we are -- we're -- we're spending 24 hundreds of millions of dollars on really state 25 of the art technology to provide a -- a needed ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 58 2 And then we -- we haven't -- normally we 3 haven't thought through the -- the end -- the 4 end game, which is that there's a benefit if 5 we're first or second of -- of selling this to 6 other people. 7 I guarantee you that Ketchum's going to go 8 around letting the world know that the fourth 9 largest pension fund in -- the eighth largest 10 in the world, or fourth largest in the country 11 is -- is doing this. 12 And -- and if we haven't -- if -- if the 13 vendor venture arrangement hasn't been -- been 14 excluded, because we're too far along, I would 15 encourage you looking at all this stuff. 16 TREASURER GALLAGHER: Okay. 17 MR. HERNDON: We'll do that, and we'll come 18 back and -- and talk about that with you 19 further. 20 GOVERNOR BUSH: Okay. 21 TREASURER GALLAGHER: Governor, I'd like to 22 sort of set little parameters here. 23 I just want my other two colleagues, and 24 the -- those in the audience to know that it is 25 my intention to recommend at this point, unless ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 59 2 ahead with the five vendors for continuing to 3 negotiate with the staff of the State Board. 4 And obviously we're interested in, 5 you know, what the fees are going to be, and -- 6 and what the carry's going to be, and certain 7 funds that are in some way duplicated that 8 would be not duplicated. 9 And so just to set the parameters of what 10 I'm planning on doing so that maybe that will 11 keep some people from having to talk. And -- 12 and it might add other people that want to 13 talk. I don't know. 14 But just -- that's -- just so that maybe 15 we'll get it in some kind of a -- there may be 16 something that somebody's going to say that's 17 going to make a huge change in my thoughts at 18 this point. But I will be surprised. 19 GOVERNOR BUSH: General? 20 COMPTROLLER MILLIGAN: I -- I would just 21 like to know exactly what is meant by 22 "extensive negotiations." 23 I'd like to know what the intent of the 24 negotiations are. I'd like to know what the 25 objective of the negotiations are before I buy ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 60 2 I don't think it should just be who can 3 bring me the lowest fees. As I tried to get to 4 a little while ago, there ought to be some 5 clarification of -- as to how we can control 6 and -- and otherwise have the clout necessary 7 to protect the members of the FRS. 8 And there are probably a lot of other 9 things that ought to be considered in 10 negotiations, including some of the, quote, 11 unquote, value-added things that may be brought 12 forward by a particular vendor. 13 So I -- I'd just like to have negot-- 14 extensive negotiations defined in some way. 15 TREASURER GALLAGHER: Well, I wasn't 16 looking to contract them by any means. I -- as 17 far as I'm concerned, I think it -- 18 COMPTROLLER MILLIGAN: Well, I -- I -- 19 TREASURER GALLAGHER: -- anything -- any 20 opening you want to add, add it. I -- 21 COMPTROLLER MILLIGAN: Well, I wasn't 22 suggesting that you were, Tom. 23 I'm just suggesting that I think it's 24 important that we -- they -- the vendors that 25 we're going to deal with, and the SBA, know ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 61 2 GOVERNOR BUSH: That's -- 3 COMPTROLLER MILLIGAN: -- is all I'm trying 4 to get at. 5 GOVERNOR BUSH: You -- I think that's an 6 important tool, because -- I mean, an important 7 thing to -- to discuss. 8 I think the bundled providers would like a 9 little -- little guidance given to the SBA as 10 well as it relates to negotiation, so that -- 11 so that there's some clarity on both sides. 12 And I think that's more than fair to -- 13 in fact, it ought to be part of the res-- a 14 resolution that we -- we craft here right now. 15 I mean, I'm -- I concur with 16 Commissioner Gallagher's comment, although it 17 wasn't in a res-- it wasn't in a resolution 18 form. If it was, I would second -- 19 TREASURER GALLAGHER: Well -- 20 GOVERNOR BUSH: -- it. 21 TREASURER GALLAGHER: -- it wasn't in a -- 22 in a motion yet. But that's what I plan on 23 doing. And I guess, if it'll make people 24 happy, Fidelity, VALIC, ING Aetna, Nationwide, 25 and Prudential is who I'm talking about. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 62 2 GOVERNOR BUSH: Those are the -- the -- the 3 recommendations -- 4 TREASURER GALLAGHER: -- five that have 5 been -- 6 GOVERNOR BUSH: -- from PEORP and IA-- the 7 IAC, right? 8 TREASURER GALLAGHER: That's correct. 9 Now, that passed through that committee on 10 a 10 to 2 vote. 11 I want to -- okay. I guess we'll go ahead. 12 I -- I won't add to that right now. 13 MR. HERNDON: Well, Governor, if it -- if 14 it would be helpful, perhaps in responding 15 briefly to the General's comments, and we can 16 kind of skip over the staff recommendations. 17 I mean, I -- I -- you're all familiar with 18 them, and -- 19 TREASURER GALLAGHER: We did skip over 20 them. That's why I made it -- 21 MR. HERNDON: I -- 22 TREASURER GALLAGHER: -- when I did. 23 MR. HERNDON: I -- I understand. 24 TREASURER GALLAGHER: I figured that'd max 25 some of the time. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 63 2 opportunity. But I -- I understand the 3 message. 4 Essentially, what -- what we focused on in 5 this endeavor, and would be the focus of any 6 further negotiations are -- are five 7 ingredients. 8 And I -- I -- I say these five ingredients, 9 not intending to leave anything out 10 necessarily, but in the interest of just kind 11 of simplifying the conversation. 12 And -- and they are: Investment 13 performance, the quality of the investment 14 products themselves. And I -- when I'm 15 thinking about quality, I'm talking about high 16 degrees of confidence in consistent 17 performance, preferably outperformance of a 18 benchmark that -- that is chosen. 19 Secondly is the fees or costs associated 20 with providing the -- the program. There 21 obviously we want as low a cost as we can 22 reasonably expect to get for the products. 23 We're not trying to drive people into 24 bankruptcy, but we know pretty well what the 25 costs of various product offerings are with a ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 64 2 The third is a very solid educational 3 program that is complimentary -- I want to 4 stress that -- that word of the PEORP program 5 and its education program. 6 And where possible, we can break out 7 education elements that vendors propose to 8 offer on a fee for service basis so we can 9 compare apples to apples, and we can make some 10 recent decisions about Provider A can provide 11 this kind of high touch service; and Provider B 12 can, we can see how much they would charge. 13 Fourth is recordkeeping synchronization. 14 Now, for the most part -- 15 TREASURER GALLAGHER: I thought that 16 both -- didn't you recommend not having that, 17 and then the -- the Advisory Board recommended 18 not having that? 19 MR. HERNDON: Yes, sir. But -- but 20 there -- I'm not -- I'm not talking here about 21 providing recordkeeping. I'm talking here 22 about synchronizing with our recordkeeper. 23 And there are two or three things that we 24 have concerns about. All of the vendors have 25 indicated to us that they can comply -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 65 2 accounts. It's critical in this kind of thing. 3 They have to be able to meet the time 4 tables that we have to get that pricing 5 information to the recordkeeper. So there are 6 some boilerplate concerns that we have from 7 each vendor, that we want to hear them say we 8 can meet in a very clear form. 9 Now, we don't, frankly, expect that any of 10 the firms will -- will have a problem by these. 11 We -- we just want to hear it restated. 12 And then, finally, there -- there are -- 13 and, again, this is kind of a broad category, 14 but there are some transition issues we've 15 talked about in the past. Some firms have the 16 capability to accept in-kind transfers of stock 17 portfolios, for example, from us. That just 18 lowers the cost of the program overall to 19 everybody. 20 So those are the five global kind of 21 ingredients in -- in the negotiation. 22 Now, what we did -- and I appreciate that 23 this is somewhat presumptuous on our part. But 24 we e-mailed out to all of the vendors on Friday 25 afternoon -- this past Friday afternoon, a list ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 66 2 that Commissioner Gallagher just highlighted, 3 some concerns with respect to their specific 4 products. And asked them to be prepared to 5 talk about those in specific terms. 6 And we, in fact, did as 7 Commissioner Gallagher highlighted as well, 8 also highlighted some areas where there are 9 some duplicate products. For example, we've 10 got divergent costs, and -- and so forth. 11 We've also tried to be very mindful of 12 coming up with a good diversified line-up of 13 investment options. 14 And so those are the broad categories. 15 It's our expectation that with the information 16 we provided to the firms last Friday, if the 17 Trustees ultimately do decide to go forward 18 along these lines, that they understand our 19 concerns. 20 We've had a couple of requests for 21 clarification. Nothing major. We've responded 22 to those. 23 We would expect to start those negotiations 24 this afternoon. We would run through this 25 week, being mindful of the Thanksgiving ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 67 2 last chance. 3 Obviously when we get to actually 4 negotiating a contract, if one is called for, 5 you have to reduce all of that to a much more 6 excruciating form of written report. 7 But -- but that's by-in-large the -- the 8 thrust of the -- 9 GOVERNOR BUSH: Tom. 10 MR. HERNDON: -- negotiations. 11 GOVERNOR BUSH: What about the General's 12 concern about customer protection? 13 I'm not sure what -- how you called it. 14 But the -- the ongoing issues of -- of -- 15 that were -- that he brought up. Couldn't that 16 be another element of this -- I don't think he 17 described it in those five -- 18 MR. HERNDON: Well, absolutely. When I 19 talked about fees and costs, I'm -- I'm 20 including that in that category. And I 21 apologize if I'm not being more -- 22 GOVERNOR BUSH: Well -- 23 MR. HERNDON: -- explicit -- 24 TREASURER GALLAGHER: -- well, I think 25 you're talking about in quality. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 68 2 TREASURER GALLAGHER: In other words, their 3 quality area is -- we know their quality today. 4 But managers change. 5 MR. HERNDON: Right. 6 TREASURER GALLAGHER: And we've had that -- 7 MR. HERNDON: Right. 8 TREASURER GALLAGHER: -- in our deferred 9 comp, and we've had to get -- you know, get rid 10 of a -- a mutual fund because it lost a good 11 manager they had, and it started to slip in 12 performance. 13 And it needs to -- at that point, needs to 14 come off the table. 15 MR. HERNDON: Right. 16 TREASURER GALLAGHER: And then -- and what 17 we do, as the General said, we inform people 18 that we no longer allow people to put money in 19 it, and we recommend they might want to move to 20 somewhere else. 21 And we -- it's hard to make them, although 22 a couple of them, I see them getting hurt so 23 much, I'd feel like just closing it down, and 24 moving it for them. 25 And I -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 69 2 TREASURER GALLAGHER: -- we may or may not 3 have the legal authority to do that. But 4 the -- 5 COMPTROLLER MILLIGAN: Well, that -- 6 TREASURER GALLAGHER: -- issue should be 7 gone over. 8 COMPTROLLER MILLIGAN: And -- and that's 9 what I'm concerned about now. I think we ought 10 to build through -- 11 TREASURER GALLAGHER: That's right. 12 COMPTROLLER MILLIGAN: -- these 13 negotiations the legal clout, whatever you -- 14 however you want to describe it, that enables 15 us to effectively fly high cover for the 16 employees that are investing in bundled 17 providers. 18 MR. HERNDON: Yes, sir. 19 I completely agree with you -- 20 COMPTROLLER MILLIGAN: Whatever that means. 21 And it means a lot to me that you are going to 22 build in a tremendous amount of protection. 23 And that means that these bundled providers 24 have got to come forward and negotiate to that 25 end. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 70 2 TREASURER GALLAGHER: Well, what this also 3 means is that the employees need to know 4 that -- I mean, it -- it really looks like how 5 big a parents do we want to be in this. And -- 6 GOVERNOR BUSH: Yes. 7 TREASURER GALLAGHER: -- that's -- that's 8 sort of the -- part of the problem in -- in 9 this. And that is -- 10 COMPTROLLER MILLIGAN: It -- it isn't a 11 question of how big we want to be, but if we 12 want to be big, we ought to have the capacity 13 to do it. 14 I'm not suggesting anything other than we 15 build into right now the ability to do whatever 16 we need to do. And I don't know what that is. 17 TREASURER GALLAGHER: Well, I mean, I can 18 tell you, there's -- 19 COMPTROLLER MILLIGAN: -- protection for 20 members of the FRS. 21 TREASURER GALLAGHER: There is -- there is 22 something that should be built in, and that is 23 that we -- that we don't have -- or it's 24 questionable if we have in the deferred comp 25 plan. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 71 2 nonperformer, in other words, it just doesn't 3 perform any more, because of whatever reason -- 4 usually it's management problems -- that you 5 can take -- that the people know that you can 6 take their money from that -- and it's got to 7 be a bad -- I mean, there's got to be some 8 criteria there. You just don't want to move 9 people's money around, that -- you know, give 10 them a choice to move it, and if they don't 11 move it to wherever they want, then somehow or 12 another -- 13 GOVERNOR BUSH: I -- 14 TREASURER GALLAGHER: -- we're in a 15 fiduciary responsibility to move it. 16 COMPTROLLER MILLIGAN: I'm not going to try 17 to describe all those details. I -- I just 18 want to make sure that we have the capacity. 19 I think everybody understands that. 20 MR. HERNDON: It -- 21 COMPTROLLER MILLIGAN: And also would like 22 to just add one other thing, Governor, if I 23 may. 24 That is, I -- I recognize in the education 25 piece here, you talk about the complementary, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 72 2 particular bundled provider that really adds 3 some value to what they are providing. There 4 are probably a bunch of other complementary 5 things. 6 And I just would be -- I would ask you to, 7 you know, consider other things that some of 8 these bundled providers may bring if -- to the 9 table in a complementary sense. 10 MR. HERNDON: Yes, sir. 11 If I might add, Governor, and I 12 apologize -- it -- just make this one comment, 13 because it may be helpful. 14 Any recommendation that we were to bring 15 back to you postnegotiation would be couched in 16 the subject to successful negotiation of a 17 contract. 18 So it would be that we would recommend A, 19 B, or C, or none of the above. But all of that 20 would be subject to negotiating a contract on 21 terms that we find agreeable to us. 22 So -- 23 GOVERNOR BUSH: As we try to set the tone 24 for these negotiations, I'm not sure how we do 25 this in a motion form. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 73 2 plan, there's an underlying premise that people 3 are empowered to make choices for themselves as 4 well. 5 And we could -- you could attempt to create 6 a -- a negotiation climate that basically says, 7 benefits of defined -- you know, the defined 8 benefit program, we're just going to impose it 9 on defined contribution. 10 It's a totally different philosophy that's 11 underneath this. And -- and I hope that we 12 don't lose sight of that. 13 The -- the people that are risk -- certain 14 people, because of the longevity of service, 15 clearly are not going to opt into this. There 16 are other people that maybe, because of 17 their -- when -- in that initial education 18 phase will stay in the defined benefit plan. 19 But there are others that have the 20 capability of making decisions for themselves 21 with proper advice. 