Report No. 2009-30
March 2009
Complete Audit Report
Changes to the Deferred Compensation Plan Should Benefit Participants
Since September 1, 2007, the Missouri State Employees' Retirement System (MOSERS) Board of Trustees has been responsible for the administration of the state's deferred compensation plan. The plan serves as supplemental retirement savings for Missouri state employees who choose to participate. At April 2008, current and former state employees had approximately $1.43 billion invested in the plan. Because of the significance of these investments, our audit objectives included evaluating (1) the performance of investment options offered by the deferred compensation plan, (2) how Missouri's plan compared to similar plans in other states, and (3) the expected plan changes.
Investment options often underperformed benchmarks
Our analysis of the current investment options showed a significant number underperformed their investment benchmark. Of the investment options available, 24 had 5 and 10 year established benchmarks to evaluate against. Of those 24 funds, 15 funds (63 percent) underperformed relative to their 5-year benchmark, 13 funds (54 percent) underperformed relative to their 10-year benchmark, and 10 funds (42 percent) underperformed relative to both their 5 and 10-year benchmarks. Participants had invested approximately $237 million (32 percent of the total plan investments in mutual fund options) in these 10 funds as of April 2008. (See page 9)
The number of similar investment options may have negatively impacted investment diversification
Based on the number of investment options available in other states' plans and discussions with MOSERS officials, the number of investment options currently available in Missouri's plan may have led to overlap in investment strategies and negatively impacted diversification. MOSERS officials said many funds had similar investment styles. Deferred compensation plans in the 8 surrounding states average 18.5 investment options, compared to the 31 available in Missouri's plan. (See page 9)
Changes should significantly reduce participant costs and simplify investment planning
Adding target-date funds as investment options should result in significant cost savings for plan participants. MOSERS officials expect the management costs for the target-date funds to be approximately .25 percent of invested assets (25 basis points). Our analysis showed that would be about 68 percent less than management fees charged on the current mutual fund options. MOSERS officials said the administrative costs for the target-date funds may be impacted depending on how many plan assets do not transfer to the target-date funds.
Target-date funds are designed to be self-adjusting, shifting from a more aggressive investment mix to a more conservative mix as the investor approaches retirement age. The use of target-date funds should simplify investment decisions for plan participants and help them to improve investment returns relative to investment risk. (See page 10)
Complete Audit Report
Missouri State Auditor's Office
moaudit@auditor.mo.gov
