Section 2700.311  Standards Governing the Selection of Investment Options

a)         The Board, with the input of an independent investment consultant, is responsible for the selection of the Investment Options for the Plan.

b)         The objective of the Board is to offer a sufficient range of Investment Options to allow Participants to diversify their account balances and construct portfolios that reasonably span the risk/return spectrum. 

c)         The Board shall select Investment Options after satisfactory review of such factors as the investment experience of the underlying manager, the suitability of the investment approach used and the investment record.  The criteria for index funds (those products designed to approximate the return of a specific index) are, in some cases, different from those of actively managed products.  The criteria for suitable Investment Options, as well as illustrative examples, within the structure are:

1)         The Investment Option has consistently adhered to clearly defined investment objectives. (For example, the Investment Option's investment portfolio matches the Investment Option's investment strategy/style.)

2)         The Investment Option has demonstrated investment results that consistently rank it in the upper 50% of the peer group universe of those investment options with similar objectives. (For example, the Investment Option's 5 and 10 year annualized performance returns were above the industry median over the same period.)

3)         The Investment Option has performed in the upper 50% of the peer group universe in difficult market environments relative to its peers and benchmarks over a long period of time. (For example, in a year when the market posted negative performance returns, the Investment Option posted returns that protected against declines better than the overall market.)

4)         The analysis of the volatility of investment returns of each Investment Option are favorable and commensurate with the stated investment objectives of the Plan. (For example, the Investment Option's volatility, as measured by standard deviation, was less than its benchmark with a similar investment style.)

5)         The expense ratio of the Investment Option is in the bottom two-thirds of a universe of investment options with similar objectives. (For example, the Investment Option's expense ratio is below its industry median expense ratio.)

6)         The Investment Option is an appropriate size to accommodate assets of the Plan. (For example, an Investment Option has sufficient assets to accommodate investor cash flow activity without impacting investment results.)

7)         The Investment Option sponsor or family of Investment Options has demonstrated over time that its depth of operation and management is superior. (For example, the Investment Option has been managed by the same investment portfolio team for several years.)

8)         The future outlook of the Investment Option is positive, considering the investment manager, portfolio structure and investment style. (For example, the Investment Option's portfolio manager has a long track record of outperformance.  However, it is important to note that there is no guarantee for future investment performance.)

9)         Investment Option family or manager must be willing, by contract, to provide summary performance reviews of the Investment Option. (For example, the Investment Option's portfolio manager provides a quarterly commentary on performance results for the Investment Option.)

d)         The Board shall use best efforts to include representation of a State certified Minority Option in the Plan.  The Plan shall seek to include at least one Investment Option managed by a State certified minority money manager, unless the Board determines that no such entity exists that conforms to the Board's fiduciary responsibility.

e)         An independent investment consultant shall be responsible for performing thorough due diligence on each Investment Option.  The investment consultant shall monitor the performance of the Investment Option on an ongoing basis and present a report to the Board on a quarterly basis.  This analysis shall measure the performance of each Investment Option relative to the appropriate index and similar portfolios in a universe of same style Investment Options.  All of the criteria that were considered by the Board in the selection process shall also be reviewed on a quarterly basis.

f)         The selection of Investment Options for the Plan occurs in an environment of full disclosure characterized by competitive selection, objective evaluation and proper documentation.  The overriding consideration with respect to all decisions made by the Board concerning the Plan is that the decisions be made solely in the best interests of the Plan's participants and beneficiaries.  The following protocols guide the Board's selection of Investment Options for the Plan:

1)         The Board shall select Investment Options for the Plan, with the input of its independent investment consultant, through a competitive proposal process, using uniform documents for the solicitation, review and acceptance of the Investment Option.  Uniform documents may vary by the investment structure of an Investment Option.

2)         The documents shall contain, at a minimum:

A)        a description of the goal to be achieved;

B)        the particular strategy of Investment Option;

C)        the need for the Investment Option;

D)        the qualifications that are necessary; and

E)        a plan for post-performance review by the Board's investment consultant.

3)         The Board and its investment consultant shall determine parameters for the Investment Option search.  Advertisements for the Investment Option search shall be placed in the State newspaper and in one or more industry periodicals at least 14 days before the response is due.

4)         All interested respondents shall return their responses to the Board, as directed by the proposal document.  Investment staff and investment consultant shall open the responses, record them and thoroughly review each for content, quality and compliance with proposal document requirements.

5)         Following review and evaluation of the responses from interested firms, the field of candidates is narrowed to a smaller list of the most highly qualified Investment Options.  At this point, the Board's investment staff and investment consultant meet with representatives of each Investment Option to obtain an independent assessment of each option's capabilities.

6)         Following the interviews with the selected Investment Options, the Board's investment staff and investment consultant recommend to the Board one or more Investment Options for the Plan.  Generally, the finalists appear before the Board to present their qualifications.

7)         The Board accepts or modifies the recommendation and makes the final decision with respect to the Investment Options for the Plan.

8)         Subsequent to the Board's decision, the Board's legal counsel, investment staff and investment consultant coordinate with representatives of the Investment Option, CMS and the Recordkeeper, in order to provide an appropriate transition for the new Investment Option into the Plan and provide appropriate notice of the transition to the Plan.

(Source:  Added at 33 Ill. Reg. 13451, effective September 14, 2009)