August 8, 2008 - ABA Annual Meeting, New York
Things to Consider in Structuring
an Effective Investment Program
To protect the confidential and proprietary information included in this material, it may not be disclosed
or provided to any third parties without the approval of Hewitt Investment Group LLC.
Factors To Consider
Philosophical Issues
Investment Issues
•
•
•
•
•
•
•
•
•
•
What do employees want?
Brand name importance/recognition
Payment of expenses by participants
Level of paternalism
Investment education
Number and type of funds
Role of lifestyle/lifecycle funds
Active vs. passive management
Retail funds vs. institutional accounts
Window/self-directed option
Investment and
Other Policies
Administrative Issues
Compliance Issues
• Bundled vs. unbundled arrangement
• Daily valuation
• Total plan cost
• 404(c) requirements
• Investment communication/education
• Fiduciary checklist
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Investment Issues
9Number and Types of Investment Options
9Sample Defined Contribution Plan Structures
9Selecting the Investment Options
9Transitioning the Assets
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Types of Investment Options
Theoretical Risk/Return Spectrum
Company
Stock
Small Cap
Equity
International
Equity
Mid Cap
Equity
Expected Return
Large Cap
Equity
Balanced /
Lifecycle
Diversified
Fixed-Income
Stable Value
Expected Risk (Variability of Returns)
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Number of Investment Funds Offered
• The average number of investment options offered by a large number of DC Plans is 17; the
median number is 15.
Number of Funds Offered - Average and Median
20
17
14
16
12
12
12
14
10
10
11
15
13
12
10 10
10
11
8
8
4
0
2001
2003
2005
Average (All Funds)
Average (Excluding Premixed)
Median (All Funds)
Median (Excluding Premixed)
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
Improta DC Presentation.PPT XP/02
2007
5
Types of Available Investment Options
• The most prevalent asset classes remain consistent with the past (stable value, intermediate
bond, large cap, small-cap, and international).
100%
98%
84%
80%
97%
89%
88%
71%
60%
57%
46%
40%
29%
20%
14%
12%
12%
7%
0%
Mny Mrkt
Stbl Valu
Int Bond
Speclty
Bond
Balanced Large-Cap Mid-Cap
Small-Cap
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
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Interntnl
Global
Emergng
Mkts
Sector
10%
REIT
Employer
Stock
Total Current Asset Mix
• 60% of plan assets are invested among three broad categories: Large-Cap Equity (26%),
Stable Value (18%) and Employer Stock (16%).
2%
M o ne y M a rk e t
18 %
S t a ble V a lue
<1%
S ho rt - T e rm B o nd
Int e rm e dia t e B o nd
3%
<1%
S pe c ia lt y B o nd
5%
B a la nc e d
9%
P re m ixe d
La rge - C a p E quit y
26%
M id- C a p E quit y
4%
6%
S m a ll- C a p E quit y
7%
Int e rna t io na l E quit y
G lo ba l E quit y
1%
E m e rging M a rk e t s
1%
S pe c ia lt y/ S e c t o r
<1%
16 %
E m plo ye r S t o c k
1%
S e lf - D ire c t e d B ro k e ra ge Windo w
0%
5%
10 %
15 %
20%
Percent of Plan Assets
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
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25%
30%
Self-Directed Brokerage Window
• The availability of self-directed brokerage windows continues to grow slowly. The assets
garnered, as illustrated on previous slide, are 1% of total assets, and 3% of assets where the
option is available.
20%
Percent of Plans
15%
10%
5%
0%
1999
2001
2003
2005
2007
(1999 n=469, 2001 n=400, 2003 n=456, 2005 n=449, 2007 n=295)
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
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Prevalence of Index Funds
• Index funds are often part of defined contribution plans. Vast majority of plans (92%) offer a
large-cap equity index fund, followed by bond funds, with 32% of plans.
13%
Sho rt-T erm B o nd
32%
Intermediate B o nd
22%
Specialty B o nd
11%
B alanced
29%
P remixed
92%
Large-C ap Equity
25%
M id-C ap Equity
20%
Small-C ap Equity
16%
Internatio nal Equity
0%
Glo bal Equity
9%
Emerging M arkets
Specialty/ Secto r
0%
30%
R EIT
0%
10%
20%
30%
40%
50%
60%
Percent of Plan Assets
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
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70%
80%
90%
100%
Active versus Passive (Index Funds)
• Passive investment strategies make sense in some asset classes; specifically in efficient
markets.
Rolling 3-Year Value Added
Rolling 3-Year Value Added
3%
8%
2%
6%
1%
4%
0%
2%
-1%
0%
-2%
-2%
-3%
-4%
-4%
-6%
-5%
-8%
-6%
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07
-10%
Dec-98
Fixed Int. MF Universe 25th Ranked vs. LB Aggregate
Fixed Int MF Universe Median vs. LB Aggregate
Fixed Int MF Universe 75th Ranked vs. LB Aggregate
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Dec-99
Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06
Large Cap Core MF Universe 25th Ranked vs. Russell 1000
Large Cap Core MF Universe Median vs. Russell 1000
Large Cap Core MF Universe 75th Ranked vs. Russell 1000
Dec-07
Utilization of Institutional Funds – by Asset Class
• The use of lower-cost Institutional fund alternatives (non-mutual funds), such as Collective
Trusts and Separate Account vehicles is beginning to increase, particularly among larger Plan
Sponsors.
