The National Association of Government
Defined Contribution Administrators, Inc.
(NAGDCA)
presents
2014 NAGDCAST #3:
Best Practices – Plan Design
Program Introduction
Steve Toole
Director of Retirement Systems
State of North Carolina
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Many Thanks to Our 2014
NAGDCAST Sponsors!
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There will be a Q&A Session at the end of today’s presentation:
 Live Written Questions: Use the Q&A Panel
located on the right side of your screen.
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Today’s PowerPoint Presentation and
Speaker Bios
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Today’s Presenters
Speaker:
Jeffrey H. Snyder,
Cammack
Retirement Group
Speaker:
Martha Spano,
Buck Consultants
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BEST PRACTICES
Jeffrey H. Snyder
Vice President, Senior Consultant
Cammack Retirement Group
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Overview
I.
Participant Services
i.
Hardship and Unforeseeable Emergency Withdrawals
ii.
Loans
iii. Investment Advice
II. Plan Features
i.
Rollovers
ii.
Roth Options
iii. Automatic Plan Features
iv. Employer Match
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Participant services
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Hardship and Unforeseeable Emergency Withdrawals
•
Common practice in 401(k) and 403(b) plans
•
Withdraw to cover an “immediate and heavy” financial need
•
Safe harbor reasons:
– Medical expenses
– Buying a principal residence
– Tuition/educational expenses
– Payments to avoid eviction/foreclosure
•
Early distribution penalties apply to 401(k) and 403(b) participants under the age of 59 ½
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Hardship and Unforeseeable Emergency Withdrawals
•
457(b) withdrawals for “unforeseeable emergencies”
– Illness or accident
– Loss of property due to casualty
– Other similar extraordinary and unforeseeable circumstance due to
events beyond control
•
Clear and consistent policies and procedures are critical
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•
Two types:
Loans
–
General purpose loans
–
Principal residence purchase loans
•
Borrow up to 50 percent of vested balance or up to $50,000 (whichever is less)
•
Limits cumulative across all vendors (recordkeepers)
•
When loans are offered it is best practice to:
–
Restrict number of loans taken
–
Charge a fee for initiating a loan to discourage use
•
Most common repayment process is payroll deduction
•
Can be detrimental to participant savings
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Investment Advice
•
Methods for providing participant advice:
–
Managed account service via recordkeeper paired with call center
–
One-on-one financial planning sessions
•
May improve diversification and reduce total volatility
•
Key items to monitor in search of managed account services/phone-based advisors:
–
Fees
–
Revenue-sharing transparency
–
Appropriateness of the asset-allocation model
–
Accuracy of the reflection of DB and Social Security benefits
–
Investment fund selection process transparency
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Plan Features
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Rollovers
•
Allow participants to control savings
•
Remove some of the burden of multiple accounts
•
Differing laws affect choices of “rollable” assets
•
New laws allow “Roth” funds to rollover
– Adds levels of complexity due to new distribution and tax laws
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Roth Options
•
Most governmental plans can have Roth plans
•
Considered best practice to offer a Roth option, when available
•
Tax-deferred savings vs. tax-free accumulation (on after-tax contributions)
•
“Designated Roth” – Roth component within 401(k), 403(b), and 457(b) plans
•
IRS regulations differ between a Designated Roth plan and a Roth IRA
•
Important to note differences in the Designated Roth and Roth IRA for:
– Designing and communicating the plan’s provisions
– Reporting purposes regarding payroll
– Reading tax information (participants)
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Automatic Plan Features
•
Automatic enrollment and automatic contribution escalation go hand in hand
•
In ERISA market, fiduciary safe harbor protections led to major increase in automatic features
•
Automatic features help raise participation rates by 10-20 percent
•
Majority of assets remain in default investments
•
Default contribution levels (typically 3 percent) tend to remain close to the same
•
Adopting both creates high participation rates and rising contribution rates
•
Important to review state laws and, if applicable, bargaining agreements
•
Alternative option “active choice” gives new employees a choice to opt-in or out
•
Quick enrollment procedures may be available
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Employer Match
•
•
•
•
•
•
•
•
•
•
More common with increased use of hybrid retirement programs
Higher rate of participation when contribution is required to receive match
Incentive for participants to be more engaged in their savings plans
Allows employer to provide additional future income without inflating other benefit