22 And I think our focus ought to be, 23 negotiate the best price, make sure that there 24 is compatibility in the education so that 25 there's not some inconsistency that -- that ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 74 2 MR. HERNDON: Right. 3 GOVERNOR BUSH: -- for the people that 4 are -- we've empowered to make choices for 5 themselves, make sure that there are the legal 6 protections that the General has brought up 7 going forward. And that, you know, the best 8 way to do this is up front. 9 But in the context of -- of the defined 10 contribution plan, not the defined benefit 11 plan. 12 And -- and then this investment performance 13 issue needs to be discussed. And I think today 14 is the day to do it. Because there seems to be 15 a lot of confusion about how you measure 16 performance. 17 And -- and perhaps we should air that out, 18 and -- and then maybe move forward to finish 19 this today at least. 20 MR. HERNDON: We'll be happy to do that. 21 I -- I think it might be worthwhile, 22 Governor, and -- and members, if -- if you're 23 agreeable. The Chairs of the Investment 24 Advisory Council, Ms. Grant, who's 25 Comptroller Milligan's appointee; and ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 75 2 case, the Advisory Council for PEORP. 3 And I think they may wish to have a couple 4 of words, and then we can move to -- 5 GOVERNOR BUSH: Great. 6 MR. HERNDON: -- the speakers. 7 I think there's probably a shorter list 8 than there was a few minutes ago -- 9 TREASURER GALLAGHER: Good. 10 MR. HERNDON: -- and -- and go -- get back 11 to -- to the program. 12 TREASURER GALLAGHER: Before you do, Tom -- 13 MR. HERNDON: Yes, sir. 14 TREASURER GALLAGHER: -- there -- there was 15 a tie vote, which sort of ends up a loser, in 16 regards to at least -- let's look at 17 SunAmerica, which now has been merged through 18 acquisitions by AIG, so that it's a sister 19 company of VALIC. 20 We've taken a pretty strong stand not to 21 have not an annuity program in this Tier IV. 22 Is that what I remember? 23 MR. HERNDON: Thus far. 24 TREASURER GALLAGHER: Thus far. 25 Would you sort of give me staff's opinion ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 76 2 SunAmerica's going to give us their opinion on 3 it -- just so we can have yours now, and listen 4 to theirs later? 5 Because I -- I left that out on purpose 6 because of the desire not to have an annuity 7 accumulation, because the problems really that 8 we had in it with defined contribution. 9 Many of the product bundled providers have 10 removed annuity accumulation from their 11 retirement plan. 12 So if you'll give us just a touch on that. 13 MR. HERNDON: And this is a -- a com-- a 14 composite of the consultants that worked with 15 us, Mercer, and Dr. Milevsky from Canada, 16 and -- and our own staff's review. 17 Essentially there were two vendors who 18 recommended or proposed annuity style products. 19 We looked at both of the products fairly 20 extensively, had a separate set of analyses and 21 so forth that -- that took place on those. 22 And ultimately concluded that from the 23 standpoint of the costs associated with the 24 annuity, the liquidity problems that existed, 25 and the returns that were available for the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 77 2 there wasn't sufficient merit to recommend any 3 of those vendors. 4 There is no question that there are 5 circumstances under which an annuity product is 6 useful. In our belief and recommendation, we 7 felt that it was much clearer -- a case could 8 be made on the next -- 9 TREASURER GALLAGHER: On the retirement -- 10 MR. HERNDON: -- process as you distribute 11 the products, when you annuitize your earnings 12 and distribute it, as opposed to on the 13 accumulation phase, tend to be very high costs 14 associated with the accumulation phase -- 15 TREASURER GALLAGHER: Right. 16 MR. HERNDON: -- there are liquidity 17 problems, and so on and so forth. 18 That's -- that's it in a nutshell. 19 TREASURER GALLAGHER: Let me just ask you 20 this -- this is going to make it real easy for 21 you. 22 Both -- both products that you looked at 23 carried a penalty for moving your money from 24 there to somewhere else? 25 MR. HERNDON: As I recall -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 78 2 MR. HERNDON: No. As I recall, one did 3 not. Or at least one was striving to eliminate 4 virtually all of the associated liquidity kind 5 of -- 6 GOVERNOR BUSH: That would be -- 7 MR. HERNDON: -- products. 8 GOVERNOR BUSH: -- the Sun? 9 MR. HERNDON: That was Sun. Yes. 10 TREASURER GALLAGHER: Okay. Well, we'll -- 11 so they don't have any penalty for moving out 12 of it. 13 MR. HERNDON: As best I can recollect, 14 that's the case. I -- 15 TREASURER GALLAGHER: Well, I'm sure 16 they're going to -- 17 MR. HERNDON: -- Dr. Francis. But they 18 may -- and they'll, I'm sure, clarify that for 19 us as well. 20 So -- 21 GOVERNOR BUSH: I'm sure they will. 22 MR. HERNDON: Yes. Ms. Cariseo, Ms. Grant. 23 GOVERNOR BUSH: Welcome. 24 TREASURER GALLAGHER: And thank you for 25 your hard work, unpaid. If you went through ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 79 2 that you've had, all of you, and the rest of 3 the Advisory, too, we thank you very much. 4 Because I know it was a tremendous -- 5 GOVERNOR BUSH: Absolutely. 6 TREASURER GALLAGHER: -- amount of work and 7 dedication that you did. 8 And I want to personally thank you. 9 MS. GRANT: Thank you. We appreciate that. 10 Good morning, Governor Bush, 11 General Milligan, and Commissioner Gallagher. 12 I was asked to speak to you today to present 13 the views of the members of the Investment 14 Advisory Council, which I Chair. 15 Last Thursday, both the Advisory Councils 16 were asked to consider the inclusion of bundled 17 providers in the program. 18 I've been a member of the IAC since 1998, 19 and have never before seen an issue exude such 20 passion from the members and the vendor 21 community. 22 TREASURER GALLAGHER: It's called money. 23 Not passion. Money. 24 MS. GRANT: When it comes to politics, I am 25 a neophyte. So a lot of this -- and all of ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 80 2 I feel I'd be remiss if I didn't tell you a 3 little bit -- a tiny bit about myself, and 4 what -- the background that I -- I bring. 5 I'm a CPA, and I've been practicing in the 6 state of Florida since 1980. I'm a partner 7 with a CPA firm, Berkowitz, Dick, 8 Pollack & Brant in south Florida. 9 I'm also a Certified Financial Planner, and 10 a member of the AICPA's Financial Planning 11 Executive Committee. 12 So -- 13 GOVERNOR BUSH: You charge by the hour, or 14 do -- 15 MS. GRANT: By the hour. 16 I've also never spoken before the Cabinet 17 before. 18 So if I seem a little nervous, I am. 19 GOVERNOR BUSH: You're doing fine. 20 MS. GRANT: Thank you. 21 Both the IAC and the PEORP represent a 22 balanced cross-section of the Florida financial 23 community. And there were representatives on 24 both panels from the public and private sector, 25 as well as our legislatures. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 81 2 lot of hours. I'm sure you guys have seen that 3 binder, the last little piece of homework, 4 which, by the way, arrived on our doorsteps on 5 a Saturday morning so we would have the weekend 6 to review it. 7 One of the reasons that the -- that people 8 go to work for the State is for the benefits. 9 And it was very clear, and both Councils felt 10 very strongly last Thursday that the 11 participants should be given adequate choice, 12 and the benefits offered to them should be 13 comparable to those in the private sector in 14 order to compete for quality talent among the 15 employees of the State of -- of Florida. 16 Choice is really what emerged from the 17 meeting. And I heard the word choice mentioned 18 so many times, I wasn't sure what we were 19 discussing at that point. 20 TREASURER GALLAGHER: Because with the 21 choice. 22 GOVERNOR BUSH: Education choice. 23 MS. GRANT: And the other thing that was 24 really very, very clear, and I couldn't agree 25 more, that in the personal financial planning ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 82 2 return is asset allocation. The first part of 3 it is the breakdown between equities and fixed 4 income, the second is the asset allocation 5 among the -- the two broad asset classes. 6 And we all agree on that point. And 7 I think that that came up in a lot of the 8 discussion, that we have to have proper 9 education, we have to have proper choice. 10 One of the things that we didn't -- we 11 weren't asked to discuss, but has been coming 12 up, and came up here this morning that I wanted 13 to comment as to, is the personal financial 14 planning piece, the one-on-one counseling that 15 Commissioner Gallagher brought up. 16 That -- I am concerned, and I did raise it 17 at the meeting, that by offering individual 18 one-on-one personal financial planning for $200 19 an hour for the participants, that the Trustees 20 may be assuming a tremendous liability, because 21 personal financial planning can't be done in a 22 vacuum. And you can't sit down with somebody 23 and say we're going to talk about, you know, 24 funding your -- your, you know, State sponsored 25 retirement plan without considering education, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 83 2 And I'm very concerned about that. And I 3 know that in the private sector, just about 4 everything that you do in every employer 5 sponsored 401(k), or other retirement plan, 6 does include language that the participant 7 should speak with their financial planner, 8 their CPA, and obtain, you know, that objective 9 advice. 10 That I am afraid that if we assume this 11 liability, that in order to do this job right, 12 it's going to be more expensive than -- than 13 the participants can afford to spend. 14 And that we ought to, you know, think long 15 and hard about including this piece. 16 I believe that when everything comes 17 together, that the asset allocation models, 18 Financial Engines, our various vendors, that 19 everything will dovetail; that once the, 20 you know, decisions are made -- the first 21 decision whether to stay in the defined benefit 22 plan and to go into the defined contribution 23 plan, then in terms of the asset allocation, 24 that all of the pieces will work together, that 25 a participant will be driven to selecting the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 84 2 their goals. 3 Finally, I'd like to thank Governor Bush, 4 General Milligan, and Commissioner Gallagher 5 for the opportunity to serve, and I consider 6 doing so a privilege. 7 And on behalf of all of the members of the 8 IAC, we look forward to doing so in the years 9 to come. 10 Mary Kay Cariseo is going to talk a little 11 bit more specifically about our 12 recommendations. 13 Thank you. 14 TREASURER GALLAGHER: Thank you. 15 GOVERNOR BUSH: Thank you so much. 16 TREASURER GALLAGHER: And, Mary Kay, I want 17 to say the same thing, thank you for your 18 diligent -- 19 MS. CARISEO: Thank you. 20 TREASURER GALLAGHER: -- work and 21 persistence in what you've been doing over the 22 last -- 23 MS. CARISEO: Thank you. 24 I appreciate that. 25 And I don't have the expertise that we're ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 85 2 jointly with the IAC, it's been a very 3 eye opening experience for us, and has brought 4 those of us that don't have the financial 5 background, to be able to rely on them for 6 their expertise. 7 I'm not going to go into -- much in-depth 8 as to what our recommendations were. You all 9 have those, and have had an opportunity to look 10 over them. 11 I would just like to say that I'm very 12 glad, Governor, that you mentioned today that 13 you want to spend some time talking about 14 performance. 15 We did not have the opportunity to really 16 delve into, and looking at product by product 17 what each of these companies is offering, and 18 talking about performance. 19 And I would just ask you, and as I met with 20 each of you last week, to make sure that we 21 don't do this with blinders on, and not look at 22 risk. I think that that is very important. 23 I've been educated about how important that is. 24 The last thing that we want is for our 25 employees to go and chase returns. That's the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 86 2 certainly, as the education component, we need 3 to make sure that we are educating them 4 properly that they don't do that. 5 But I think that you have five companies 6 that have certainly worked very diligently to 7 come as far as they have come. And I know 8 after speaking with many of them, that they 9 look forward to continuing this negotiation 10 process. 11 You've got a -- a tough job ahead of you on 12 November 27th to make a final recommendation. 13 I would ask that you all keep in mind the 14 people that we're doing this for, and that's 15 for our employees. 16 As many of you know, I represent county 17 governments in Florida, and I represent 18 25 percent of the employees that are going to 19 have to make this decision. And I would ask 20 that you keep that in mind. 21 Also, as I have from the beginning, I will 22 continue to keep my main focus on the education 23 component. That is where I think is the most 24 critical key to this program being a success. 25 And so I will continue to focus my ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 87 2 today, we're having our legislative conference 3 down in Orlando. I flew back this morning. 4 But this afternoon, we will be having a 5 general session for all of the county 6 commissioners, county administrators, and 7 county attorneys around the state on the PEORP 8 program so that they are well aware in advance 9 of this decision coming before their employees. 10 So with that, I'm not sure if I really want 11 to thank you for this opportunity. But it has 12 been enlightening, and I have enjoyed it. 13 And I thank you all very much. 14 TREASURER GALLAGHER: I have a question. 15 MS. CARISEO: Yes, sir. 16 TREASURER GALLAGHER: You've been watching 17 education real close. It looks like the plan's 18 pretty well set. 19 How about giving us a grade on what you 20 think it's -- how it is. 21 MS. CARISEO: Well, I can tell you from 22 experience, as someone who used to be in the 23 DB program, who had an opportunity to go into a 24 defined contribution program when I worked for 25 the university, we have set up a system that is ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 88 2 education that I had when I had to make my 3 decision. 4 So although it may not be perfect, we will 5 have to make changes as we go along and we 6 bring groups in. I'm sure we'll have to make 7 some -- some changes. 8 But I can tell you from a personal 9 experience that what I have seen thus far is 10 1,000 times better than what we didn't have 11 when I had to make my decision. 12 TREASURER GALLAGHER: So your past 13 experience helped get this moving in the right 14 direction you think? 15 MS. CARISEO: I hope so. 16 TREASURER GALLAGHER: Well, good. 17 Thank you. 18 GOVERNOR BUSH: Thanks, Mary Kay. 19 MS. CARISEO: Thank you. 20 MR. HERNDON: You want to talk about 21 performance assessment, and we can do that. 22 And I know you also want to hear from some of 23 the speakers. 24 So let me just briefly bring the -- the 25 issue kind of in clarity. One of the concerns ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 89 2 expressed, is our use of risk adjusted return 3 analysis in this stage of the -- the selection. 4 And that risk adjusted analysis was net of 5 fees, and it was done product by product 6 against all of the company's products in 7 similar categories, and against the unbundled 8 line-ups. And all of that information is 9 available for us to highlight for you. 10 But I guess the one point that I want to at 11 least put to rest is the troubling contention 12 that somehow or other this was sprung on folks 13 at the last minute. 