PSNC 2014: Investment Diversification

Amid the discussion of industry best practices at the 2014 PLANSPONSOR National Conference, the question of the retirement plan investment menu and how it has or should evolve came up continuously.

Industry experts and attending sponsors alike questioned whether a lineup of traditional mutual funds should still make up the core retirement plan menu, and whether alternatives should be added. Others asked about the ideal number of funds to include on a plan menu, and whether prepackaged investment solutions make sense for all employees.

According to Tim McCabe, national sales manager and senior vice president of Stadion Money Management, “The pendulum has swung the other direction from just 10 years ago. There has been a huge reduction of the plan menu.”

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And as investment menus have shrunk, many more packaged products have hit the market, McCabe adds. Fifty percent of retirement assets are currently in packaged products, he said, and that could grow to 80% going forward.

“The majority of participants should be in a professionally managed solution,” concurred Josh Cohen, managing director of defined contribution for Russell Investments. “It doesn’t matter if they are all PHD’s or factory workers, they should still be using a target-date type product.

“There is no magic number that makes for a more manageable fund menu. It depends on what you want to put in participants hands, although six to eight funds that are different from each other is a good number to start with,” Cohen said.

“For the participant who chases performance, we think adding alternatives in a packaged format that includes, for instance, real assets, income alternatives and alpha alternatives can work well,” said Laura Lawson, senior client portfolio manager in the OppenheimerFunds Global Multi Asset Group. “This is generally what is appropriate for the DC market, but how you put it together is important.”

McCabe said that Stadion Money Management uses exchange-traded funds (ETFs) for a similar purpose.

“For instance, in a 2050 target-date fund, we would use 50% equity and 10% bond, plus a tactical sleeve made up of all ETFs, giving the manager the ability to be opportunist on behalf of the participant,” McCabe said. “We might use gold, timber, commodities, all packaged inside a professionally managed account. This also leaves us 40% of the fund to smooth out returns over market volatility.”

Cohen added that breaking away from name brand fund recognition is a good goal. “In the end a brand name fund doesn’t help a participant. It’s difficult to make a change in funds when participants are attached to a name. It’s better to change to a more generic fund so able to make changes with confidence.”

“The good news about breaking such an attachment is that companies are offering 3(38) fiduciaries to help you make those decisions,” McCabe added.

PSNC 2014: The RFP from Start to Finish

Choosing a provider for a plan starts with the request for proposal (RFP), and experts discussed best practices for the process at the PLANSPONSOR National Conference Tuesday.

Three terms most commonly used when judging vendors are the RFP, request for information (RFI) and benchmarking studies, said Michael Kozemchak, managing director at Institutional Investment Consulting.

“Benchmarking studies compare your plan to 10 to 40 similar plans via a scattergram,” Kozemchak said. Most are based on data that is three or more years old, and do not provide a true picture, added Robert Massa, chief investment officer at Ascende Inc.

Kozemchak dismissed RFIs as “garbage in, garbage out” and a “fruitless” exercise that some plan sponsors have turned to as a result of the 408(b)(2) requirement that that they ensure the reasonableness of fees paid to the vendors and providers in their plan.

The most robust way for a plan sponsor to review their vendors is through a rigorous RFP process, Kozemchak said. “RFPs are periodically necessary because of litigation,” said Vincent Morris, president of Bukaty Companies.

Inevitably, Kozemchak said, the RFP “will yield surprises, such as what you are actually paying, or that your plan documents are misaligned with how the plan is actually being run.”

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Massa added that RFPs can reduce fees. “There was a time when it was a fiduciary policy to benchmark your fees,” he said. “With 408(b)(2), we went a step further; it is now a regulatory requirement.” Otherwise, plan sponsors risk litigation, and many of these cases are settling in the $10 million range, Massa said.

“The next wave will be how fees are being allocated among participants,” Massa said. Cases will begin looking at “investment management fees, revenue sharing and recordkeeping fees—and how you are allocating these fees among your participants. Is it level and equitable? Are fees reasonable?”

Sponsors can avoid these lawsuits by issuing RFPs, speakers said. “If you haven’t gone to market in the past five years, you have to be prepared,” Kozemchak said. “There has been considerable fee compression,” so sponsors might be successful in lowering fees. However, also include your current incumbent, Morris said, because “it gives you leverage on fees and/or services.”

Sponsors should also issue RFPs to improve the quality of vendor services, Morris said. “Why search for a new recordkeeper? Is there a pain point? Is it because you need to do due diligence? Are you unhappy with your vendor’s services?” Before even starting the RFP process, he said, put your goals in writing and try to resolve problems before going through the process.

Many off-the-shelf RFP templates are available, such as those from The SPARK Institute, Morris said, but “you need to customize your RFP” by including the specific challenges your retirement plan is facing and the objectives you would like to meet.

Remember that before issuing an RFP to replace a vendor, there is always a tradeoff, Massa said. “Figure out what you want to get out of your vendor and what you like from them,” he said.

It is also a good idea to enlist the help of a third-party advisory firm or an attorney to draft the RFP, because if you do it yourself, you must meet the prudent expert standard,” Morris said.

Consider including your other employee benefit offerings, such as stock administration and a legacy defined benefit plan, Kozemchak said. “You may be able to use fewer vendors and create a better participant outcome,” he said.

After issuing an RFP, Morris recommends permitting vendors to come back with questions and then sending the answers to all the candidates to “level the playing field.” Then, when the RFP documents come in, parse through the information, use quantitative tools and resources such as the PLANSPONSOR Recordkeeping survey, Kozemchak and Massa said. Next, do a side-by-side analysis, Morris said. “Does the vendor include a relationship manager and serve 100 clients, or does the vendor include a relationship manager but serve only 20 clients?” Morris said.

Determine whether they offer compliance work and retirement readiness data, he said. Consider whether they offer education at flexible price points, Massa added. “Is the recordkeeping data protected from identity theft through encryption during not just data transfers but through encryption where it is stored?” he asked. “What happens to participant data when they do compliance testing? Is it sent to third-party companies in countries such as Bangladesh that are not friendly with the U.S.?”

The final step is inviting the four or five panelists in for a presentation, but sponsors should not base their decision on just the sales pitch, Morris said. They should consider all of the criteria the panel has just spoken about, he said. And once you have the vendor on board, don’t forget to ensure that they are implementing everything they promised,” Kozemchak said.

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