The Markets March 4, 2013

DC Plan Investing Lessons from DBs

Defined contribution (DC) plans could gain the investment efficiencies enjoyed by many defined benefit (DB) plans, a paper contends.
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In its report, “DC Plan Investments: A Path to Improve Long-Term Outcomes,” Towers Watson notes that in DB plans, a single asset pool and flexibility in handling portfolio liquidity allows plan sponsors to diversify investment exposures across many strategies, including some that benefit from a substantial liquidity premium. As a result, many plan sponsors have reduced total plan volatility without compromising the level of return.   

In addition, the larger asset base also supports lower fees through sliding fee schedules and lower-cost vehicles. Lower fees are accessible to larger asset pools primarily due to the scalable nature of investment management, as well as custodial and administrative systems. These advantages could clearly also benefit DC plan participants, Towers Watson contends.   

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The report notes that with the recent growth in target-date funds, which hold investments based on a target retirement date, and pooling of strategies in these funds, the traditional benefits of asset pooling are now becoming increasingly available.

 

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However, according to the report, before further improvements can happen, regulations and the emphasis on the perceived benefits of daily valuation and daily liquidity need to reflect something more akin to global best practices.  

Most DC plans currently provide participants access to daily liquidity, should they request it. As a result, all plan options must be priced daily, inhibiting the use of less liquid strategies (such as hedge funds, real estate and private equity). Towers Watson says this inhibition is unfortunate, as these relatively illiquid strategies could improve the investment efficiency of most portfolios.  

The report suggests regulators should recognize the benefits of long-term investments and work to remove ambiguity and perceived fiduciary concerns in certain areas—including daily pricing, liquidity, fees and reporting.  

The report can be downloaded from here.

 

 

Products March 4, 2013

Lincoln Trust Rolls Out Model(k)

Lincoln Trust has introduced a low-cost retirement plan solution, Model(k), providing fiduciary risk management for broker/dealers serving the small and midsize 401(k) market.
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Model(k) provides a packaged solution for broker/dealers with full 3(21) fiduciary protection, and a core fund line-up of risk-based, asset-allocation models without the investment and platform constraints of the traditional product offerings. Advisers also receive retirement training through Lincoln Trust’s 401(k) Academy.

Broker/dealers and plan sponsors have been looking for alternate solutions to investing for retirement, according to Tom Gonnella, executive vice president of Lincoln Trust. “The industry has been at the mercy of insurers and product providers, whose opaque fee structure and antiquated investment options have failed to deliver true value to participants,” Gonnella said.

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Lincoln Trust’s strategy offers a transparent 401(k) alternative that keeps costs low and allows the adviser to be on the same side of the table as his or her participants and plan sponsors, according to Gonnella.

In addition to full 3(21) fiduciary risk management, Model(k) provides professional fund management as well as complete compliance and fee disclosure coverage. The retirement solution allows broker/dealers and advisers to focus on managing the relationship, Gonnella said, while the plan is professionally managed and protected.

The 401(k) Academy, a two-day education program, helps an adviser to become fluent in retirement plans. Also in the works, Lincoln Trust plans to offer a certification course and continuing education credits for advisers.

As an independent multi-manager solution, Model(k) services include:

  • Investment Policy Statement;
  • Pre-screened fund universe;
  • Plan design assistance;  
  • Year-end preparation;  
  • Participant call center;  
  • Mid-year or projected nondiscrimination testing;  
  • Sponsor, adviser and participant websites; and
  • Quarterly investment option reporting.

The firm’s Personalized Expense Ratio (PER) report, an “all-in” fee calculation, is available only on the Lincoln Trust 401(k) platform. Lincoln Trust’s Personalized Expense Ratio Calculator (PERC) walks an investor through a process to calculate and benchmark the real cost of a 401(k) plan.

More information is at Lincoln Trust’s site for the Model(k) management program.

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