14 And so in that light, I would refer you 15 back -- and I didn't bring copies for 16 everybody -- but to the March 19th -- and I 17 want to restate -- March 19th selection 18 evaluation criteria document that the Trustees 19 and the Advisory Councils approved. 20 And I'm not going to belabor this any 21 further. But there's two pages of information 22 in here where we talk about measuring excess 23 return ratio, information ratio, downside risk, 24 relative standard deviations, and so on and 25 so forth. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 90 2 criteria for the bundled providers, and has 3 been in there for months. 4 It is true, Governor, and I'd be the first 5 one to acknowledge, that there are various ways 6 to measure risk. We used one that is endorsed 7 by the consultants that work with us. There 8 are others. 9 They all do measure risk appropriately 10 given what their -- the models are attempting 11 to do. They do come up with different 12 conclusions at times. 13 And so we're not here to suggest that -- 14 that somebody else's proposal isn't acceptable 15 that may be. 16 But they are oftentimes aimed at slightly 17 different targets, too. And it's important to 18 bear that in mind. 19 So I know some of the vendors have -- have 20 expressed that concern. And I just wanted to 21 kind of set that stage, and then we can hear 22 from them at your -- at your pleasure. 23 Now, I have about a dozen people, all of 24 whom want to go last. 25 So if -- if it's all right, we'll just ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 91 2 and we can go from there. 3 And I'm not sure actually -- I -- and these 4 are not in any particular order. I'm not sure 5 that all of them still wish to speak. 6 I know the folks from VALIC, Bob Condon, 7 happens -- 8 GOVERNOR BUSH: Tom -- 9 MR. HERNDON: -- to be first on my list. 10 GOVERNOR BUSH: Tom, can we start with your 11 financial advisor, with Callan, to describe 12 the -- 13 MR. HERNDON: Absolutely. 14 GOVERNOR BUSH: Maybe that would be -- 15 MR. HERNDON: Sure. 16 GOVERNOR BUSH: -- the best way to set the 17 stage. 18 MR. HERNDON: Absolutely. 19 GOVERNOR BUSH: And then -- 20 MR. HERNDON: Ms. Valcik, Jeanne Valcik, 21 who's here on behalf of Callan. 22 GOVERNOR BUSH: And we would ask the 23 vendors -- we'd probably need to set a time -- 24 TREASURER GALLAGHER: And -- and, Tom, why 25 don't you do this: Why don't you take the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 92 2 them up here, and let the Governor squirrel 3 them around any way he wants, and call them as 4 he wants. 5 MR. HERNDON: We can do that. 6 TREASURER GALLAGHER: That'll -- then 7 everybody won't be mad at you for making them 8 first, instead of last. Be mad at the 9 Governor. 10 MS. VALCIK: Jeanne Valcik, 11 Callan Associates. 12 What's your pleasure? Would you like me to 13 go through a description of the risk measures 14 that we looked at, how we got to this point 15 today? 16 I'm not exactly sure what you want to hear. 17 And I talk a lot, I can just launch into 18 something, and go for days. 19 TREASURER GALLAGHER: Just talk long 20 enough -- 21 GOVERNOR BUSH: Why don't you talk about -- 22 TREASURER GALLAGHER: -- so Tom can get -- 23 GOVERNOR BUSH: -- the meaning of life. 24 TREASURER GALLAGHER: -- the names on the 25 papers. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 93 2 TREASURER GALLAGHER: Talk long enough so 3 Tom can write the names on the papers and get 4 them up here. 5 MS. VALCIK: Okay. Okay. 6 First off, if there's anything that's -- 7 that's -- that's really weird about the risk 8 measures that we looked at across these 9 managers, then our Callan clients have real 10 problems, because that's exactly the risk 11 measures that are in this performance book that 12 I presented yesterday. 13 I mean, they're -- they are very standard 14 risk measures that we use for all of our client 15 performance reporting purposes. And if we're 16 going to use them to manage -- measure managers 17 going forward, you can be darn sure that we're 18 going to use them in the search process. 19 Right? 20 TREASURER GALLAGHER: Makes sense. 21 MS. VALCIK: Makes sense. 22 So, you know, when I was at the 23 United Methodist Foundation of Western 24 North Carolina yesterday, we went through these 25 exact same risk measures. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 94 2 say is, what are the measures of risk that we 3 looked at. We didn't look at a single measure 4 of risk. 5 I've been hearing that a lot, that you only 6 looked at one measure of risk. Well, remember 7 that Callan started with 256 funds. And we 8 looked at all of these measures of risk for 9 those 256 funds. 10 We also looked at performance, rolling 11 17-year per-- 17 rolling three-year periods, 12 versus the benchmark in the peer group. 13 We took all of that data, and rolled it up 14 into a score for the vendors, which we 15 presented on May 19th, I believe, in an open 16 meeting. And, of course, that information's 17 been out on the website for a very, very long 18 time. 19 So what are the risk statistics that we -- 20 that we do measure and report to all our 21 clients. First, standard deviation. I'm sure 22 you're all aware of standard deviation. 23 Standard deviation are the quarterly 24 returns. It's a single measure of risk. It 25 says nothing about how it does relative to the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 95 2 Another measure we look at is down-- 3 TREASURER GALLAGHER: While you're there. 4 One of the issues when you do measure is 5 that you have to have a benchmark to measure 6 your -- your risk problem with. 7 And I'm not going to argue with our 8 benchmarks. I think they were -- well, maybe 9 you can -- why don't you do that. 10 Why don't you tell me how we decided what 11 the benchmarks were. 12 I think that's going to help me get to the 13 risk side, if you would. Did you all decide on 14 the benchmarks? 15 MS. VALCIK: We -- 16 TREASURER GALLAGHER: Did we decide on 17 them? What -- what exactly -- how did that -- 18 MS. VALCIK: It was a collaborative 19 effort -- 20 TREASURER GALLAGHER: Okay. 21 MS. VALCIK: -- between Callan, vendors, 22 staff. 23 The benchmarks that we used primarily were 24 the benchmarks that are the ones that were 25 adopted in the Investment Policy Statement. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 96 2 fund, we used the Russell 1000 growth index. 3 Because that's what the policy statements 4 were -- says we're going to measure them 5 against. 6 TREASURER GALLAGHER: Now, did the policy 7 statement name the benchmark, or did it name 8 the -- 9 MS. VALCIK: Policy statement actually 10 names the benchmarks. 11 TREASURER GALLAGHER: Okay. Now, then I 12 need to go back to figure out who set, and how 13 the policy statement was set. 14 I'm just -- this is my catch up education 15 here. 16 MS. VALCIK: Sure. 17 TREASURER GALLAGHER: I probably all knew 18 this at once, I'm sure -- 19 MS. VALCIK: The Investment Policy 20 Statement I would say was adopted about in 21 March. Probably before that actually. 22 And it -- it laid out the nine categories. 23 We've heard that number nine a lot, haven't 24 we? 25 TREASURER GALLAGHER: Oh, yeah. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 97 2 (Governor Bush exited the room.) 3 MS. VALCIK: -- nine categories, what the 4 broad asset class was, and what the benchmark 5 is for each of those. 6 TREASURER GALLAGHER: And what -- during 7 that period, was it op-- was it open 8 discussions so people could have input into 9 what they thought should be those? 10 MS. VALCIK: What we did was we sent a 11 letter to all of the vendors and said, here's 12 the fund that you've given us. We've done 13 regression analysis and decided which Callan 14 style group you should be measured against. 15 Here's the benchmark you gave us, here's the 16 benchmark we're going to use. 17 We sent that out to all the vendors. 18 I believe that was in March also. 19 TREASURER GALLAGHER: Okay. 20 MS. VALCIK: Maybe in April. 21 GOVERNOR BUSH: Now -- 22 MS. VALCIK: And so it -- 23 TREASURER GALLAGHER: -- a vendor -- 24 MS. VALCIK: -- so that information has 25 been on the table -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 98 2 Well, I'm not questioning how long it's 3 been around. 4 MS. VALCIK: Okay. 5 TREASURER GALLAGHER: So a -- a vendor sent 6 to you their product and what benchmark they 7 use -- 8 MS. VALCIK: Uh-hum. 9 TREASURER GALLAGHER: -- their product 10 against. 11 MS. VALCIK: Uh-hum. 12 TREASURER GALLAGHER: Then we picked out 13 what benchmarks we were going to use -- 14 MS. VALCIK: For comparability, correct. 15 TREASURER GALLAGHER: So we -- 16 MS. VALCIK: So within a broad asset class. 17 Such as large cap growth, we used the 18 Russell 1000 growth. 19 TREASURER GALLAGHER: Right. 20 But there could be others. 21 MS. VALCIK: There -- there could be other 22 benchmarks, absolutely. 23 TREASURER GALLAGHER: And usually what 24 drives the benchmarks is the allocation of 25 investments within that benchmark; am I ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 99 2 MS. VALCIK: You mean what drives the 3 return of the benchmark? 4 TREASURER GALLAGHER: Well, that -- right. 5 That -- well, I could -- but the benchmark 6 is set -- okay, you can -- that's probably the 7 good way to put it. 8 The return on that ben-- benchmark is based 9 on the investments made in that benchmark. 10 MS. VALCIK: That's correct. 11 TREASURER GALLAGHER: And everybody knows 12 pretty much exactly what the spread of 13 investments are in -- 14 (Governor Bush entered the room.) 15 TREASURER GALLAGHER: -- Lehman's two -- 16 whatever. 17 MS. VALCIK: Publicly available benchmarks. 18 TREASURER GALLAGHER: Right. So everybody 19 knows that -- 20 MS. VALCIK: A lot of times, you have to 21 buy to get the actual holdings. 22 TREASURER GALLAGHER: Right. 23 But you know exactly what they're 24 holding -- 25 MS. VALCIK: Yeah. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 100 2 everything else, so you know what you're -- 3 what your bogey is to shoot against. 4 MS. VALCIK: Right. 5 TREASURER GALLAGHER: Now, there obviously 6 is different -- let's -- the easiest one for me 7 to take would -- let's take a foreign bond 8 fund. And the benchmark may allow 10 percent 9 of U.S. bonds in it, and other people may put 10 60 percent. 11 MS. VALCIK: Uh-hum. 12 TREASURER GALLAGHER: But that -- and there 13 may be a benchmark that would be 60 percent. 14 So that may put a fund at a disadvantage if 15 they do poorly -- 16 MS. VALCIK: Uh-hum. 17 TREASURER GALLAGHER: -- based on what 18 they're put up against, because they're put up 19 against something that -- that was, for 20 whatever reason, different. 21 So how about getting me to why we picked 22 the ones we picked? 23 MS. VALCIK: Because they're very 24 representative of that particular asset class. 25 They're a good benchmark. They're -- they're ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 101 2 TREASURER GALLAGHER: Better than others. 3 MS. VALCIK: Well, you know, benchmarks -- 4 there's issues with every benchmark that you 5 pick. 6 If there was a perfect benchmark, our whole 7 world would be a lot easier. 8 But as a group of benchmarks, I think that 9 we've made a very good selection within -- 10 within using the Russell benchmarks. 11 TREASURER GALLAGHER: Well, you only use -- 12 MS. VALCIK: Some could -- some people 13 could argue that the S&P Barra growth is a 14 better benchmark. 15 But those are issues for academic papers 16 that we read all the time. 17 TREASURER GALLAGHER: Well -- 18 MS. VALCIK: But as a group, we made it 19 clear to all the vendors that this is what we 20 were doing. 21 TREASURER GALLAGHER: All right. But 22 I'm -- I'm looking at just -- and this does 23 complicate things. 24 But what I'm thinking -- I'm looking out 25 for the guy that's putting his money in. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 102 2 TREASURER GALLAGHER: And I don't want to 3 lose, if I can help it, a product that may be a 4 really good performer in general, but it has a 5 high risk ratio on one benchmark, but not on 6 another. 7 Do you see where I'm coming in -- the same 8 area? 9 Does that make sense to you? 10 MS. VALCIK: It does make sense to me. 11 I'm not sure that we have any instances 12 where that in -- was the case. We had some 13 instances where the vendors said, we don't 14 believe that you have the right benchmark. 15 And actually we ran some of the work that 16 we did for the ISIG group as we were studying 17 all of the returns just a week ago, or 18 two weeks ago. 19 TREASURER GALLAGHER: So what -- what 20 you're telling me is that you -- you listened 21 to them when they made that complaint, you 22 looked at the benchmark they thought was 23 better -- 24 MS. VALCIK: Uh-hum. 25 TREASURER GALLAGHER: -- and you ran -- you ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 103 2 MS. VALCIK: We redid the work, and -- 3 and -- and looked to see how they looked 4 against the particular benchmark that they 5 thought was more appropriate. 6 But it's -- it's important -- 7 TREASURER GALLAGHER: Now, wouldn't change 8 the -- might that change the risk ratio on 9 that? 10 MS. VALCIK: Yeah, it did change the risk 11 ratio. 12 TREASURER GALLAGHER: Right. 13 MS. VALCIK: Yeah. 14 TREASURER GALLAGHER: Well, what I'm saying 15 is I'm -- 16 MS. VALCIK: -- bench ratio. 17 But I do think it's important when 18 you're -- we're dealing with this number of 19 funds, that you use a benchmark that's 20 comparable acrossed all of them. 21 So that if we were to go into each one of 22 them, and use a separate benchmark, I don't 23 think you would get a very good -- good piece 24 of work. 25 So if you're looking at large cap growth ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 104 2 pretty much all have the same fishing pond. 3 I think it's appropriate to use the same 4 benchmark. 5 In the instance I was talking about, it was 6 a -- it was a balanced fund. And we had an 7 issue of whether it was really a balanced fund 8 or not. They -- they convinced us it was a 9 balanced fund, so we used a blended benchmark 10 between the S&P and the Lehman Brothers 11 aggregate. 12 TREASURER GALLAGHER: Okay. So we've done 13 that when it made -- it -- when there -- 14 MS. VALCIK: Right. 15 TREASURER GALLAGHER: -- is some 16 differences. 17 So when you make the blended one, then both 18 of them have -- 19 MS. VALCIK: Then they had a piece of each 20 of them -- 21 TREASURER GALLAGHER: Some advantages -- 22 MS. VALCIK: But -- 23 TREASURER GALLAGHER: -- and disadvantages. 24 MS. VALCIK: -- but if we -- 25 No. This -- this was not search work that ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 105 2 of candidates to try to evaluate. 3 But if we were doing search work, we would 4 evaluate all those managers against a single 5 benchmark. 6 If you said to me, we want you to go out 7 and find the best large cap growth fund 8 available out there, we would go in our 9 database, and we would search relative to a 10 single benchmark for comparability purposes. 11 TREASURER GALLAGHER: Right. 12 But the question would be: Which 13 benchmark, and why? 14 MS. VALCIK: Well, it would -- it's a 15 benchmark that we would sit down with the 16 client and determine beforehand. 17 So we -- we actually write, like a menu -- 18 an order form -- take your order of what -- 19 what benchmark is appropriate for the level of 20 risk that you see. 21 There are differences in benchmarks. The 22 Russell 1000 growth index, for instance, that's 23 more aggressive than the S&P 500. 24 TREASURER GALLAGHER: Right. 25 See, that's where I'm coming from. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 106 2 the opportunity to be a little more aggressive, 3 and they should obviously be educated on that. 4 And, therefore, they'll -- you know, 5 that -- the -- the manager that aims toward 6 that benchmark -- 7 MS. VALCIK: Uh-hum. 8 TREASURER GALLAGHER: -- is going to 9 outperform the one that aims toward the one we 10 have. 11 So it would be -- when you look at the two, 12 if you use our benchmark, what's going to 13 happen is, you're going to say, oh, that's -- 14 that's a high risk deal, because it doesn't 15 meet the parameters of our benchmark. 