Creating a win-win retirement program.(Best Practices)

In the old days, retirement was simple. You turned 62, got an engraved watch at a small party, and received a small monthly stipend as you prepared to enter the "sunset of your life." Retirement was mostly an individual responsibility; only a handful of employers offered private retirement plans. However, the massive industrialization of the early 1900s, the emergence of organized labor, the increased competition for labor, and the inevitable vagaries of human nature caused these private, informal retirement arrangements to become subject to government regulation. Since then, workers have become increasingly conscious of the need to plan for a predictable and secure income stream after retirement, and governments (and other employers) got into the act of providing retirement benefits to public servants.

The City of Laguna Hills, incorporated in December 1991 as a "general law" city tinder the laws of the State of California, started its governmental activities with an anchor staff of four. To hire the most qualified complement of professionals in an extremely competitive labor market, the newly formed City Council adopted a recruitment strategy that included a comprehensive retirement package that was at par, if not better than, what was available in other local public agencies. Thirteen years later, the city is still dedicated to the goal of helping its employees achieve a financially secure future. This philosophy has translated into tremendous loyalty among the 27 full-time employees, 40 percent of whom have an average tenure with the city of at least 10 years. This article describes how Laguna Hills has employed GFOA's recommended practices to create a retirement program that works for both the city and its employees.

DEVELOPING RETIREMENT PLAN STANDARDS

To facilitate the financial security and independence of those who serve the city's 34,000 residents, Laguna Hills developed a broad complement of retirement plans. At incorporation, the city planned to offer both a defined benefit plan and a defined contribution plan. In selecting the provider for the defined benefit program, the city used the GFOA recommended practice, "Public Employee Retirement System Investments," to determine whether prospective plan providers operated with prudent investment principles in managing the plan assets at their disposal. Specifically, the city incorporated into its retirement plan standard the stipulation that "fiduciaries of PERS must invest plan assets for the exclusive benefit of plan participants."

Laguna Hills also followed GFOA's recommendation to determine whether "PERS complied with the state's statutes regarding the establishment of formal, comprehensive investment programs that were operated by competent professionals and monitored by oversight boards and committees, and that the board governance processes controlling the selection process for the plan's trustees, staff, and advisers are designed to systematically ensure sufficient and competent investment expertise, and fiduciary behavior, at each level." The city went to great lengths to (1) establish formal benchmarks for portfolio and managed account performance that are specific to the assigned role of the portfolio or the portfolio manager; (2) regularly evaluate performance using consistent, documented, and reliable disciplines; and (3) establish clear criteria and procedures for portfolio manager watch lists and terminations. In 1993, Laguna Hills joined the California Public Employees Retirement System (CALPERS), a multiple-employer public agency that acts as a common investment and administrative agent for participating public entities in California. Foremost among CALPERS' guiding principles are (1) "obtaining the highest return on our investment portfolio to survive, prosper, and grow in a safe and prudent manner" and (2) "ensuring that all benefits are appropriately funded."

Consistent with its goal of providing retirement planning options to its employees, the city also sponsors an IRS Section 457 ...