Page 17 - AugDefComp

Memo

To: County of San Mateo DCAC
From: Innovest

Date: August 8, 2022
Re: Index Fund Review Memo

During the May 26, 2022 DCAC meeting, Innovest presented alternatives to improve index fund
investments in the plans and to streamline the investment menu. The Committee will revisit this topic
during the August meeting, and we would like to provide an overview of the discussions regarding index
funds that took place during the prior meeting.

Innovest presented two high-level options for consideration. The first was related to streamlining the
index fund options in the investment menu and the second was to replace the existing Vanguard index
funds with Fidelity index funds. We have provided an overview of both considerations below:

Streamlining the Investment Menu

At present, there are four domestic equity index fund options offered in the plan – Vanguard Institutional
Index (large-cap, S&P 500 index), Vanguard Mid Cap Index, Vanguard Small Cap Index and Vanguard Total
Stock Market Index (all-cap). We believe the Vanguard Total Stock Market Index fund creates some
redundancy in the investment menu and is unnecessary given availability of the other three options that
cover small-, mid- and large-cap domestic equity asset classes.

Innovest recommended the following change to streamline the investment menu:

• Remove the Vanguard Total Stock Market Index (VTSAX) fund from the plans.
• Map all assets and future allocations to the plan’s S&P 500 index fund.

The rationale for this recommendation is to eliminate redundancy and create a simple, yet diversified,
investment menu and to reduce confusion among participants. Innovest presented reporting that
illustrated over 99% of the holdings in the Vanguard Institutional Index (large-cap, S&P 500 index),
Vanguard Mid Cap Index and Vanguard Small Cap Index funds are also held in the Vanguard Total Stock
Market Index (VTSAX) fund, creating redundancy. Additionally, all these index funds are capitalization
weighted, therefore, the average market capitalization of the Vanguard Total Stock Market Index fund is
more closely aligned with large-cap, which supports the recommendation to map it to the S&P 500 index
fund (large-cap).

Replacing Vanguard Index Funds with Fidelity Index Funds

The second recommendation presented during the May DCAC meeting was to replace all the following
Vanguard index funds with the following Fidelity index funds:

• Replace Vanguard Institutional Index (VINIX) fund (0.035%) with Fidelity S&P 500 Index (FXAIX)
fund (0.015%) and map all assets and future allocations to the Fidelity S&P 500 Index (FXAIX) fund.

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