16 But if it was the other one, which is a 17 more riskier benchmark, it meets it well, and 18 it wouldn't have the risk problem in it. 19 Am I right? 20 MS. VALCIK: I -- I'm not sure what you 21 said. I'm not sure what you were saying. 22 TREASURER GALLAGHER: Well, maybe I'm 23 not -- 24 MS. VALCIK: But you understood. 25 TREASURER GALLAGHER: -- sure what I say ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 107 2 GOVERNOR BUSH: I -- 3 TREASURER GALLAGHER: What I'm saying is if 4 you -- depending on what benchmark you use -- 5 GOVERNOR BUSH: You wouldn't adjust 6 downward as much on a -- on a benchmark that 7 was -- 8 TREASURER GALLAGHER: More risky. 9 GOVERNOR BUSH: -- that was more -- more 10 aggressive. 11 MS. VALCIK: Yeah. But it's the -- it's 12 the return that you -- 13 GOVERNOR BUSH: I assume that's what you 14 said. 15 MS. VALCIK: If you're looking at -- 16 TREASURER GALLAGHER: That's right. 17 MS. VALCIK: -- if you're looking -- 18 GOVERNOR BUSH: Exactly. 19 MS. VALCIK: -- at -- at the measure of -- 20 of risk that -- that everyone has talked about, 21 the excess return ratio, it's return of the 22 portfolio, minus return of the benchmark -- 23 it's the same for all managers -- and then it's 24 the standard -- it's the standard deviation of 25 the return relative to that benchmark. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 108 2 of the manager -- of each of the managers. 3 So a manager that takes less risk relative 4 to that benchmark -- 5 TREASURER GALLAGHER: But see -- 6 MS. VALCIK: -- and relative -- 7 TREASURER GALLAGHER: -- it's relative -- 8 MS. VALCIK: -- to return -- 9 TREASURER GALLAGHER: -- to that benchmark 10 is the issue. 11 MS. VALCIK: But you -- but -- but -- 12 TREASURER GALLAGHER: There's a more 13 aggressive benchmark, he's not going to be -- 14 be any more risky. 15 MS. VALCIK: If it's a more aggressive 16 benchmark, he's not going to be more risky. 17 Okay. 18 TREASURER GALLAGHER: Am I right, or -- 19 I mean -- 20 MS. VALCIK: But if they -- but if they 21 have good absolute returns relative to that 22 large cap growth peer group, they're going to 23 look good relative to the large cap growth 24 benchmark. 25 TREASURER GALLAGHER: But if you have a -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 109 2 MS. VALCIK: Uh-hum. 3 TREASURER GALLAGHER: -- and they 4 produce -- 5 MS. VALCIK: Uh-hum. 6 TREASURER GALLAGHER: -- they would look 7 great, because they're producing all these high 8 returns, you're also going to say they have a 9 very high risk aversion to that benchmark. 10 MS. VALCIK: But the only conservative 11 benchmark that there could be for in -- in the 12 large cap growth area, is to go to the S&P, 13 which is a more core benchmark. 14 So I would argue that we're looking at 15 large cap growth, we need to look at a large 16 cap growth benchmark. 17 And we're looking at core, let's look at 18 that core benchmark. 19 TREASURER GALLAGHER: Okay. Well, that's 20 probably not a -- 21 MS. VALCIK: And that's where you chose to 22 be. 23 TREASURER GALLAGHER: That's probably not a 24 good example. 25 But I would say bond -- foreign bonds might ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 110 2 maybe performed, and some U.S. bonds have, and 3 so depending on what mix you'd put in, you'd 4 perform better. 5 MS. VALCIK: I don't think we had many 6 issues with the use of the Lehman Brothers 7 aggregate index in the bond world. And, 8 fortunately, we didn't have any foreign bond 9 funds. 10 TREASURER GALLAGHER: Okay. Go ahead. 11 MS. VALCIK: I'm not sure if I made myself 12 clear. But I -- what I could -- 13 GOVERNOR BUSH: I lost you about 5 minutes 14 ago. When you -- 15 MS. VALCIK: That's terrible. 16 GOVERNOR BUSH: -- got to standard 17 deviation and -- 18 TREASURER GALLAGHER: Well, maybe if I 19 don't ask any more dumb questions, we'll get 20 along -- 21 GOVERNOR BUSH: Let me ask -- no. Those 22 are good questions. They were just above my 23 pay grade. 24 The -- is it -- you have to measure -- you 25 have to benchmark, you have to measure -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 111 2 GOVERNOR BUSH: -- particularly a -- 3 I mean, that -- that seems to be a given -- 4 MS. VALCIK: And -- and you need to -- 5 GOVERNOR BUSH: -- concern -- 6 MS. VALCIK: -- pick a standard benchmark. 7 GOVERNOR BUSH: Is it a -- is it a -- it 8 is -- is it a past performance, is it a 9 indicator on an investment that is, you know, 10 20 years, 30 years in duration. 11 I -- 12 MS. VALCIK: No one's ever been able to 13 prove that past performance is a perfect 14 indicator of future performance. 15 If it was, we'd all -- 16 GOVERNOR BUSH: Haven't we -- 17 MS. VALCIK: -- we -- we would just be all 18 omniscient, and pick the perfect fund. 19 GOVERNOR BUSH: Right. 20 That's just what -- 21 MS. VALCIK: And so we -- 22 GOVERNOR BUSH: -- I thought. So -- 23 MS. VALCIK: -- we looked -- 24 GOVERNOR BUSH: -- so what -- when we 25 weighted the factors -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 112 2 GOVERNOR BUSH: -- for the whole grading, 3 how much of this, which is all looking at the 4 past to determine -- which I assume is the only 5 thing you can do, unless you're clairvoyant -- 6 how much weight do we put into that as it 7 related to how we graded these? 8 MS. VALCIK: Well, we -- we looked at a 9 number of different measures. So not just 10 straight performance. 11 And we also looked at rolling returns, 12 which we at Callan believe are very important. 13 We look at 17 rolling three-year periods. So 14 it measures the -- 15 GOVERNOR BUSH: Okay. 16 MS. VALCIK: -- manager's ability -- 17 GOVERNOR BUSH: That's -- 18 MS. VALCIK: -- to have consistent 19 outperformance. That's -- that's like the only 20 darn thing we've ever found that has any 21 predictive power. 22 TREASURER GALLAGHER: That's a good one. 23 GOVERNOR BUSH: That's a good one. 24 MS. VALCIK: And that's -- that's a measure 25 that we looked at for every manager in -- in ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 113 2 the unbundled piece of the program. 3 TREASURER GALLAGHER: And -- and that is 4 how we got down to the 47 that we're sitting 5 here talking about now? Is that -- 6 MS. VALCIK: Forty-seven funds now? 7 TREASURER GALLAGHER: Is that -- is that 8 about where we are? Forty-seven. I'm 9 guessing. 10 I didn't personally count them. But -- 11 MS. VALCIK: Well, the -- the process that 12 we came through is we -- we had the -- the 13 256 funds. We at Callan had an individual 14 score for each of the funds based upon risk 15 adjusted measures, straight performance 16 measures, and so on. 17 We also had a qualitative score for each 18 company. And then we had a single score for 19 each of the companies. 20 GOVERNOR BUSH: A what score? 21 MS. VALCIK: A single score. It was a 22 1 to 5 score. 23 TREASURER GALLAGHER: Okay. Now, 24 there's -- the difference between the funds and 25 the company is, the company's the one who is ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 114 2 MS. VALCIK: Yes. 3 TREASURER GALLAGHER: -- and the fund is 4 managed by -- 5 MS. VALCIK: Someone else. 6 TREASURER GALLAGHER: -- someone else. 7 MS. VALCIK: Yeah. 8 So in the case of -- of -- of VALIC, they 9 don't have any internally managed funds. All 10 of theirs are -- are managed by different fund 11 companies. 12 TREASURER GALLAGHER: All right. 13 MS. VALCIK: And we evaluated the fund 14 company, the management team, not VALIC, in 15 that particular score, because we're looking at 16 the product. 17 So I was trying to roll how we got to the 18 final ISIG recommendation. We came from the 19 Callan recommendation on investment 20 performance. That was rolled into the Mercer 21 recommendation, and their recommendation was 22 looking at the education services, and so on. 23 That went forward to the ISIG group. The 24 ISIG group then -- based upon the -- the 25 vendors that had made it that far, we exchanged ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 115 2 performance, and -- and who the portfolio 3 managers were, and, you know, we're 4 concerned -- there -- there's something that 5 looks screwy here, would you please explain 6 that. 7 And as a result of that session -- then 8 there was a scoring session where the ISIG got 9 together and discussed everything that was on 10 the table right now, and came with the final 11 recommendation that you all saw. 12 TREASURER GALLAGHER: Well, that was the 13 recommendation not to take any. 14 MS. VALCIK: Uh-hum. 15 TREASURER GALLAGHER: Okay. Well, we're 16 pas-- I think -- I think we're past that. 17 MS. VALCIK: Oh. And I was going to tell 18 y'all, just in case -- I -- everybody thinks 19 consultants are biased against bundled 20 providers. I used to be a bundled provider. 21 So I -- 22 TREASURER GALLAGHER: And that's -- 23 MS. VALCIK: -- I hang out with them. 24 TREASURER GALLAGHER: And that's why you 25 left? ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 116 2 MS. VALCIK: No. I -- I still go to their 3 weddings, I still go to the baby showers. 4 TREASURER GALLAGHER: Well, let -- let me 5 just say this. We're -- we're sort of outside 6 the bundled program at this point -- 7 MS. VALCIK: Okay. 8 TREASURER GALLAGHER: -- okay, so I -- 9 that's probably the wrong name to call them. 10 At least that's what I think -- 11 MS. VALCIK: Yeah, you're -- 12 TREASURER GALLAGHER: -- because they're -- 13 MS. VALCIK: -- right. It's -- 14 TREASURER GALLAGHER: -- not -- 15 MS. VALCIK: -- difficult. It's more of 16 a -- 17 TREASURER GALLAGHER: The key to the bundle 18 is -- is they offer the service to let you know 19 how your money's doing in each of the funds 20 that they -- that they run. 21 And they, you know, obviously take care of 22 that for you. 23 Here the State's agreed to do that for 24 everybody. So nobody has to compete with that. 25 MS. VALCIK: Yeah, it's more of a product ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 117 2 TREASURER GALLAGHER: Right. 3 So really I think that nobody has a problem 4 with these -- I tried to do this before, and 5 didn't get very far with it. 6 But we all -- I think everybody's pretty 7 much agreed that these are quality companies, 8 they represent quality funds, some are -- 9 perform better than others. 10 MS. VALCIK: Better than the others, yeah. 11 TREASURER GALLAGHER: We're trying to not 12 have duplicates here -- choice, but certainly 13 not have the same -- like we have unfortunately 14 in -- in our defined -- or in our deferred comp 15 program, we have seven bundled providers, and 16 many of them offering the exact same funds, 17 which just -- 18 MS. VALCIK: Right. 19 And as you -- 20 TREASURER GALLAGHER: -- same -- 21 MS. VALCIK: -- know, that that -- that 22 practice is changing. I mean, the number -- 23 TREASURER GALLAGHER: They're all changed. 24 MS. VALCIK: -- of bundled providers in 25 457 plans is slowly being worked down. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 118 2 we're -- we should be at the front end of this 3 line, not in the back. And it looks like 4 that's slowly where we're ending up. And we're 5 going to have to -- fair warning, we have to 6 look at those deals, same thing in the -- in 7 the defined -- or the deferred comp. 8 So really one of the things I think we need 9 to be looking at, now that we're not bundled, 10 and I guess we're -- the State's the bundler, 11 how are all the -- how are all these funds 12 doing? 13 MS. VALCIK: Uh-hum. 14 TREASURER GALLAGHER: Because these are 15 really what we're recommending, through these 16 providers, to our employees. 17 So I'll stop talking. 18 MS. VALCIK: So what do you want me to talk 19 about? 20 Do you want me to talk more about these 21 risk measures and really drive you crazy? 22 Do you want me to talk about -- 23 GOVERNOR BUSH: What -- how much -- 24 TREASURER GALLAGHER: Let's -- 25 GOVERNOR BUSH: -- variation's on the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 119 2 MS. VALCIK: I'm not sure what you mean. 3 GOVERNOR BUSH: -- you adjust for risk. 4 How much -- and you have many different ways 5 to -- to do that apparently. You picked one 6 that's the -- a common one. 7 MS. VALCIK: Uh-hum. 8 GOVERNOR BUSH: How much variation is 9 there -- I think, Tom, you told me there was 10 14 different adjustment schemes that can be 11 used, or formulas that can be used for risk. 12 Does it create -- if you pick one over 13 another, does it create huge variances, are 14 there -- in terms of measurement? 15 MS. VALCIK: You know, they tend to be 16 fairly comparable and move in lock step, but 17 not always. 18 Because, for instance, standard deviation 19 is a straight out measure of risk, not relative 20 to the benchmark. 21 So you're going to get numbers that are all 22 over the board when you look at standard 23 deviation only. So we never look at standard 24 deviation only really. 25 Downside risk, of course, is relative to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 120 2 above the benchmark. So downside risk only 3 measures the standard deviation of returns 4 below the benchmark. 5 That's -- and that's a number that we 6 looked at heavily as we went through. 7 You know, what's their downside risk. Because 8 that talks about when do they underperform. 9 That's what's probably pretty darn 10 important to us. 11 TREASURER GALLAGHER: Yes. 12 Well, Governor, I -- 13 GOVERNOR BUSH: You ready? 14 TREASURER GALLAGHER: -- start calling the 15 twelve if you -- and -- 16 GOVERNOR BUSH: Maybe you could just stick 17 around, because -- 18 MS. VALCIK: You bet. 19 GOVERNOR BUSH: -- there may be a chance 20 to -- 21 MS. VALCIK: I'm ready. 22 TREASURER GALLAGHER: You may want to 23 counter some -- 24 GOVERNOR BUSH: All right. Well, here we 25 go, the -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 121 2 GOVERNOR BUSH: -- this is the 3 Florida Lottery. 4 I can't read it. 5 Oh, here it is. Loren Briscoe, 6 Representative Fasano's office. That's a good 7 timing. 8 Good morning. 9 MS. BRISCOE: Good morning. 10 Luck of the draw, right? 11 GOVERNOR BUSH: Yeah. Congratulations. 12 MS. BRISCOE: Thank you. 13 My name is Loren Briscoe, and I am here to 14 speak on behalf of Representative Fasano. He's 15 unable to be here today. Unfortunately, he was 16 doing a speech for a high school this morning. 17 So just to give you some background about 18 myself. I work for the House Majority Office, 19 and work closely with the State Administration 20 Committee that handles the FRS issues. 21 As you know, Representative Fasano has been 22 very involved in this process, and he was 23 honored to have served on the PEORP Advisory 24 Committee pursuant to the request of the 25 Speaker of the House, Tom Feeney. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 122 2 simple, and that is to create the best defined 3 contribution plan for the members of the 4 Florida Retirement System. The Legislature 5 believes that choice and competition are the 6 two key ingredients that will make this plan 7 successful. 8 In support of this intent, we can look to 9 similar legislation passed by other states. 10 For example, South Carolina has mandated in 11 their legislation that they provide for at 12 least four bundled providers. 13 So by allowing multiple companies to 14 compete and to participate alongside the 15 unbundled portion of the plan, the plan will 16 foster competition that ultimately benefits the 17 consumers, who are our State employees, our 18 municipal employees, and our teachers. 19 Representative Fasano strongly endorses the 20 Advisory Council's recommendation to add five 21 bundled providers to the current unbundled 22 design of the PEORP. However, he also believes 23 that the plan should offer participants the 24 option to invest in guaranteed annuity 25 products. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 123 2 implemented so that it is readily available to 3 the members of the Florida Retirement System. 