costs
Match contributions may be FICA tax free to both the employee and the employer
Consider plan design issues when contemplating a matching plan
When paying Social Security and FICA taxes, contributions to a 457(b) plan subject to
FICA taxes
Most employers add matching to qualified 401(a) and/or 403(b) plans
Can be used as a retention tool when attaching a vesting period
For ERISA plans, minimum requirements for vesting periods and use of forfeited
assets
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Best Practices
Martha Spano
Principal
Buck Consultants
Investment Policy Statement
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Investment Policy Statement (IPS) as a Roadmap
● Establishes the purpose of the plan
● Outlines roles and responsibilities
● Sets the assets/investment options to be used
● Defines performance standards
● Defines risk parameters
● Creates the process for dealing with problems
The Investment Policy Statement codifies the standards for managing the plan.
At a minimum, it should be reviewed annually.
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Components of the Investment Policy Statement
Introduction and purpose
• Establishes reason for the plan and the IPS
Elements of an IPS
Roles and responsibilities
• Discusses what the obligations and responsibilities are for the
people involved with the plan
Plan investment options
• Establishes reason for the plan and the IPS
- Options providing different risk/return characteristics
- Information access
• Outlines the options to be included in the plan
Investment objectives and performance standards
• Provides the benchmark and peer group performances over
defined periods of time
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Components of the Investment Policy Statement
Investment manager and investment fund guidelines
• Provides for the following standards:
- Compliance with ERISA/fiduciary responsibility
- Compliance with IPS and all agreements
- Market value determination
- Diversification standards
Investment monitoring and reporting
• Establishes measurement criteria such as:
- Peers and benchmarks
- Investment style
- Process and philosophy
Watch list
• Describes the criteria for putting investment managers
under heightened security
• Discusses how a manager is taken off the watch list and
the time limit for remaining on the watch list
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Components of the Investment Policy Statement
Investment and fund selection and termination
• Details the criteria for selecting a fund or manager
• Describes the criteria for terminating a manager and
the process of liquidation and transfer of assets
Fee policy
• Defines how the plan will pay the fees
• The use/non-use of revenue sharing
• Discusses how fees are charged
• Review process
Participant disclosure
• This section discuss all of the participant disclosures
such as fees, investment alternatives, how participants
should deliver investment instructions, etc.
Note: The IPS should be detailed enough to effectively manage the plan, but not so detailed as to “handcuff” decision
makers.
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Fund Lineup
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Investing is a Challenge for Most Participants
Research from Rutgers University, Boston College, Universities of Texas, and Pittsburgh
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Designing Optimal Investment Lineup
Many plans use a tiered structure:
•
Present the lineup that identifies who
may be best served by which funds
•
Primarily communications tool
•
Some plans are moving to three tiers,
dropping the Active core
SDBA*
Higher
sophistication
Active
Core
Offers something for everyone:
•
Asset allocation funds provide a one-stop option
to meet needs of most participants
•
Passive funds offer low fees and market returns;
avoid issue of underperformance
•
Core funds provide diversification, opportunity to
outperform, fill gaps
•
Sophisticated investors can access additional
choices via SDBA*
* Self-Directed Brokerage Account
Passive
Core
Asset Allocation
Lower
sophistication
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NAGDCA Members on Investments
NAGDCA –Public Sector DC plan Survey Report, March 2014
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% of participants using
•
•
•
Number of options offered and used
Options offered have stabilized over the past several years at around 181
Only 7 percent of participants rebalance over time2
Participants rarely utilize new options
Note: Number of options treats lifecycle funds as a single fund
Sources: 1Vanguard – How America Saves 2011, 2JP Morgan Retirement Services
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Fund Lineup
Capital Preservation
Domestic Fixed Income
Domestic Equity
Foreign/International Equity
Pre-Diversified Funds
Non-Traditional Assets
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Constructing a Fund Lineup: Selecting Asset Classes
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Constructing a Fund Line-Up: Importance of Diversification
Best Performing Asset Classes 2003-2013:
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What is a Stable Value Fund?
