Products November 13, 2014

Northern Trust Launches Global Small Cap Fund

Northern Trust Asset Management launched a new fund for institutional investors that encompasses quality small capitalization stocks across global developed equity markets.
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The global small cap fund builds on Northern Trust Asset Management’s Engineered Equity strategies, with $37.4 billion in assets under management as of September 30. The fund, launched this month with an investment by Kemper Corporation for its Master Retirement Trust, is designed to efficiently capture the premium associated with high quality small capitalization stocks while minimizing uncompensated risk factors.

“Our Engineered Equity approach provides efficient exposure to global small cap equities with a bias toward high-quality companies and factors that generate persistent performance over time,” says Matthew Peron, managing director for global equity at Northern Trust Asset Management. “We worked closely with Kemper to develop a solution that fits their performance and risk budget needs, leveraging our core capabilities, and we believe this strategy will have broad appeal.”

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The global small cap fund is an extension of Northern Trust’s factor-based U.S. small cap strategies, which have a 15-year track record and $3.4 billion in AUM as of September 30. The new collective trust fund is available to U.S. defined benefit and defined contribution retirement plans and Northern Trust intends to offer the global small cap strategy to a range of investors through separate accounts and other fund structures.

For more information about Engineered Equity at Northern Trust, see the Equity Imperative research series and related information at www.northerntrust.com/equityimperative.

Data & Research November 13, 2014

Employee Stock Purchase Plans Can Reduce 401(k) Loans

Fiduciaries often cite asset leakage as a major challenge in running a 401(k) plan, but one provider says there may be a straightforward solution to slowing loan-related leakage.
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And what is that solution? Offer a company stock plan, says Fidelity Investments. New research released by the firm finds a strong negative correlation between the availability of employer stock and the likelihood that an employee will take a loan from their 401(k) account. Not only that—those who do take a loan from their 401(k) account while also having access to an employee stock purchase plan (ESPP) tend to borrow a smaller amount. This class of borrowers also had a lower outstanding loan amount on average, the research shows.

While the positive impact of ESPPs on 401(k) loans was evident in companies of all sizes, Fidelity says the difference was striking in smaller companies (less than 500 employees), where only 9% of workers took out 401(k) loans when an ESPP was also available. This compares with 14% for smaller employers that only offer a 401(k). The outstanding loan rate at small companies was also significantly lower in Fidelity’s analysis, with only 14% of ESPP/401(k) workers having an outstanding 401(k) loan balance, compared with 23% of employees at 401(k)-only companies.

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Large employers, defined here as those with more than 10,000 employees, can also expect a positive impact on 401(k) loan activity when as ESPP is offered, Fidelity says. Employees in this segment borrowed an average of $2,000 less than employees with only a 401(k) account, and had an average outstanding loan balance of $3,000 less than employees without access to an ESPP.

“While Fidelity encourages employees to think twice before taking a 401(k) loan, we understand that sometimes life events can create immediate financial needs,” says Kevin Barry, executive vice president, for stock plan services at Fidelity Investments. “Savings in an employee stock purchase plan can present a viable option for workers who need to draw on their savings for financial purposes.”

Barry explains that employer stock can often be purchased at a discount and is typically kept in an account outside of an employee’s 401(k) account. He adds that ESPP holdings usually can be cashed in without the risks and tax implications associated with tapping a 401(k) account—and the money does not have to be repaid if an employee changes jobs.

Fidelity says its research shows ESPPs continue to grow in popularity, both among employers and employees. Workers like them because ESPPs are often offered to employees as a complementary workplace savings vehicle to supplement their 401(k), and on the employer side, the accounts appear to be increasingly important among workers evaluating a new job opportunity.

Indeed, Fidelity says another survey it conducted recently reveals fully 86% of respondents under the age of 40 said they would want their new employer to offer a company stock plan if they changed jobs, and 40% of overall respondents consider a company stock plan as a “must have” benefit when making a decision to change employers.

“Employee stock purchase plans are a win/win for employers and employees,” Barry adds. “Employers utilize them to reward workers and encourage a sense of ownership in the company, while employees get an additional savings vehicle to help them reach their financial goals.”

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