4 Representative Fasano understands that the 5 SBA has a time line to follow, and deadlines to 6 meet in order to get this plan up and running. 7 However, to that end, he fully supports the 8 recommendations of your own Advisory Committee, 9 and asks that you direct the SBA to contract 10 with those five bundled providers. And, 11 finally, he encourages the SBA to negotiate 12 with a provider that offers a guaranteed 13 annuity. 14 In closing, allow me just to pass along 15 Representative Fasano's sincere compliments to 16 both the Trustees and the members of the PEORP 17 Advisory Council and the IAC. While we have 18 not always agreed on these issues, I believe 19 that all the parties share in our 20 aforementioned goal of premiere -- providing a 21 premiere defined contribution plan for 22 Florida's valued employees. 23 GOVERNOR BUSH: Thank you. 24 MS. BRISCOE: Thank you, sir. 25 GOVERNOR BUSH: Thanks very much. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 124 2 GOVERNOR BUSH: When you come up, if you 3 could sign in and state for the record who you 4 are, and what company you represent, that'll 5 help. 6 Steve Keating, and Dr. Van Harlow from 7 Fidelity. 8 MR. KEATING: Good morning. 9 My name is Steve Keating. On behalf of 10 Fidelity Investments, would like to thank you 11 all for giving us the opportunity to spend some 12 time with you this morning. 13 We had a wonderful half hour slide 14 presentation -- 15 GOVERNOR BUSH: That's what I was going to 16 suggest, is half hour's probably a little too 17 much. 18 MR. KEATING: And we agree with you. 19 Based on the comments this morning, we were 20 actually going to talk about three or four 21 different issues. We really just want to 22 address the one issue that you all had talked 23 about earlier, which -- 24 GOVERNOR BUSH: Do you think you can do it 25 in 5 minutes, just because -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 125 2 GOVERNOR BUSH: Perfect. 3 MR. KEATING: So what I would like to do 4 really is just turn it over to my colleague, 5 Dr. Van Harlow. 6 And let me just introduce him. 7 Dr. Harlow is the President and Chief 8 Investment Officer of Fidelity Strategic 9 Advisors. 10 He is also responsible for Fidelity's asset 11 allocation policy worldwide. 12 He received his Ph.D. in financial 13 economics and his MBA from the University of 14 Texas, and his B.A. in physics from 15 Rice University. 16 TREASURER GALLAGHER: Go, Horns. 17 MR. KEATING: He is also a CFA and past 18 editor of the Financial Analyst's Journal. 19 DR. VAN HARLOW: All right. Thank you. 20 Good morning. 21 I've been tagged with the -- the risk 22 discussion, so I'd like to just walk you 23 through -- 24 GOVERNOR BUSH: Want to move the mic up a 25 little bit so we can hear you better? ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 126 2 work you -- walk you through a real simple 3 example about risk and -- in this context, 4 and -- and why some alternatives are -- are -- 5 are very important. 6 TREASURER GALLAGHER: I tell you what, if 7 you think we can see that -- I can't anyway, 8 and I can usually see pretty good. 9 GOVERNOR BUSH: I can see that. It says 10 low price stock, Russell 2000 value. 11 MR. KEATING: We have a handout -- 12 TREASURER GALLAGHER: Well, give me the 13 handout. Because I -- I can read, but I can't 14 see far away. 15 Did you get one, and I didn't? 16 How about that. 17 GOVERNOR BUSH: You can have mine. 18 TREASURER GALLAGHER: Oh. Well, staff's 19 back there hogging it. 20 GOVERNOR BUSH: They're hoarding them back 21 there. 22 DR. VAN HARLOW: All right. 23 GOVERNOR BUSH: Onward. 24 DR. VAN HARLOW: Here's an example of two 25 funds. And what we're looking at is an example ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 127 2 the Russell 2000 value, which is the -- the 3 benchmark that's typically used to evaluate 4 small cap value funds. 5 Up -- on the upper left -- well, the 6 vertical access is return; horizontal axis 7 is -- is risk as measured by standard 8 deviation. 9 But we see that the low price stock fund 10 relative to the Russell 2000 value has higher 11 returns, lower risk. Fund X has slightly 12 higher returns and slightly greater risk. 13 And using the excess return ratio, the 14 benchmark relative measure that is being used 15 in -- in today's context, Fund X can easily 16 have a higher ratio than low price stock. 17 GOVERNOR BUSH: Why? 18 DR. VAN HARLOW: Because it's closer to the 19 benchmark. 20 TREASURER GALLAGHER: Uh-hum. 21 DR. VAN HARLOW: It's operating -- it tends 22 to own the same industries, capitalization 23 stocks, value versus growth stocks. And 24 because the denominator is a risk relative to 25 that benchmark, it can tend to have a higher ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 128 2 into those higher scores. 3 It really addresses 4 Commissioner Gallagher's point. 5 Which of those funds though is a better 6 fund for participants. Low price stock has 7 lower risk, and a higher return. 8 But to be honest with you, I can't tell 9 from this perspective, because the appropriate 10 way to evaluate funds, the standard in the 11 industry, is to understand the risk -- the 12 exposures to small cap and large cap stocks 13 that that fund took, the exposures to value 14 versus growth, domestic versus foreign. 15 In a mutual fund world, every manager is 16 different. 17 In a defined benefit world, the benchmark 18 relative measure is pretty much the standard, 19 because everybody is getting a -- a benchmark 20 specific mandate. 21 In a mutual fund world, in a defined 22 contribution world, that's not true. Everybody 23 tends to do whatever they think's best for the 24 shareholder. 25 So -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 129 2 It's well known that using generic 3 benchmarks can be misleading. I can -- I can 4 reverse rank funds by choosing different 5 benchmarks. And this is well known. 6 So what's important is to evaluate funds 7 based on the investments that they're making. 8 And this is very easy to do. 9 So basically, you're using fund specific 10 benchmarks, fund specific risk analysis. 11 And why is this important to the 12 State of Florida? 13 Because Financial Engines does exactly 14 that. 15 Financial Engines does this -- this 16 portfolio specific analysis. And I think in 17 this context, and going forward with -- with 18 the various providers, Financial Engines may be 19 recommending funds to employees that wouldn't 20 necessarily have the highest excess return 21 ratio. 22 So there's sort of a disconnect there. So 23 in the negotiations going forward -- 24 GOVERNOR BUSH: Get that down, too. 25 I'm asking just to make sure that we get ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 130 2 because that's it. 3 DR. VAN HARLOW: Okay. So I think there 4 needs to be some -- 5 TREASURER GALLAGHER: I can agree with 6 that. 7 DR. VAN HARLOW: -- alternative measures of 8 performance going forward, if -- if, in fact, 9 you're going to be recommending funds based on 10 this style specific -- or fund specific risk 11 analysis. 12 GOVERNOR BUSH: It seems to me that we -- 13 I'm -- wouldn't you want to match those, Tom? 14 Wouldn't you want to have the measurement 15 of performance going in to be the same that you 16 use when you're providing advice? 17 MR. HERNDON: Yes, sir. If you're 18 attempting to measure the same thing. 19 But as Dr. Van Harlow is pointing out, in 20 the defined contribution world or the mutual 21 fund world, which he lives, funds have fund 22 specific benchmarks, and they float around. 23 They're not driven by a benchmark -- 24 TREASURER GALLAGHER: Right. 25 MR. HERNDON: -- that is consistent. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 131 2 TREASURER GALLAGHER: The managers 3 change -- 4 MR. HERNDON: -- to do is just the opposite 5 of that. That's precisely the point. We're 6 trying to measure against a consistent 7 benchmark. 8 Because we want to be able to say to 9 people, you bought a large cap growth fund, and 10 this is what we're giving you is a large cap 11 growth fund. 12 We're not giving you a large cap growth 13 fund that is camouflaged as 30 percent bonds 14 and 20 percent small cap, because that's 15 something different than what you bought. 16 And so that's what we're trying to do is to 17 say specific to a consistent benchmark across 18 the category. 19 GOVERNOR BUSH: Okay. 20 DR. VAN HARLOW: If I could respond. 21 The great thing about the technology today 22 in Financial Engines, and other products that 23 we have, is that we can really focus on the 24 security selection ability of managers, and not 25 worry about where they live. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 132 2 allocation level, which is clearly where the 3 majority of risk control is done, we can pick 4 and choose to offset those various exposures to 5 match the asset allocation benchmark that is, 6 you know, chosen to meet that employee's, 7 you know, retirement objective. 8 So we don't -- we don't necessarily have to 9 tie our hands to specific benchmarks anymore. 10 We can -- we can -- we can control that risk at 11 the portfolio level, which is what 12 Financial Engines does. 13 TREASURER GALLAGHER: Well -- and I -- I 14 agree with that. You see, I think the only 15 real way to measure -- I'm pretty -- you know, 16 all these nice things are great. 17 But how much did I give you, and how much 18 do I get back? 19 DR. VAN HARLOW: Right. 20 And were you compensated for the risks that 21 you took. 22 TREASURER GALLAGHER: Well, I guess that 23 matters, because I took a risk, I might not get 24 as much back. 25 But that's pretty much the way I like to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 133 2 And, yes, there's a benchmark in order to 3 keep everybody inside a parameter -- a set of 4 parameters, which is what Tom was talking 5 about. 6 We don't want somebody thinking they're 7 buying large cap, and 50 percent of the 8 investment's in small cap. 9 DR. VAN HARLOW: Correct. 10 TREASURER GALLAGHER: But it really -- 11 they've got -- did great. Or it might be, it 12 did terrible, you never know. 13 But it's -- it's -- I guess you have to 14 look at how managers have operated in the past 15 on how much you gave them, and how much you get 16 back. And it doesn't guarantee it. But a lot 17 of times, managers are good, and they're good. 18 DR. VAN HARLOW: Right. 19 And there are guidelines that you -- that 20 you -- that are available to you for those 21 managers to understand where they're operating. 22 Okay. 23 GOVERNOR BUSH: Finished? 24 DR. VAN HARLOW: Yeah. 25 GOVERNOR BUSH: Thank you. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 134 2 GOVERNOR BUSH: Tom -- 3 TREASURER GALLAGHER: A lot of points for 4 that. 5 GOVERNOR BUSH: -- Tom Cerra from IRC. 6 How you doing, Tom? 7 Good morning. 8 MR. CERRA: Good morning. 9 Governor, Trustees. I'm not going to make 10 this speech. I'm going to -- 11 TREASURER GALLAGHER: We already -- 12 MR. CERRA: -- make it very brief, based on 13 Mr. Gallagher's comments. 14 First of all, it's an honor to be here as 15 an American and a Floridian, and participate in 16 this debate in a free country. 17 I'd like to make two points: Number one, 18 the motion made by Commissioner Gallagher fits 19 hand in glove with a survey that we conducted 20 with the IRC's membership. We did a poll, and 21 I -- the IRC are your 300,000 K-12 education 22 employees. 23 Eighty-eight percent of the employees 24 surveyed wanted to have -- 25 TREASURER GALLAGHER: Of course. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 135 2 national brand name companies in this proposal 3 plan. And you're going to, I hope, do that 4 today. 5 I would tell you that it would be a hollow 6 victory though if on November 27th, we come 7 back, and there are not five choices for those 8 employees to make. 9 So I would -- I would say to you as you 10 give instructions to your negotiators -- and in 11 my previous life, I was a school board 12 negotiator, and negotiated over 100 labor 13 contracts. 14 And I know, if I'm given bad instructions, 15 I sometimes come back with bad deals. 16 But I -- I would hope that the instructions 17 would be, come back with a deal. And put the 18 people in the room and negotiate hard, but 19 let's get the deal. We need five choices for 20 this plan to work well. 21 And we commend you for the effort you've 22 made thus far. We hope on November 27th, 23 that's where we find ourselves. 24 Thank you very much. 25 GOVERNOR BUSH: Thank you. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 136 2 MR. CONDON: Good morning. 3 And thank you for giving me the opportunity 4 to say a few words. 5 What I would like to just mention -- I'm 6 not going to go through these things. I'm 7 just -- for the record, I'm leaving you with a 8 couple of forms. 9 I think to the discussion on risk, I just 10 want to put it in context. I think the way it 11 was raised was in terms of bundled versus 12 unbundled. In other words, it wasn't company 13 specific. 14 It was raised in terms of, what is the 15 right measurement if you're going to determine 16 whether you should even go with bundled 17 providers. And in that context, I believe one 18 of the risk elements was used. 19 When, in fact, Callan -- and -- and we 20 agree that since March, there have been on the 21 record all of the tests that we use. And there 22 were 12 of them. 23 But when we were asked questions by various 24 board members, for example, through all the 25 committees that we visited with, this one ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 137 2 using just one risk measurement. 3 And the chart I've put in front of you 4 demonstrates that if you looked at all 12 of 5 the measurements, and -- and -- and categorized 6 them in total -- 7 GOVERNOR BUSH: Which -- which chart? 8 There's three pieces of paper -- four pieces -- 9 MR. CONDON: The color -- 10 GOVERNOR BUSH: -- of -- 11 MR. CONDON: -- the color chart that has 12 the red and the blue. 13 GOVERNOR BUSH: That one? 14 MR. CONDON: It says: Which funds are less 15 risky? 16 Basically what this does, it takes each 17 asset category, and it compares all of the 18 bundled providers in those categories, based on 19 the Callan information that is out in the 20 public realm, which is the only thing we have 21 to work with. 22 And it compares it against the SBA group of 23 funds. And in every cast -- in every case, if 24 you aggregate all of the risk measurements, the 25 bundled providers meet the tolerance -- risk ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 138 2 SBA's funds. 3 And -- and so this was really done in 4 response to numerous questions that we, and 5 other bundled providers were getting about were 6 our investments more or less risky. And that 7 was the reason why we put this together. And I 8 don't want to belabor it. 9 The other thing I think that's important is 10 that at the end of the day, as 11 Commissioner Gallagher has pointed out, it's -- 12 you know, what does the employee choose, and 13 what will they have in terms of investment 14 results. 15 And the other graph that we put in here, 16 again, based on the information that is out on 17 the -- on the Internet, provided by the SBA, 18 which, again, is the only thing we have to work 19 with, this would demonstrate that net net at 20 the end of the day, over the -- the five-year 21 performance period, if you use the asset 22 allocation that was used by the SBA, the 23 bundled funds consistently outperformed the 24 group of SBA funds. 