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Domestic Equity
– Market capitalization
– Active vs. passive
– Growth vs. value
How to Implement?
-Passive LC Core
-Active mid-cap and small-cap
Fixed-Income
– Core vs. specialty
– Other sectors: high-yield, long
duration, international, emerging
markets
How to implement ?
-Diversified total return fund with
small discretionary allocations to
High Yield and international Bonds
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Foreign/International
– Capitalization ranges
– Exposure to currencies
– Countries and regions
How to Implement? Core vs. Specialty
– Best Practice is to have exposure to:
• Developed markets (MSCI EAFE
index)
• International developed smalland mid-cap equities
• Emerging market equities,
developed, and small- and midcap, (MSCI ACW IMI index)
Non-Traditional
– Inflation-protected securities (most
commonly known as TIPS)
– Real estate
– Commodities
– International fixed income
How to Implement?
• REITS
• Commodities
• Diversified real asset fund
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Pre-Diversified Funds
•
Benefits
– A single option that offers a fully-diversified
portfolio
– Automatic rebalancing
– A risk-return profile that changes with the
participant’s age
– Pre-determined glide path
– Selection of a portfolio by age
– Can be customized to reflect the demographics
and savings patterns of employees
– Can utilize other asset classes such as inflation
protected securities, real estate, international
bonds, and even commodities
– Adding annuities to TDFs
•
•
Types
– Target Date Funds
– Target Risk Funds
– Balanced Fund
Target date funds are still the most common
default option
– Need to conduct better due diligence
on selection and monitoring of TDFs
– DOL publishes Tips for Reviewing
TDFs
– Need to align with participant
demographics and risk tolerances
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Reviewing TDFs: Several Important Considerations
Asset allocation
A. Differ in asset classes
Traditional asset classes vs. TIPs,
REITs, alterative
Structural
A. Roll-down process
B. Implementation – active vs. passive
C. Rebalancing and tactical allocations
B. Sub-asset classes can make a big
difference
1. International vs. US
2. Over-diversification
3. Too many proprietary funds
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Special Investments
White Label Funds
Managed Accounts
Brokerage Window
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White Labeling as the Participant Sees It
Plan sponsor seeks to simplify lineup and increase flexibility through manager of
manager approach
.
U.S. Equity Large Cap
Non-U.S. Equity
U.S. Smid Cap Equity
Real Assets
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White Labeling as the Plan Sponsor Sees It
U.S. Equity Large Cap
- 17% Large Growth SA
- 17% Large Value SA
- 17% Large MF
- 50% Russell 1000 CIT
Non-U.S. Equity
- 19%
EAFE SA
- 19%
Global MF
- 19%
Non-U.S. Growth SA
- 19%
Non-U.S. SA
- 19%
Emerging Markets MF
- 3%
ACWI ex USA CIT
Real Assets
- 28% Global Property SA
- 28% Global Listed Infrastructure SA
- 20% Real Asset MF
- 20% Real Asset CIT
- 30% TIPS CIT
U.S. Smid Cap Equity
- 32%
Smid Core
- 22%
Small Core SA
- 22%
Small Growth SA
- 22%
Small Value SA
- 3%
Russell 2000 CIT
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Pros and Cons of Manager of Manager or White Label Funds
• Pros
– Reduce plan
complexity/streamline for
participants
– Reduce opportunities for
momentum market timing
– Eliminate mapping issues for
those funds
– Potential ability to introduce
alternatives and illiquid assets
• Cons
–
–
–
–
Not all recordkeepers support
Challenges in setting up
Rebalancing challenges
Other challenges similar to
separate accounts such as
governance and unitization
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Managed Accounts
•
•
•
•
•
An investment advisor manages and monitors the retirement account.
