HB-4338, As Passed House, May 18, 2016

SUBSTITUTE FOR

HOUSE BILL NO. 4338

     A bill to amend 1980 PA 300, entitled

"The public school employees retirement act of 1979,"

by amending sections 125, 127, and 131a (MCL 38.1425, 38.1427, and

38.1431a), sections 125 and 127 as added by 2010 PA 75 and section

131a as added by 2012 PA 300.

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

     Sec. 125. (1) The Except as otherwise provided in this

section, the department shall administer Tier 2 and shall be is the

fiduciary and trustee of Tier 2. The department may appoint an

advisory board to assist the department in carrying out its duties

as fiduciary and trustee. The department and the state treasurer

shall comply with Executive Reorganization Order No. 1999-5, MCL

38.2721, in the administration of Tier 2.

     (2) The department shall determine the provisions and

procedures of Tier 2 and the plan document in conformity with this

act and the internal revenue code.

     (3) The Except as otherwise provided in section 131a, the

department has the exclusive authority and responsibility to employ

or contract with personnel and for services that the department

determines necessary for the proper administration of and

investment of assets of Tier 2, including, but not limited to,

managerial, professional, legal, clerical, technical, and

administrative personnel or services.

     (4) Each employer shall be deemed is considered to have

adopted and shall comply with the provisions and procedures of Tier

2 and the plan document.

     (5) Beginning July 1, 2016, the department shall administer

Tier 2 through a third party administrator. The third party

administrator must not be affiliated with an entity that provides

investment services to the retirement system, a reporting unit, or

a qualified participant. Subject to this subsection, the department

shall select a third party administrator based on a competitive

proposal process established by the retirement system. The request

for proposal must require the responding entity to disclose any

conflict of interest, criminal convictions, investigations by the

Internal Revenue Service, the Securities and Exchange Commission,

or any other federal or state taxing or securities regulatory body,

or court, and pertinent litigation regarding the conduct of the

entity. The request for proposal must also require the responding

entity to certify that it has the experience and demonstrated

ability to comply with the operational guidelines for the

administration of Tier 2.

     (6) The third party administrator selected under subsection

(5) shall do all of the following for Tier 2:

     (a) Provide administration, enrollment, and record keeping.

     (b) Coordinate customer education with all Tier 2 investment

vendors. As used in this subdivision, "investment vendor" means

that term as defined in section 127.

     (c) Conform to the payroll and information sharing processes

established by the department for proper administration of all Tier

2 contracts and account plans.

     Sec. 127. Each Subject to section 131a, each qualified

participant, former qualified participant, and refund beneficiary

shall direct the investment of the individual's accumulated

employer and employee contributions and earnings to 1 or more

investment choices within available categories of investment

provided by the department. The limitations on the percentage of

total assets for investments provided in the public employee

retirement system investment act, 1965 PA 314, MCL 38.1132 to

38.1140m, 38.1141, do not apply to Tier 2.

     Sec. 131a. (1) Tier 2 accounts are subject to the following

terms and conditions:

     (a) On or before January 1, 2013, the retirement system shall

design an automatic enrollment feature that provides that unless a

qualified participant who makes contributions under this act elects

to contribute a lesser amount, the qualified participant shall

contribute the amount required to qualify for all eligible matching

contributions under this act. The retirement system shall implement

this automatic enrollment feature on or after January 1, 2013, as

determined by the retirement system.

     (b) Employer matching contributions do not have to be made to

the same plan or account to which the elective employee

contributions were contributed as the basis for the matching

contributions.

     (c) Elective employee contributions shall must not be used as

the basis for more than an equivalent amount of employer matching

contributions or, in the case of for matching contributions under

section 131(2) and (6), 50% of the employer matching contributions.

     (d) The retirement system shall design and implement a method

to determine the proper allocation of employer matching

contributions based on elective employee contributions as provided

in this section.

     (e) The department shall designate not fewer than 3 but not

more than 8 investment vendors that are eligible to provide

investment options for qualified participants. At a minimum, the

request for proposal must require a responding entity to disclose

any conflict of interest, disclose any criminal convictions,

disclose any investigations by the Internal Revenue Service, the

Securities and Exchange Commission, or any other federal or state

taxing or securities regulatory body, or court, or pertinent

litigation regarding the conduct of the person or entity. The

department shall issue a request for a proposal under this

subdivision at least once every 5 years. An investment vendor may

include, but is not limited to, an insurance company, investment

adviser, or broker-dealer. The department shall not designate an

entity as an investment vendor unless the entity meets all of the

following requirements:

     (i) The entity offers a variety of investment options,

including, but not limited to, mutual funds, index funds, target

date funds, guaranteed accounts, and other options.