25 And, again, the -- I think the -- in terms ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 139 2 Commissioner Gallagher, it -- it really is 3 somewhat of a moot point is that I think you're 4 going to have a -- a lot of great choice here. 5 And I think that if -- the -- the real 6 purpose I think of looking at things like this 7 is we all should be on the same page. 8 And that goes I think to the point about 9 when we do enter into the negotiation phase, 10 at -- at the last time I appeared before you 11 was the day that, General, you recommended that 12 we do a best and final offer, and that 13 everybody be given all of the background 14 information as to how decisions up to that 15 point had been made, so that everybody could 16 see the light of day, everybody could see what 17 basis decisions were being made on. Because 18 there seemed to be a lot of confusion that day. 19 And I would recommend that as we enter into 20 the negotiation phase, we do it as team 21 members, that we look at this as how do we -- 22 the -- the SBA and the bundled providers, put 23 together the best possible team that will not 24 only provide the best investments for the 25 employees, but will also provide the best ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 140 2 How do we take our assets -- and I mean 3 physical assets -- and combine them with the 4 physical assets and the great work that 5 Tom Herndon showed today that's already been 6 done in terms of the Internet, and how do we 7 blend all those together, and come away with a 8 package of both bundled and unbundled providers 9 that -- that presents a team face to the entire 10 employee group. 11 And to do that, I think we have to enter 12 into negotiations in good faith, and we need to 13 set some rules and parameters as to what you 14 expect to come out of -- of those negotiations. 15 GOVERNOR BUSH: What would you suggest 16 we -- we should expect? 17 MR. CONDON: That whatever measure is used 18 for why investment funds are picked, that we 19 all understand right up front what those 20 measurements are going to be. 21 For example, in the letter that we did 22 receive notifying us that there probably would 23 be negotiations if you arrived at the 24 conclusion that you did today, one of the 25 recommendations was that we remove our stable ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 141 2 That is a very important tool to be used in 3 asset allocation within the -- the investments 4 that we would be recommending. 5 So, again, we just need to know, what are 6 the rules. Because if you -- if -- if we get 7 sent away to negotiate, and come back in a -- 8 in a mooted form, I don't believe we've done 9 the best thing for the employees. 10 And so we -- as has happened all through 11 this process, there probably are going to be 12 some healthy issues of disagreement. And we 13 should have an opportunity to understand why 14 there is disagreement, and be able to quickly 15 rectify that, and not have to wait and pop it 16 on you -- or -- or on anyone else on the 27th. 17 GOVERNOR BUSH: Do you have any specific 18 suggestions though of parameters of negotiation 19 that would give you some comfort that it's good 20 faith? 21 MR. CONDON: Yes. 22 I think that, for example, in the SBA 23 letter that came to us, it said, be prepared 24 for an additional round of best and final 25 offer. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 142 2 the United States. We make our best and final 3 offer. And we do it in the context of what we 4 believe is in the best interest of the 5 employees as far as the services that we're 6 providing. 7 The implication is that cost -- pure bottom 8 line cost is the only parameter on which things 9 should be decided. If that was the case, you 10 wouldn't have choice. 11 So I -- I do think that -- we may be 12 misinterpreting the last sentence of the letter 13 that went out from the SBA, but it seems to 14 imply that it ought to be done on lowest cost. 15 And we think that -- that some guidance 16 needs to be given there. 17 TREASURER GALLAGHER: Well, let me ask you 18 a question. 19 On your sheet like this -- 20 MR. CONDON: Yes. 21 TREASURER GALLAGHER: -- give me what the 22 face-to-face counseling on $100,000 account 23 would be for VALIC. 24 MR. CONDON: It would be $350. 25 TREASURER GALLAGHER: All right. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 143 2 MR. CONDON: Yes. 3 TREASURER GALLAGHER: Wouldn't -- 4 wouldn't -- very few people are going to get 5 this face-to-face thing. 6 You're giving it free in your -- at -- 7 that's part of your cost -- 8 MR. CONDON: It's built into our structure, 9 yes. 10 TREASURER GALLAGHER: And the SBA chose to 11 let people that want to do it, you know, do it. 12 I think what they're talking about talking 13 to you about is, if somebody wants a 14 one-on-one, take the 350 -- take that -- that 15 34 basis points out of that -- that lump there 16 that's costing everybody that wants to buy one 17 of your products, 34 basis points, and -- 18 GOVERNOR BUSH: That's a good point. 19 TREASURER GALLAGHER: -- let those that 20 want one-on-one pay the $345. And if we're 21 doing this for the other ones, I think we ought 22 to do it there. 23 And that's the kind of -- and I'm just 24 pointing this out. I'm not saying, you know, 25 do that or else. Because that's -- I'm -- I'm ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 144 2 negotiations that, to me, would be, you know, 3 acceptable, that you should -- you should be 4 able to -- or want to be able to let every 5 employee save 34 basis points. 6 I mean, that -- that over a 30-year period, 7 you know, is a lot of money on an annualized 8 basis that could -- because it -- it -- it 9 becomes -- when you take it off the 10 basis points and turn it into cash, it -- 11 MR. CONDON: And -- and I think there's -- 12 that you can look -- this is what I mean by a 13 healthy discussion. I think you can look at 14 that a couple of different ways. 15 For example, you heard the lady that spoke 16 to you earlier this morning mention that 17 26 percent of the people in the state of 18 Florida don't even read at the high school 19 level. 20 I mean, you have employees that are spread 21 out all over the state that are probably not 22 even going to know how to use the Internet to 23 get some of the advice that they're going to 24 need to have. 25 We have the ability to sit down -- we do ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 145 2 employees in other plans that the State already 3 sponsors that are going to look to us for 4 advice. 5 The -- both those people, and people who do 6 not currently do business with us, have the 7 ability to come to our representatives, knowing 8 that they're part of the program, they could 9 sit down with them, they could do asset 10 allocation modeling, they could do a complete 11 financial plan if they want to do -- and 12 there's no obligation, because we don't charge 13 them $200 an hour. 14 And if after listening to our 15 representative, Commissioner, they decided that 16 maybe the VALIC program was not the right one 17 for them, they could then go and invest in 18 the -- in the SBA program, and they will have 19 had the benefit of possibly hours of 20 counseling, and didn't pay a penny for it. And 21 we're willing to take that risk. 22 So, again, you know, it's -- there's -- 23 there's a healthy debate over whether -- 24 whether you should not make the service 25 available, unless somebody pays for it; or make ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 146 2 done a good enough job that the individual 3 says, you know, you did such a great job, I 4 would now like to invest with your company. 5 TREASURER GALLAGHER: Right. 6 MR. CONDON: But if they don't, I 7 understand how I'm going to follow. 8 TREASURER GALLAGHER: And I understand 9 that. And that's -- but these are the kind of 10 things that I think they're referring to that 11 need to be talked about. 12 I'm not, by any means, saying it ought to 13 be the other way. 14 MR. CONDON: And, Commissioner -- 15 TREASURER GALLAGHER: In fact, I -- 16 MR. CONDON: -- I think we're on the 17 same -- 18 TREASURER GALLAGHER: -- I asked the 19 same -- 20 MR. CONDON: -- page. 21 TREASURER GALLAGHER: -- question of 22 putting -- putting the two thirty-five into 23 the -- you know, have it -- maybe everybody 24 should get -- get some two thirty-five an hour 25 in the bundled provider -- not in the unbundled ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 147 2 And, you know, we figure everybody gets 3 2 hours and see that 34.5 basis points would be 4 pretty low on the -- and if -- in the 5 unbundled. I think. I don't know. 6 That would be something that -- there's 7 nobody negotiating for the unbundled providers 8 as a -- as an unbundled provider provider. 9 GOVERNOR BUSH: Do you think it's 10 inappropriate in the negotiations that may take 11 place, should we empower the SBA to do so, 12 the -- the staff, to make sure that there's 13 complementary education services, and not 14 contradictory education services? 15 MR. CONDON: Yes, absolutely, Governor. I 16 agree with that. 17 In fact, when we met with the committees -- 18 ever since the -- the revised process took 19 place -- and we've now gone through I don't 20 know how many different committee meetings, 21 and -- 22 GOVERNOR BUSH: Thank you. 23 MR. CONDON: -- it was very refreshing. 24 But at that point, we were able to 25 demonstrate, because we were constantly being ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 148 2 service. 3 And we used examples and referred them to 4 examples for -- like, for example, 5 Baptist Hospital in Miami, where we are one of 6 two providers of investment choices, along with 7 our friends here from Fidelity, as an example. 8 Yet the hospital wanted one consistent 9 message of how the program itself -- 10 GOVERNOR BUSH: So, I mean -- 11 MR. CONDON: -- should work, before you 12 ever get to the investments. And they chose 13 our organization to do the communication of the 14 overall plan, with no mention of either -- 15 GOVERNOR BUSH: Do you think -- 16 MR. CONDON: -- company's investments. 17 GOVERNOR BUSH: Do you think that there 18 should be recordkeeping synchronization? 19 MR. CONDON: I think there should be 20 synchronization, but I don't think there should 21 be duplication. 22 And, for example, one of the 23 representatives from Citibank came to our 24 organization, and looked at our systems, he 25 said, they're totally compatible, you could tap ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 149 2 you need. Therefore, you don't have to do 3 separate recordkeeping. And we totally agree. 4 And we -- and -- and we're ready -- and -- 5 and it is in that form that I gave you, we're 6 ready to put the -- the cost of the 7 recordkeeping back into a reduction of our 8 fees. 9 GOVERNOR BUSH: Okay. 10 So, in other words, the point being that 11 we've established some parameters here -- 12 anything that -- that General Milligan or 13 Commissioner Gallagher or I have said that gave 14 you a sense that there won't be good faith 15 negotiations -- 16 MR. CONDON: No. 17 GOVERNOR BUSH: -- given the six or 18 seven -- 19 MR. CONDON: Nothing that you've said, 20 Commissioners, gives me a problem. 21 Again, my only reference -- and it could 22 be -- just -- 23 TREASURER GALLAGHER: You're getting 24 paranoid -- 25 MR. CONDON: Just because -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 150 2 long -- 3 GOVERNOR BUSH: Just because they're 4 following you, doesn't mean you have to be 5 paranoid, you know what I mean? 6 TREASURER GALLAGHER: Let me ask another 7 question -- 8 MR. CONDON: I resemble that remark, yes. 9 TREASURER GALLAGHER: -- another -- another 10 question. 11 I'm concerned that the law may be hindering 12 what we ought to be doing here. And the reason 13 I say that is, it looks to me -- at least what 14 Tom said earlier is that the law is requir-- is 15 restricting you as a company, and your 16 education people, to only talking about your 17 products. 18 And there are certain areas that might be 19 good for somebody that you don't have. But if 20 somebody was giving a well rounded, 21 independent -- 22 MR. CONDON: Commissioner, I don't think 23 the law is that restrictive, as -- as long as, 24 for example, the SBA and its partners, if we 25 have bundled providers, can come to an ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 151 2 as far as how the program is to be 3 communicated. 4 We could actually -- and we have offered 5 this up to -- in -- in our meetings with the -- 6 with the SBA, we could actually be scripted as 7 to what we could -- we could hold some of the 8 seminars if they wanted to use our manpower, 9 they could provide us with scripts, we could -- 10 we could -- as we do in the case of 11 Baptist Hospital, we could talk strictly about 12 the program, until such time as a discussion of 13 investment products comes along. 14 And then I believe Mr. Herndon is correct, 15 the only investments we could discuss at that 16 point would be our own investments. 17 But generically up to that point, we could 18 become, as could the other bundled providers, 19 a -- a very valuable part of the overall team. 20 GOVERNOR BUSH: Any other questions? 21 Thank you. 22 MR. CONDON: Thank you. 23 GOVERNOR BUSH: Dominic Calabro, Tax Watch. 24 We've got two more after that. 25 TREASURER GALLAGHER: That's it? ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 152 2 TREASURER GALLAGHER: Hallelujah. 3 MR. CALABRO: Thank you, Governor. 4 My name is Dominic Calabro. And I do 5 request I'll limit my hour and half 6 presentation to about 3 to 5 minutes. 7 All kidding aside, I think this is a -- a 8 very historic event, very historic opportunity. 9 Moving to a defined -- or a contribution 10 program and making it available on an optional 11 basis for the employees of Florida's state and 12 local governments is essential to modernizing 13 our entire public employee work force. 14 Florida is one of the best managed defined 15 benefit plans in the country. Florida Tax 16 Watch, the Florida Council of 100, through the 17 Davis Productivity Awards, has acknowledged 18 that. 19 This is a very different plan. 20 Defined benefit, a -- a plan by its definition 21 and design, is very paternalistic. It's 22 designed to be so. 23 It's designed to ensure that we minimize 24 preserved capital and minimize the risk, and 25 make sure that there are assets to honor the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 153 2 The defined bene-- contribution plan though 3 is different in that it is very much an 4 employee empowerment plan, and very much market 5 driven. 6 And I think some of the challenge has been 7 moving from the defined plan, which virtually 8 most -- if not all the states have -- to a -- a 9 very market driven defined contribution plan is 10 that there's kind of a seepage in trying to be 11 paternalistic, and trying to make sure that 12 we -- we looked out for the investment return, 13 the low costs, and so forth, for the employees. 14 And while it's noble, I think it -- it 15 unintentionally undermines the -- the real 16 value -- the real value I think of committing 17 to having both unbundled and bundled providers. 18 I think you're right to select five. 19 They were reviewed by the Investment 20 Advisory Committee very, very thoroughly, 21 meeting a -- a range of important tests, as 22 well as the PEORP. 23 But I think -- 24 (Comptroller Milligan exited the room.) 25 MR. CALABRO: -- by having -- having this, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 154 2 importantly, empower the employees with timely, 3 relevant information about the class of 4 investments and how they're performing 5 throughout. 6 The important thing I want to recommend -- 7 I think it's already built into the plan, but 8 critically important, is to make sure that an 9 employee who may choose either bundled or 10 unbundled, can move, not only future 11 investments, but all the equity of -- of past 12 principal, and -- and earnings achieved without 13 a -- a fee, so that they can make those 14 investment decisions without a fee cost. Okay? 15 They still have market risk, but that would 16 be a very, very important consideration so that 17 they're always in the driver's seat to make 18 those choices. 19 TREASURER GALLAGHER: What do you mean by 20 "fee costs?" You mean a transfer fee to -- to 21 the -- 22 MR. CALABRO: An administra-- a -- a 23 penalty. 24 TREASURER GALLAGHER: Right. 25 Okay. We've pretty much eliminated -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 155 2 TREASURER GALLAGHER: -- those. 