Typically:
– Offered by the same independent third-party that provides online advice
– Use the same investment methodology, features, etc., as for online
investment advice
– Advise on drawing down income through retirement
– Geared for do-it-for-me investors, as the provider implements the advice
by taking discretionary control of the participant’s account
– Paid via an asset-based fee deducted from participant account
Solutions may be opt-in or opt-out
36.2 percent of large plan sponsors offer managed accounts
< 5 percent offer as default
Source: 2014 Callan DC Survey
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Pros and Cons of Managed Accounts
• Pros
– Professional management
– Tailored solution
– Leverages funds within the
plan
– Advice can extend to
contribution levels and
drawdowns
• Cons
– Fees
– Limited utilization of tailoring
– Materially better than target
date fund but requires
participant input
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Self-Directed Brokerage Accounts
What they are:
• Full window, including mutual funds, ETFs, individual securities
• Limited window, typically with only mutual funds
• Administered through brokerage—not part of recordkeeping system
– Brokerage firm typically opens accounts, monitors accounts, accepts
orders, maintains records, responds to account questions
– May have separate entities executing trades, preparing statements,
custodian accounts
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Pros and Cons of Self-Directed Brokerage Accounts
• Pros
– Provides wide array of
investments for vocal minority
of do-it-yourselfers
– Can facilitate efforts to
streamline core lineup
• Cons
–
–
–
–
Low utilization
Cost
Loss of revenue sharing
Loss of economies of scale
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Self-Directed Brokerage Accounts—Prevalence
2006
2007
Source: 2014 Callan DC Index.
2008
2009
2010
2011
2012
2013
2014
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Investment Vehicles
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Pros and Cons of Collective Trusts in DC Plans
•
Pros
– Typically less expensive and offer tiered fee
schedules
– Standardized and customized revenue
sharing
– Fewer mutual fund “issues”
• Transaction penalties
• Registration and other costs
• Investment limitations
– Morningstar and Lipper coverage has
increased
– Fact sheets and disclosure statements are
available
•
Cons
– Must be maintained by a bank
– No ticker symbol
– Less reporting and data availability
– More set-up time/steps than mutual
funds
– No board of directors, product not
registered with SEC
– Revenue sharing not always available
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Pros and Cons of Separate Accounts/Unitized Funds
• Pros
– May provide lowest fees for
large plans
– Customizable investment policy
guidelines
– Allow for customized, equitable
administrative fees
– Access to greater set of
institutional managers
– May allow plan sponsor to
leverage DB plan managers
• Cons
– Requires trustee/custodian to be
hired for unitization
– Requires customized fact sheets and,
if desired, other strategy details
– Communications challenges (fund
descriptions, manager strategy, etc.)
– Possible implementation challenges:
many moving parts
– Not traded on NSCC
– Not a regulated/registered fund
– No revenue sharing
– High minimums
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Prevalence of Investment Types Offered
•
Most plans (71.6
percent) have at
least one
institutionally
structured fund,
such as a
separate account,
collective trust, or
unitized/private
label fund in their
lineup.
* Multiple responses were allowed.
Source: 2014 Callan DC Survey
Does your plan offer the following investment types
within the fund lineup?*
na
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 Live Written Questions: Use the Q&A Panel
located on the right side of your screen.
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Contact Information:
Steve Toole
State of North Carolina
steve.toole@nctreasurer.com
Jeffrey Snyder
Cammack Retirement
jsnyder@cammackretirement.com
Martha Spano
Buck Consultants
Martha.Spano@xerox.com
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