     (ii) The entity is not subject to disqualification under 17

CFR 230.262.

     (iii) The entity meets the disclosure requirements of covered

service provider as described in 29 CFR 2550.404a-5 and 29 CFR

2550.408-2.

     (iv) The entity provides to its customers authorized

investment advisers that provide investment advice.

     (f) In reviewing a responding entity's proposal under

subdivision (e), the department shall consider all of the

following:

     (i) The experience of the entity in providing services to

similar types of retirement plans.

     (ii) The quality of the investment options that would be

offered to qualified participants.

     (iii) The suitability of the investment options to the needs

and interests of qualified participants.

     (iv) The capability and the commitment of the entity to

perform in a manner that is in the best interests of qualified

participants.

     (v) The fees and expenses associated with proposed investment

options.

     (g) In-plan transfers of account balances are permissible

across Tier 2 contracts or account plans, whether the Tier 2

contract or account plan is the default investment vendor or an

alternate investment vendor.

     (2) A reporting unit may select 1 or more alternate investment

vendors from the list published under subsection (7) to provide

investment options for the reporting unit's employees who are

qualified participants. The reporting unit shall notify the third

party administrator selected under section 125 of an alternate

investment vendor selected under this subsection. The third party

administrator shall assign the selected alternate investment vendor

and authorized investment adviser to the reporting unit.

     (3) If a reporting unit selects an alternate investment vendor

under subsection (2), the alternate investment vendor shall

designate at least 1 authorized investment adviser to provide at

least 1 hour of financial literacy education and customer service

at the reporting unit per school year. If a reporting unit does not

select an alternate investment vendor under subsection (2), the

default investment vendor shall designate at least 1 authorized

investment adviser to provide at least 1 hour of financial literacy

education and customer service at the reporting unit per school

year.

     (4) The department shall not collect employer or employee

contributions related to Tier 2 from a reporting unit that selects

an alternate investment vendor under subsection (2) unless

authorized to do so by the reporting unit. This state and the

reporting unit do not have a duty to monitor the alternate

investment vendor's performance.

     (5) The department shall designate a default investment

vendor. The default investment vendor shall provide investment

options for qualified participants of reporting units that have not

selected an alternate investment vendor under subsection (2).

     (6) An alternate investment vendor shall register with the

third party administrator selected under section 125 in a manner as

determined by the third party administrator. The alternate

investment vendor shall provide the third party administrator with

the names of the alternate investment vendor's authorized

investment advisers. The alternate investment vendor shall notify

the third party administrator if an investment adviser provided to

the third party administrator under this subsection is no longer an

authorized investment adviser of the alternate investment vendor.

     (7) For each reporting unit, the third party administrator

shall publish on the third party administrator's website a list of

each alternate investment vendor and authorized investment adviser

registered as described in subsection (6) that is available within

that reporting unit.

     (8) The third party administrator shall submit an annual

report to the office of retirement services in the department. The

report must include all of the following:

     (a) Each alternate investment vendor and authorized investment

adviser registered as described in subsection (6).

     (b) For each reporting unit that makes a selection under

subsection (2), the alternate investment vendor and authorized

investment adviser assigned to the reporting unit by the third

party administrator.

     (9) As used in this section:

     (a) "Alternate investment vendor" means an investment vendor

selected by a reporting unit under subsection (2).

     (b) "Authorized investment adviser" means an investment

adviser who is authorized by an investment vendor to provide

investment advice to the investment vendor's customers.

     (c) "Broker-dealer" means that term as defined in section 102

of the uniform securities act (2002), 2008 PA 551, MCL 451.2102.

     (d) "Investment advice" includes the rendering of investment

advice as described in 29 CFR 2510.3-21(c)(1).

     (e) "Investment adviser" means that term as defined in section

102a of the uniform securities act (2002), 2008 PA 551, MCL

451.2102a.

     (f) "Investment vendor" means an entity, other than the third

party administrator selected under section 125, designated by the

department under subsection (1)(e) to provide investment options

for qualified participants.