3 MR. CALABRO: But that's critically 4 important, because otherwise people feel locked 5 in. I don't want to pay 5 percent or 7, or 6 3 percent, and so forth. 7 So by giving them that, I think the next 8 challenge -- I think that the -- the General 9 asked is making sure that the employees are 10 given very timely, accurate information so they 11 can see whether they want to move those funds. 12 And I think by doing that, you'll put the 13 employee in the driver's seat, they will become 14 better investors, they'll also become better 15 consumers, not only with their state and -- or 16 Florida Retirement System investment, but also 17 their other private investments, and their own 18 personal decisions. 19 I think you've made the right decision. 20 I think this is historic. And like anything 21 else, I think by having a combination of the 22 bundled and unbundled, they both add value, 23 you're going to make each one better. 24 A conversation I had just the other day in 25 Orlando with some folks at -- I was talking to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 156 2 Phil Blumberg. 3 And he said, Dominic, you know, since FIU 4 has moved down here, Florida International 5 University, it has made the University of Miami 6 a better university. And vice versa. 7 President Mitch Maidique of FIU said the 8 same thing. 9 So I think the competition between the two 10 would go a long way to make the entire plan 11 better for the employees and the taxpayers of 12 Florida. 13 GOVERNOR BUSH: Thank you -- 14 MR. CALABRO: Thank you. 15 GOVERNOR BUSH: -- Dominic. 16 Steve Metz, TIAA-CREF. 17 MR. METZ: Thank you, Governor, 18 Commissioner, members of the SBA. My name is 19 Steve Metz. I represent TIAA-CREF. 20 Obviously I do appreciate this opportunity. 21 My partner and I, Frank Messersmith, and 22 Susan Johnson, and others in our firm have 23 worked on this project -- 24 (Comptroller Milligan entered the room.) 25 MR. METZ: -- for four long years. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 157 2 jobs up here given, I think, the pending 3 motion. 4 And as a matter of fact, 5 Commissioner Gallagher, when he was a House 6 member, and I was a young lobbyist, I remember 7 taught me that usually when you get up and 8 speak, you're not adding very much, the 9 decision's already been made. 10 But there are some occasions when hopefully 11 there's some things that I can say that maybe 12 will change your mind. 13 Because my job is a little bit more 14 difficult than most of the speakers today, I 15 hope you'll just give me a few more -- a few 16 more moments. 17 I have also conferred with Shane Matthews 18 and Doug Flutie before I got up here today, 19 because I realize I've got to throw a -- a 20 Hail Mary in the end zone here. 21 So I -- I hope you will listen to me. 22 I'm not an expert on a lot of this. This 23 is way pay grade above me when you start 24 talking about a lot of these technical issues. 25 So I'm going to try to bring it home from, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 158 2 we do get into real technical issues, we have a 3 number of people from TIAA-CREF that are here. 4 I think the very purposes and the main 5 goals of the PEORP seem to match so beautifully 6 with my client, TIAA-CREF. 7 By the way, I'm very, very proud to 8 represent that company. And in over 30 years 9 of representing clients before the Legislature 10 and Executive agencies, I can tell you, I've 11 never been more proud of representing an 12 organization like TIAA-CREF. 13 They're a low cost leader in this arena, 14 they've been around since 1918, they were 15 started for the sole purpose, the only purpose, 16 is to help the participant have a good pension 17 at the end of the day. 18 And your criteria of choice and low cost, 19 and solid reliable returns, and the emphasis on 20 the participant, is the very essence of why 21 TIAA-CREF was started. 22 I think there are at least three very sound 23 reasons why I hope you'll -- you'll open up 24 that motion and think about adding TIAA-CREF. 25 The first reason I think is a very ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 159 2 provider that's still standing -- barely 3 standing, but still standing -- that offers 4 three unique products that are not offered in 5 the unbundled SBA architecture, nor are they 6 offered by any of the bundled providers. 7 Those three products are a guaranteed fixed 8 annuity with very superior returns, a 9 real estate account that again has had very 10 good returns, and a social choice account. 11 You'll recall on a 6 to 6 vote, about as 12 close as you can get, the joint committee voted 13 to offer TIAA-CREF's guaranteed annuity 14 account. And unfortunately 6 to 6 doesn't get 15 you there. But that's how close we are here. 16 The guaranteed annuity account, it 17 currently pays 6.5 percent. Over the last 18 20 years, it has averaged 9.1 percent. 19 That's an absolute outstanding good, solid 20 return, especially when we're given the -- the 21 downturn in the equity stock market. 22 Two point five million people have decided 23 to choose that product. And I know 24 Commissioner Gallagher has been very concerned 25 about liquidity. And I know he understands ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 160 2 Less than 2 percent, Commissioner, and 3 members of the SBA, less than 2 percent of 4 those people ever take the money out before 5 the -- the -- before the agreed-on time period, 6 which, as you know, we have changed from ten to 7 seven, realizing the concerns that you had 8 about liquidity restrictions. 9 An infinitesimal amount of that 2 percent 10 ever pay any kind of penalty. 11 So the marketplace has shown -- the 12 marketplace, not an estimate of kind of where 13 we're going to be in the future -- but the 14 marketplace over the last 80 years has shown 15 people like this, they like this as a choice. 16 May not be a choice for all of us, but as a 17 choice. It's not bad to have some money in 18 something that pays that kind of solid return 19 without any loss of principal. A guarantee 20 you're not going to lose your principal. 21 Also like to talk very briefly about the 22 real estate account. Again, an account not 23 offered by anyone else. 24 Real estate has been a great thing to 25 invest in the last few years. It's a long-term ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 161 2 diversify your stock investment. It has gotten 3 8.96 percent over the last five years. Very, 4 very good returns. 5 And finally, the other thing that we offer, 6 nobody else offers, is the social choice 7 account. Not everybody, but there are a lot of 8 people that decide to invest in portfolios, 9 even their pension dollars, with a social 10 conscience. They don't like liquor, they don't 11 like tobacco, they don't like northern Ireland. 12 This gives your participants that 13 opportunity, and it has the benefit of 14 insulating the rest of your funds from -- from 15 that -- from special interest groups that -- 16 that might be petitioning you for this or that. 17 It's a -- it's -- it makes sense to offer that 18 as a choice. 19 The second reason that I think you ought to 20 put TIAA-CREF in this -- in this motion, this 21 is a solid, solid company. 22 One of the main reasons that we were not 23 chosen by SBA staff in this last round, and one 24 reason that PEORP Advisory didn't include us, 25 is the fact that this risk adjusted capital, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 162 2 layman's standpoint, I know it was based on 3 basically your -- your last five years of 4 returns. 5 TIAA-CREF is an old-fashioned company, been 6 around since 1918. We own all of our own 7 funds. We don't have the luxury, nor do we 8 think it's appropriate in a pension system, to 9 go out and try to pick the last best 10 five years, and -- and use that as -- as some 11 way to get people to invest. 12 We don't hit homers. We hit singles and 13 doubles every single year. And if somebody is 14 a participant in TIAA-CREF, the statistics 15 show, without question, that they're going to 16 get good, reliable, solid returns. 17 So we would ask for you to think about us 18 in those terms. We may not be the star, but 19 we're awful, awful safe; we're awful sound; and 20 we're going to give you good, good reliable 21 returns. 22 We simply can't win the kind of beauty 23 contest that -- that we were put in here. 24 I'd like to also say just a few other 25 things. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 163 2 recordkeeping has been a big issue. The reason 3 that TIAA-CREF has internal allocated 4 recordkeeping is because we have a special way 5 that we vintage the dollars that you give us 6 for the guaranteed annuity to make sure that 7 the participant, that individual participant 8 giving us money at a certain time, that that 9 money is locked in at a certain interest rate 10 and dividend that we can give them. 11 The only way we can do that is with this 12 allocated recordkeeping. It does not affect 13 CitiStreet and your TPA's ability to continue 14 to have master recordkeeping. They should have 15 it. 16 And the facts also show that they -- we can 17 hook up to them without -- without any problem. 18 So we don't understand why you would deny 19 participants what is -- what is, in effect, a 20 one-stop service with a true bundled provider. 21 And by the way, we're -- we're really the 22 last bundled provider standing here that does 23 offer all of those things. One person can call 24 us up and get it all. 25 It would also seem that you might want to ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 164 2 one, two, three years down the road, you really 3 want to see how your system has worked? 4 Why not have one true bundled provider 5 that's low cost, that's reliable, that has an 6 impeccable reputation, to compare. Compare 7 customer satisfaction at the end of a couple of 8 years. 9 How -- how has it worked with us as a 10 bundled provider, how has it worked with what 11 you have set up? 12 Last couple comments. 13 Low cost. Let me put these charts out 14 front. 15 GOVERNOR BUSH: Can you see it? 16 MR. METZ: You've seen these charts I think 17 before. 18 You know, when you -- when you look at us 19 over on that right-hand side, there's no 20 gimmicks, there's no reimbursements. What you 21 see is what you get. That's what this company 22 is all about. It's low cost. 23 It's often been said in the literature that 24 performance comes and goes, but costs will live 25 with you forever. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 165 2 look like gross and net. And you can see that 3 even on a net basis, we're still the second 4 lowest among all the bundled providers. 5 So if I had to -- had to sum up why I 6 really hope and pray, and beg and plead that 7 you -- 8 TREASURER GALLAGHER: Beg and plead. 9 MR. METZ: -- you think about adding us, 10 with -- I -- I just see no downside to adding 11 us, and all the pluses -- but -- but here -- 12 why not add one more? Why not add us? 13 We've got the most experience ever in 14 DC plans for public employees. Started since 15 1918; we have the highest financial rating -- 16 the highest financial rating from all 17 independent rating organizations; we're low 18 cost; we're going to give you solid returns. 19 You can see this last article that I gave 20 you -- I mean, we have a -- we have a 21 reputation for trustworthiness -- actually 22 in -- in this survey that was done, we were 23 number 2 in the country, the -- the second -- 24 the -- number 1 was USAA, which is an insurer 25 that caters to the U.S. military personnel. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 166 2 thought of that way. But that's based on 3 80 years of trying to do the right thing. 4 So we just hope that you would please think 5 about getting us to the bargaining table. I'm 6 very proud to represent this company. 7 And I know you have a tough decision, and I 8 hope you'll -- I hope you'll include us. 9 GOVERNOR BUSH: Thank you, Steve. 10 TREASURER GALLAGHER: I have one quick 11 question, if I may. 12 GOVERNOR BUSH: Yes, Commissioner. 13 TREASURER GALLAGHER: I received a letter 14 from an Associate Dean at the University of 15 Miami, and I just want to read one thing. And 16 I want you to clarify this for me. 17 It said: In short, my concern is that 18 accepting the SBA recommendation would deny 19 State University System employees the 20 opportunity to benefit from the products and 21 services of a company that is highly esteemed 22 in the academic world, meaning TIAA-CREF. 23 Do you want to comment on that for me? 24 I don't believe that it does that, do you? 25 MR. METZ: I'm sorry? ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 167 2 read it again, or -- 3 MR. METZ: Yes. 4 I -- I thought they were flattering us for 5 a moment there. 6 TREASURER GALLAGHER: Well, they were. But 7 they were -- they were -- this letter said 8 that -- I'll repeat it again. 9 My concern is that accepting the SBA 10 recommendation -- that means not having you 11 included -- 12 MR. METZ: Yes. 13 TREASURER GALLAGHER: -- would deny 14 State University System employees the 15 opportunity to benefit from the products and 16 services of a company that is highly esteemed 17 in the academic world. 18 MR. METZ: Well, I think the -- I -- I 19 think, Commissioner, the answer to that is that 20 not every employee in the higher ed system is 21 eligible for the current Optional Retirement 22 Program that, as you know, TIAA-CREF has about 23 60 percent of that market. 24 There are a number of employees that are in 25 higher ed that are not eligible for ORP, that ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 168 2 talking in that context. 3 TREASURER GALLAGHER: So we're not denying 4 people that already have it now -- 5 MR. METZ: No. 6 TREASURER GALLAGHER: -- the opportunity 7 now -- the future opportunity. 8 MR. METZ: No. That's what I think he's 9 talking about. 10 TREASURER GALLAGHER: Okay. 11 GOVERNOR BUSH: I'm encouraged that the 12 University of Miami is concerned about the 13 State University employees. That's a -- 14 TREASURER GALLAGHER: I am, too. 15 GOVERNOR BUSH: -- positive sign. 16 TREASURER GALLAGHER: Well, just to be 17 straight up, FIU sent a letter also. 18 GOVERNOR BUSH: Yeah. I know. 19 Thank you, Steve. 20 Any other questions? 21 The last speaker is Ron Richmond from 22 SAFECO. 23 MR. RICHMOND: I'm here to also beg to be 24 on the team. 25 I have two issues today actually. One is ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 169 2 And that has never been resolved by this Board 3 at this point. 4 As you'll recall, about a month ago, 5 Bob Cohen, a lawyer from our firm, came here, 6 and -- and advised you that we were involved in 7 protests. You asked that we go mediate with 8 the SBA. The SBA has recommended to you that 9 you do not allow us in. 10 As you will recall, we were 12 points 11 behind the vendor, VALIC, out of 1,000 points. 12 And really there was no criteria posted ever 13 for a cutoff. It was done summarily. There 14 were no number of points that were necessary, 15 there were no number of vendors that were 16 necessary, there was no criteria. And we 17 believe that alone flies in the face of the 18 Administrative Procedures Act. 19 We believe that we should be graded higher. 20 We offered a guaranteed account as a 21 money market account that was accepted by 22 Callan as a product, but dismissed by Mercer. 23 Callan, we thought, was the product 24 advisor, and Mercer not. But we believe that 25 that would have thrown the 12 points above. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 170 2 Subsequent to that meeting with the SBA, 3 the SBA called and asked if we would allow 4 Share Builder to stand on its own. It's a 5 self-directed brokerage account. 