Monthly Archives: October 2015

Recent NAGDCA Agenda Shows Creativity Still Alive in Government DC Market

Following my attendance at the 2014 NAGDCA Conference I posted an article about how disappointing it was that the conference agenda contained so little fresh and new.   This year’s Indianapolis conference agenda was much more innovative and refreshing.

My favorite session was titled “The What, Why and How of Structuring Investment Menus: Contrasting Case Studies.” All of the speakers had something significant to contribute. The session was moderated by Richard Davies of AB (AllianceBernstein), and the panelists were Steven Montagna, City of Los Angeles, Jeffrey Cable, Colorado PERA, and Cindy Rehmeier of the Missouri Employees Retirement System (MOSERS).

Different Solutions, But Equally Successful

What I liked best about this session is that it presented three very distinct and different ways of structuring plan investment menus. Each of these plans is very successful, and highly regarded. Yet each one has chosen a different way of designing their investment array, and how they are offered to plan participants.

MOSERS is to be commended for using auto-enrollment and voluntary auto-escalation. Custom asset allocation funds are the default option, and MOSERS has done a great job moving participants from a confusing array of 31 investment options in 2009 to a more streamlined and contemporary design of funds that are segmented into three major categories. The custom target date funds are designed for the majority of participants who don’t want to make investment decisions. A second tier offers a stable income option, and an opportunity to participate in the commingled pool used to fund the defined benefit plan. For active investors, there is a self-directed brokerage option. Auto-enrollment is a tremendous idea more plans should adopt. Unitization of the defined benefit fund as an investment option for the defined contribution plan is an innovative idea. Whether it will catch on with most participants is unknown, and is administratively complex, but it shows creative thinking.

Colorado PERA uses a thoughtful “three tier” approach with an excellent focus on low cost institutional funds. The basic tier includes PERA target date funds, with a second tier offering seven custom asset class funds. These funds permit participants to set their own asset allocations, instead of having someone do it for them in the target date funds. A third tier includes the self-directed brokerage account for participants who think they always know better than anyone else. The Colorado program has devised a simple way for participants to customize their own asset allocations without having to select from expensive retail funds. This creative design serves three different plans (457, 401(k) and a DC Choice plan alternative to the state defined benefit plan).

The City of Los Angeles program is perhaps the most different of all from the “conventional” design of defined contribution plans. For starters, the City of Los Angeles plan does not offer target date funds. Instead, the plan offers five risk-based funds (ultra-conservative, conservative, moderate, aggressive, and ultra-aggressive). All funds are institutionally priced with very low fees.   The second tier offers more savvy investors a choice of seven “white label” funds constructed around asset classes (core bond, core large-cap, etc). This allows participants to design their own custom asset allocation rather than use one of the risk-based asset allocation funds. And, like the other plans there is a self-directed brokerage option for that small percentage of participants who think they always know investments better than anyone else.

Refreshing and Creative

It is very refreshing to see the way each of these plans tailored their investment array to their own participants, without using “easy way out” options like offering only target date funds.   I have long felt that the rush to target date funds was not the panacea many plan sponsors thought they were. There are many plan sponsors who raised their hands in an “alleluia” moment, thinking that target date funds are the ultimate solution for their participants, and that nothing else would come after that. All three of these plan sponsors have “evolved” beyond just offering target date funds, and that is great idea.

Thinking Beyond Target Date Funds

Though target date funds have been widely trumpeted as the best way to “bundle” participants into logical groupings, many of us have always had trouble buying the whole concept of everyone the same age having exactly the same asset allocation needs. To me, it just never made sense. If you take everyone age 50, or whatever age, there is simply no way that everyone in that age group has the same needs. People of the same age have different risk tolerances, different family issues, different sources of future and current income, and different desires for post-retirement income and legacy planning. In my own situation during my working career, I opted out of target date funds and selected managed accounts because I didn’t feel the asset allocation in the target date fund for my age group made any sense for my personal circumstances. I know of many other retirement professionals who did the same thing, many of whom opted for risk-based funds instead of age-based funds.

The Thinking on Target Date Funds is Evolving

There has been much written on this topic over the past ten years or so, and I am glad to see that the defined contribution industry is finally moving beyond target date funds being the “ultimate” solution. I like the City of Los Angeles approach in particular because it doesn’t even pretend that risk tolerance is age-related. The fact that no target date funds are offered is refreshing. It takes a bit of courage to do what Los Angeles did, and I like that. Of course, Los Angeles is my hometown and I readily admit that people in California think a bit differently. The Los Angeles approach may not work well in other places, but I think it is refreshingly honest to have an investment array that emphasizes individual relationship to risk (asset allocation funds) rather than the easier alternative of lumping participants by age group. In that regard, both Colorado PERA and MOSERS offer creative options to the conventional target date fund design. Los Angeles just goes one step further and shows that a highly successful plan with impressive characteristics does not necessarily have to offer target date funds.

Grouping by Zodiac Sign May Make More Sense Than Age Grouping!

While I am not opposed to target date funds, I don’t think they are the great solution many people think they are. You can easily make an argument that asset allocation funds based on your zodiac sign would be better than age! Yes, I think it is plausible that you could design an asset allocation fund suited to Libra’s that is better tailored to their characteristics than a single fund for everyone who is between the ages of 45 and 50! While that is a humorous idea, it makes a point.  And, if a plan sets up funds based on your zodiac sign, it will most certainly be done first in California!

I commend each of these three plan sponsors for thinking “outside the box” in their plan design. I think this is truly one of NAGDCA’s best sessions and it offers three very intriguing ways to think about your plan investment menu. Whether any of these three creative approaches work for you and your participants isn’t the point. The point is that the government defined contribution market is still evolving, thank goodness, and so is the wisdom surrounding the design of the investment menu.

Great Work by the Annual Conference Committee

In addition to the speakers recognized above, I would like to thank the 2015 NAGDCA Annual Conference Committee, chaired by Polly Scott of Wyoming. The other members were Kathleen Wilson, Jim Link, John Bourne, John Eckhardt, Regina Hilbert, Erin Sheridan, and Rey Guillen. Thank your for an informative conference agenda, and in particular, for this very creative and energizing session.