The State of Florida, pursuant to Section 112.215, Florida Statutes, has provided State employees a deferred compensation program to supplement the State of Florida’s defined benefit and defined contribution retirement plans.  The Deferred Compensation Office within the Department of Financial Services, Division of State Treasury, administers the deferred compensation program.

The Department has contracted with four insurance companies, a mutual fund company, and a self-directed brokerage company to provide various investment options for State employees.  Additionally, the Department has contracted with a records administration company to maintain participant account records.  Department records indicate that as of June 30, 2004, Program participants totaled 70,248.

Our audit, covering the period May 15, 2002, through February 29, 2004, and selected actions taken through July 9, 2004, focused on issues relating to the Department’s selection and monitoring of the Deferred Compensation Program’s records administrator and investment product providers.  Also, as indicated in Finding No. 12, we found that, although it was exempt under the authorizing laws, the Department had paid certain communications taxes that had been assessed by cellular telephone service providers.

Finding No. 1:        On May 15, 2002, the Department issued a request for proposal (RFP) seeking responses from firms interested in providing third-party administrator and records administrator services.   Our audit disclosed that the RFP contained restrictive provisions that may have eliminated many potential providers and that the Department could have taken additional actions to ensure that more potential providers were made aware of the RFP.

Finding No. 2:        The Department received two responses to its May 15, 2002, RFP.  One of the two responses was disqualified, leaving only one response deemed by the Department to be responsive to the RFP, that being the response from Florida Records Administrator, Inc., (FRA).  FRA was subsequently selected and awarded the records administrator contract.  Our audit disclosed: 

• For some of the more significant RFP requirements, the Department evaluated the information relating to a proposed subcontractor rather than information pertaining to FRA.  The RFP made no provision for the substitution of a subcontractor’s qualifications for that of the respondent.

• Section 1.7 of the RFP states, “The firm selected to provide TPA [third-party administrator services] for the DCP [Deferred Compensation Plan] may not be an approved investment provider, or be affiliated with one.”  We found the award of the contract to FRA to be in conflict with the apparent intent of this provision of the RFP, in that while FRA may not have been directly or indirectly owned by an investment provider, FRA was established primarily for the purpose of facilitating the subcontracting of the records administration work to National Deferred Compensation, Inc., a subsidiary of an investment provider.

• Contrary to the Department’s Request for Proposal (RFP) Guide, Composition of Selection Team Section, Conflict of Interest section, the members of the records administrator selection committee did not sign a statement indicating that there were no conflicts of interest.

• The contract, effective January 1, 2003, between the Department and the FRA, was signed by the Chief Financial Officer (CFO) and the FRA’s president.  However, contrary to law, a related subcontract was signed by the Chief of the Bureau of Deferred Compensation and not the CFO.

The CFO has taken actions to change the contract’s expiration date from June 30, 2007, to March 31, 2005, so that the services can be resolicited.

Finding No. 3:        A monthly plan audit is a monthly report prepared by the Records Administrator that identifies for each participant any discrepancies between investment provider records and Records Administrator records.  The Department has not established and implemented procedures designed to verify that the Records Administrator has properly prepared the monthly plan audits and that appropriate corrective actions have been taken to correct all discrepancies. 

Finding No. 4:        Investment providers are required to pay a 5 cent-per-month per-participant marketing and education fee.  The fee is to be paid to the Records Administrator, for the benefit of the Deferred Compensation Program, and the Records Administrator is to deposit and maintain in a separate account the amounts received.  At May 28, 2004, the account had a balance of $241,449.  The Department was not receiving bank statements for the account and had not implemented procedures requiring a periodic verification of the marketing and education fee account’s activity.  We also noted that transactions and balances relating to the bank account had not been recorded in the State’s general ledger accounting records.

Finding No. 5:        The Records Administrator contract requires that each June 30 and December 31, the Records Administrator obtain from each investment provider an amount representing the present value of participant annuity accounts.  Department procedures had not been established to reasonably ensure the accuracy and completeness of the amounts reported for the participant annuity accounts.

Finding No. 6:        The Department paid the Multi-Vendor Enhanced Enrollment System (MVEES) project contractor a total of $299,054.  Our audit disclosed that, contrary to law, competitive means were not used to select the MVEES contractor. 

Finding No. 7:        Section 287.058(2), Florida Statutes, and the Department’s purchasing procedures, require that a written agreement be signed by the agency head and the contractor prior to the rendering of any contractual service the value of which is in excess of $25,000.  Likewise, prior to the authorization of contractor services, purchase requisitions and purchase orders should be approved.  Our review disclosed that an agency employee, rather than the agency head, had signed the MVEES project agreement and that contractual services were provided prior to purchase requisition approval, the signing of the agreement, and purchase order issuance.

Finding No. 8:        The MVEES contract does not contain provisions addressing the ownership of the source code and any other tangible or intangible assets.

Finding No. 9:        The Department on June 24, 2002, issued an RFP requesting proposals from companies interested in providing investment products and services for the Deferred Compensation Program.  Our audit disclosed that, as with the Records Administrator RFP, the investment provider RFP contained restrictive provisions that may have eliminated potential providers and the Department could have taken additional actions to ensure that more potential providers were made aware of the RFP.

Finding No. 10:     A total of 11 investment provider proposals were received by the Department.  Subsequent to the evaluation of the responses, a total of six companies were engaged by the Department to provide investment products and services.  Our audit of the Department’s award of the contracts disclosed:

• Contrary to the Request for Proposal (RFP) Guide, Composition of Selection Team Section, Conflict of Interest section, the members of the selection committee did not sign a statement indicating that there were no conflicts of interest.

• Section 3.3.1 of the RFP requires of proposers the management of at least one plan with a minimum of $1.6 billion under investment management and 20,000 participants.  It was not clear from the documentation provided whether several of the selected investment providers met this requirement.

Finding No. 11:     The Department, following the completion of an investigation, suspended without pay for a period of 31 days the Chief of the Bureau of Deferred Compensation.  The notice of suspension stated that the basis for the suspension was the lack of professional judgment in accepting and not reporting gifts.

Finding No. 12:     Although with respect to Department cellular phone services, the Department was exempt from paying certain communications service taxes, the Department paid to one vendor such taxes approximating $60,000 during the audit period.

The Chief Financial Officer's response to the findings and recommendations contained in this report can be viewed on the Auditor General's Web site.