6 And we advised that we would allow that to 7 stand on its own. 8 And what makes Share Builder a 9 self-directed brokerage account unique is that 10 you can buy fractional shares with it. It's 11 the only self-directed brokerage account in the 12 country that you can retire -- that you can buy 13 fractional shares in a retirement fund with. 14 We would like to have the opportunity to -- 15 to go ahead -- and -- and Tom has recommended 16 that to you, the two Advisory Committees caught 17 me dead -- flat-footed at the end the other 18 day, and in about 30 seconds after they'd done 19 all their discussion of -- of -- of everything 20 else, said, as to the third one, let's take 21 that up. And -- and just very quickly, they -- 22 they said that they would like to defer that. 23 We would like the opportunity to go ahead 24 and negotiate that at this time. 25 It may be that we cannot come to Tom's ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 171 2 we would like the opportunity to have -- to go 3 ahead and negotiate at this time. 4 So, number one, I would urge you to allow 5 us to participate as a team player; and, 6 number two, allow us to at least have the 7 self-directed brokerage account, Share Builder, 8 stand on its own, and negotiate. 9 Thank you very much. 10 GOVERNOR BUSH: We have one more -- 11 I'm sorry -- we -- one more speaker, Dan Demko 12 from SunAmerica. 13 And that's it, I think. So -- 14 MR. DEMKO: Thank you, Governor. 15 Make it real quick. Just two clarifying 16 points is what I wanted to raise. 17 SunAmerica, VALIC, a member of the 18 AIG companies, I think what Mr. Metz meant to 19 say, share the highest ratings in the industry. 20 So just as a clarification point. 21 And secondly, Mr. Gallagher, in terms of 22 the fixed annuity offered by SunAmerica, it is 23 completely liquid, there are no restrictions, 24 there are no penalties, it does guarantee 25 interest, does guarantee principal. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 172 2 again, that would be unique in the -- in the 3 program, that you had a guaranteed account 4 without any of the restrictions. 5 Thank you very much. 6 GOVERNOR BUSH: Thank you. 7 Tom, would you like to add anything before 8 we move forward with -- 9 MR. HERNDON: No, sir, Governor, I'll 10 resist the temptation. 11 And I think you had a discussion prompted 12 by Commissioner Gallagher's proposal at one 13 point to direct us to negotiate with the 14 five companies that he named. 15 And then there are a couple of other issues 16 related to that that we need to -- need to 17 pursue. 18 So -- 19 TREASURER GALLAGHER: Well, I'll try and 20 make a motion. And you can pick out some 21 issues in it if you choose, so you've got -- if 22 you're comfortable with your instructions. 23 My motion would be to direct staff to 24 negotiate with Fidelity, VALIC, ING Aetna, 25 Nationwide, Prudential, and SunAmerica for the ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 173 2 GOVERNOR BUSH: No. 3 TREASURER GALLAGHER: The -- the 4 recommendation also requests the Trustees to 5 direct the SBA to -- or -- I'm sorry -- I also 6 want to mitigate the concerns regarding -- 7 GOVERNOR BUSH: Can we start over just for 8 a second? 9 TREASURER GALLAGHER: Sure. 10 GOVERNOR BUSH: I think there's -- other 11 than the five bundled providers, there are 12 three issues that -- that have been discussed 13 at least. One -- or two. 14 One is the suggestion that the SunAmerica 15 product be put in the VALIC line-up, because it 16 meets your criteria on the annuity. It's 17 not -- 18 TREASURER GALLAGHER: Okay. If -- no. But 19 not the annuity, just the brokerage fund. 20 GOVERNOR BUSH: That's SAFECO. 21 MR. HERNDON: That's SAFECO. 22 GOVERNOR BUSH: That's the second issue, 23 and that's SAFECO. 24 TREASURER GALLAGHER: SAFECO. I'm sorry. 25 But SAFECO is not part of -- ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 174 2 two separate issues. 3 TREASURER GALLAGHER: I made -- I'm -- 4 thank you for straightening me out. That's 5 SAFECO. 6 GOVERNOR BUSH: Okay. Do you want to start 7 over, and -- 8 TREASURER GALLAGHER: I will. 9 GOVERNOR BUSH: Okay. 10 TREASURER GALLAGHER: My motion is to 11 direct staff to negotiate with Fidelity, VALIC, 12 ING Aetna, Nationwide, Prudential, and SAFECO 13 for the self-directed brokerage account. 14 It -- I'm also moving that they -- in 15 the -- negotiation is to mitigate concerns 16 regarding fees and costs, investment products, 17 transition issues, educational services, 18 quality, and recordkeeping. 19 COMPTROLLER MILLIGAN: I think I understood 20 that. 21 TREASURER GALLAGHER: I'll be glad to -- 22 COMPTROLLER MILLIGAN: I think I -- no. 23 You don't need to repeat it. That's fine. 24 TREASURER GALLAGHER: Actually she could 25 read it back better than I could repeat it. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 175 2 question, that you had mentioned Sun and the 3 annuity product in the first version; and in 4 the second one, you went to SAFECO and the 5 self-directed brokerage firm. 6 And I just want to be clear -- 7 TREASURER GALLAGHER: I meant -- and to be 8 very clear -- SAFECO for the self-directed 9 brokerage account. 10 MR. HERNDON: And not -- 11 TREASURER GALLAGHER: And not the other. 12 MR. HERNDON: And Not Sun and the annuity. 13 Okay. 14 I'm sorry. 15 TREASURER GALLAGHER: Not add -- 16 MR. HERNDON: I just -- 17 TREASURER GALLAGHER: -- an annuity at this 18 point. I believe the annuity should come in 19 the next point. 20 MR. HERNDON: Okay. I'm -- 21 GOVERNOR BUSH: What do you mean "the next 22 point?" 23 TREASURER GALLAGHER: This is -- this is 24 Tier IV. And this is -- these are accumulated 25 annuities, and most people have gotten away ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 176 2 I think annuities should be looked at in 3 Tier V, which is you've accumulated money, and 4 it's the payout side. 5 COMPTROLLER MILLIGAN: You know, I -- I 6 don't have any problem with -- with the motion. 7 I -- I hope that it -- it's clear that 8 during the negotiations, that everything is 9 really out on the table. And -- and that we 10 need to make sure that we give ourselves the 11 best protection that we can give ourselves down 12 the road. 13 I'm not -- I'm not concerned that we won't 14 come to good negotiations for the near term in 15 setting this thing up initially. I am 16 concerned about -- 17 GOVERNOR BUSH: General, good point. 18 COMPTROLLER MILLIGAN: -- where we are two 19 or three years from now. 20 And so I think the sense -- our sense is 21 that -- or the intent that we have in terms of 22 these negotiations I think is clear. 23 And with that statement, I'll second the 24 motion. 25 MR. HERNDON: Ms. Grant. ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 177 2 clarifying comment. 3 The committee, when we discussed the 4 self-directed brokerage option, and introducing 5 it at this time, we felt that somewhat of a 6 walk before you can run, and that if we put 7 this in at this time, it may be very confusing. 8 We have had very volatile markets. And we 9 are concerned about opening up the window for 10 individuals to, in a lot of cases, the 11 participants in these plans, this is all the 12 money that they have in the world that is 13 savings. 14 And to put an incentive, an opportunity in 15 there for them to trade a portfolio in that 16 scares us very much. 17 We had a lot of very significant issues 18 that we needed to discuss at the meeting. And 19 when we did hit that issue, we decided that we 20 didn't feel that it was something that should 21 be in the initial line-up, and that if it is 22 going to be in the line-up in the future, that 23 we should discuss it at that time. 24 TREASURER GALLAGHER: Well, you may be 25 absolutely right, it -- maybe it shouldn't be ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 178 2 But I want -- the reason I made the motion 3 the way I did is I want it to be in the 4 negotiations at this time. 5 I recognize that having a brokerage window 6 is one that -- it's like allowing people to 7 invest in a pre-IPO, that you have to be a 8 qualified investor. And the -- the SEC 9 requires that. 10 In my personal opinion, I would not want to 11 see a brokerage window that didn't have a 12 qualified individual making -- being able to 13 opt into that, because of the very things 14 you're saying. 15 But I -- I do think that there are some 16 opportunities here that SAFECO has brought to 17 the table that others don't offer, especially 18 that -- you know, being able to buy percentages 19 of stocks, that we should look at it at this 20 time. 21 I think it would be good for the staff to 22 negotiate with them at this time. And when we 23 bring it on line, it -- we may come to the 24 conclusion that it shouldn't be on line in the 25 first year or two, and you may have a very good ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 179 2 And I think I would like to have the input 3 from, you know, our advisory boards on what the 4 results of the negotiations are. 5 And -- and then it may be, please, don't 6 put it on line yet. Or make sure that these 7 are the qualifications, somebody has to have X 8 number of dollars in -- in their account; and, 9 you know, some other qualifications rather than 10 to have them, as you -- as you say, out, 11 you know, trading, you know, their money away. 12 So I -- I have the same feelings with you. 13 And this motion that I've made today -- and 14 I think the other two would agree -- by no 15 means guarantees that these companies are 16 getting a contract. 17 What it does is, say move ahead with the 18 negotiations, let's see what the results of 19 those are, and they'll come back with those. 20 And that's what I mean with this one, too. 21 I wanted to at least let it start, and get 22 going. And we may -- we may believe it 23 shouldn't started right away. 24 But I -- you did give us your input on 25 these, and you sort of did on that saying, ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 180 2 sure we have time to start from scratch, and we 3 can come up with something. 4 I would like to have the input from the 5 advisors on this. But I do want to at least 6 have the negotiations move ahead with it. 7 MS. GRANT: Okay. With all due respect to 8 your comments as to making sure that the 9 investors are qualified investors, and that 10 it's not open to where it can create, if you 11 will, like a source of danger, well -- that's 12 on the record? 13 TREASURER GALLAGHER: Absolutely. 14 MS. GRANT: Okay. 15 TREASURER GALLAGHER: I -- I will tell you 16 that -- that -- that has to be part of -- of 17 the opportunity for people to -- to go to a 18 brokerage window and -- and buy and sell when, 19 in fact, they're dealing with their -- I mean, 20 that is a responsibility I believe we have. 21 I mean, it would be -- we -- I don't think 22 we have the option to hand somebody $35,000, 23 and say, by the way, here's your retirement 24 money. 25 And that's what you could be doing in a ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 181 2 they may -- it may come back, and -- and it 3 won't make sense. I don't know. I'm not -- 4 I'm not prejudging it. 5 Fair warning is it may not make it. But I 6 want to at least see -- give it a chance to see 7 how far it can go. 8 MS. GRANT: Okay. Thank you. 9 GOVERNOR BUSH: There's a motion and a 10 second. 11 Any other discussion? 12 All in favor, say aye. 13 THE CABINET: Aye. 14 GOVERNOR BUSH: Okay. 15 MR. HERNDON: Governor, just one point -- 16 GOVERNOR BUSH: Passes unanimously. 17 MR. HERNDON: -- of clarification. 18 I'm sorry. 19 GOVERNOR BUSH: I just -- I would add one 20 other thing. It doesn't have to be in the 21 motion itself. 22 But there was a question of partnership and 23 good faith. And I'm confident that the SBA, 24 while they didn't start off with this 25 philosophically as the path they wanted to go ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 182 2 said that we want to pursue this -- 3 MR. HERNDON: Yes, sir. 4 GOVERNOR BUSH: -- and it may not yield 5 five, as you said, Commissioner, but there's a 6 pretty clear intent here. 7 So we hope that this will be done -- 8 I guess you're going to do it quickly, which is 9 great -- and that there's -- quicker than I 10 imagined is -- pretty -- pretty amazing. 11 And -- and that we really do look at this 12 in a creative way to -- to -- to get this done 13 right. 14 And -- and I would just one more time 15 emphasize what General Milligan's concern is, 16 because I agree with him wholeheartedly, to -- 17 to look at this in the longer term basis, and 18 try to look over the horizon and see what 19 the -- what the concerns that may come up, if 20 we can deal with those now, it'd be a lot 21 easier than after the fact. 22 MR. HERNDON: Yes, sir. 23 TREASURER GALLAGHER: If I may just add one 24 other thing. 25 If we were to take -- and I haven't been ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 183 2 of the available investment opportunities 3 for -- if all of these were included right now 4 for our pensioners to make choices from, how 5 many are we up to? 6 MR. HERNDON: I don't know either, to be 7 honest with you, Commissioner. I think it's 8 around 50. But I -- 9 TREASURER GALLAGHER: Fifty. 10 MR. HERNDON: -- I haven't added them up 11 with these -- with these five, plus the 12 unbundled program. But I think it's in that -- 13 TREASURER GALLAGHER: Okay. 14 MR. HERNDON: -- it's in that ballpark. 15 TREASURER GALLAGHER: Of course, we have 16 150 in the deferred comp thing, which is an 17 absolute impossible situation. 18 GOVERNOR BUSH: Clear victory. 19 TREASURER GALLAGHER: I would like -- 20 Yeah. 21 I would like you to look and see what some 22 sophisticated businesses offer in some of their 23 retirement plans in numbers. 24 I would hope that they'd be less than our 25 deferred comp, and, you know -- there's some ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 184 2 may -- 50 may be the number. I don't know. 3 But I'd like you to include that so that we 4 end up with a reasonable amount so that people 5 can make good choices, and not be overwhelmed 6 with a number of -- of choices. 7 In other words, we -- we've got columns 8 they fit in, I'd like to see the columns 9 covered, but I don't think we need to cover 10 them all with four different products. 11 MR. HERNDON: We can do that easily enough. 12 And if I might ask, Governor, just as a 13 point of clarification -- 14 GOVERNOR BUSH: Yes, sir. 15 MR. HERNDON: -- we have deferred until now 16 going forward with any contract negotiations 17 with the unbundled vendors, since they were all 18 kind of in a holding pattern. 19 We would like to move forward at this 20 point, with your consent, to proceed to 21 contract with that unbundled line-up so that 22 that line-up is available, along with whatever 23 number of bundled providers the Trustees 24 ultimately select. 25 COMPTROLLER MILLIGAN: If -- if you need a ACCURATE STENOTYPE REPORTERS, INC. STATE BOARD OF ADMINISTRATION 185 2 move forward with the unbundled. 3 TREASURER GALLAGHER: Second. 4 GOVERNOR BUSH: Moved and seconded. 5 Motion passes. 6 MR. HERNDON: Thank you. 7 GOVERNOR BUSH: Go forth and do work. 8 MR. HERNDON: Thank you. 9 Appreciate everybody's -- 10 GOVERNOR BUSH: Is that all the items on 11 the agenda, or is that -- 12 MR. HERNDON: That is -- completes the 13 agenda. 14 COMPTROLLER MILLIGAN: All right. 15 Thank you. 16 GOVERNOR BUSH: Thank you. 17 (The State Board of Administration Agenda 18 was concluded.) 19 * * * 20 (The Cabinet meeting was concluded at 21 12:31 p.m.) 22 23 24 25 ACCURATE STENOTYPE REPORTERS, INC. 186 2 3 4 5 STATE OF FLORIDA: 6 COUNTY OF LEON: 7 I, LAURIE L. GILBERT, do hereby certify that 8 the foregoing proceedings were taken before me at the 9 time and place therein designated; that my shorthand 10 notes were thereafter translated; and the foregoing 11 pages numbered 1 through 185 are a true and correct 12 record of the aforesaid proceedings. 13 I FURTHER CERTIFY that I am not a relative, 14 employee, attorney or counsel of any of the parties, 15 nor relative or employee of such attorney or counsel, 16 or financially interested in the foregoing action. 17 DATED THIS 23RD day of NOVEMBER, 2001. 18 19 25 ACCURATE STENOTYPE REPORTERS, INC.
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