13 %
M o ne y M a rk e t
25%
99%
S t a ble V a lue
99%
4%
S ho rt - T e rm B o nd
29%
20%
Int e rm e dia t e B o nd
38%
28%
S pe c ia lt y B o nd
44%
17 %
B a la nc e d
43%
30%
P re m ixe d
5 1%
40%
La rge - C a p E quit y
16 %
M id- C a p E quit y
49%
30%
23%
S m a ll- C a p E quit y
53%
18 %
Int e rna t io na l E quit y
34%
3%
5%
G lo ba l E quit y
3 1%
E m e rging M a rk e t s
49%
S pe c ia lt y/ S e c t o r
6%
9%
R E IT
9%
0%
10 %
19 %
20%
30%
40%
50%
60%
70%
80%
P e rc e nt o f E m plo ye rs
P e rc e nt o f A s s e t s
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
Improta DC Presentation.PPT XP/02
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90%
10 0 %
Investment Structure – Tiering Options
Plan Participants Investment Knowledge
I
What the Plan
know
w
Sponsor Provides
wha
do
t I Win ion
t
wan
Op
t.
Ik
som now
re
Co d s
e of
Sample Tiering Structures
I wa what
Fun
n t.
Wha
Client A
t
yle
est s
do? should
f
i
Tier 1: Lifestyle
L
I
und
have / I don’
F
Tier 2: Passively Managed Core Funds
t
th e
Tier 3: Actively Managed Core Funds
time
.
What the
Participant Says
Client B
Tier 1: Lifestyle
Tier 2: Core Funds
Tier 3: Specialty (e.g., high yield, emerging markets, company stock)
Client C
Tier 1: Pre-mixed options (using core funds)
Tier 2: Core Funds
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Sample Defined Contribution Plan Structures
Client A
Client B
Client C
Client D
Client E
Plan Size
$6.6 billion
$2.2 billion
$1.8 billion
$822.5 million
$293.1 million
Number of Funds
Total: 29
Total: 24
Total: 31
Total: 17
Total: 13
Tier 1
11 Premixed Portfolios
(target-maturity)
3 Premixed Portfolios
(target-risk)
11 Premixed Portfolios
(target-maturity)
3 Premixed Portfolios
(target-risk)
4 Premixed Portfolios
(target-risk)
Tier 2
8 Core Funds (primarily passive)
21 Core Funds
20 Core Funds
14 Core Funds
9 Core Funds
• 1 Money Market
• 1 Stable Value
• 1 Money Market
• 1 Stable Value
• 1 Stable Value
• 2 Fixed-Income
• 3 Fixed-Income
( 1 passive, 1 active, 1 high yield)
• 2 Stable Value
• 1 Fixed-Income (passive)
• 1 Fixed-Income (Passive)
• 1 Fixed-Income (passive)
• 1 Balanced
• 2 Balanced
• 3 Large Cap Equity
(passive core, active growth & value)
• 3 Large Cap Equity
(passive core, active growth & value)
• 1 Large Cap Equity
• 1 Mid Cap Equity
• 1 Balanced
• 5 Large Cap Equity
(passive core, active growth & value)
• 1 International Equity
• 3 Mid Cap Equity (active)
• 7 Large Cap Equity
(passive core, active & passive growth &
value)
• 1 Company Stock
• 3 Small Cap Equity (active)
• 1 Mid Cap Equity (passive)
• 3 International Equity
(1 passive, 2 active)
• 3 Small Cap Equity
(passive core, active growth & value)
• 2 Specialty
(REITS, Global TAA)
• 3 International Equity
(passive core, active growth & value)
• 1 Small Cap Equity
• 2 Mid Cap Equity
(passive core, active value)
• 1 Small Cap Equity
• 1 International Equity
• 1 Company Stock
• 3 Small Cap Equity
(active growth & value)
• 3 International Equity
(active growth & value)
• 1 Company Stock
Tier 3
10 Supplemental (active)
Mutual Fund Window
N/A
N/A
•1 Stable Value
•1 Fixed-Income
•2 Large Cap Equity
•2 Mid Cap Equity
•2 Small Cap Equity
•2 International Equity
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N/A
Factors Most Important in Selection of Investment Options
• 36% of employers rank historical investment performance as the most important factor.
• Fees were also an important factor in investment selection, with 62% of plan sponsors
indicating fees as the second or third most important factor.
Percent of Plans
Historical investment performance (consistent with fund objective)
Fund objective and style consistency
A gap within the fund lineup
Investment fees/expense ratio
Quality and tenure of fund’s investment staff
Employee support/communication
Name recognition of fund manager
Employer access to fund manager
Availability of fund value/return in newspaper
Other (e.g., investment process)
* Data based on Hewitt Associates’ Trends and Experience in 401(k) Plans 2007 Survey Findings.
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Most
Important
36%
26%
25%
9%
3%
0%
0%
0%
0%
0%
Second Most
Important
24%
31%
8%
28%
7%
0%
1%
0%
0%
0%
Third Most
Important
14%
17%
13%
34%
15%
3%
2%
2%
0%
1%
Investment Manager Selection Process
Determine Selection
Criteria
• Investment style, experience,
performance, fees, size, risk
Identify Preliminary
Candidates
• Screening
— Quantitative
— Qualitative
+
Select and Profile Finalists
Update Information/Visit
• Narrow to 2-3 candidates
• Provide in-depth analysis
— Organizational
characteristics
— Investment process
— Performance and risk
analysis
• Visit on-site as needed
Select Managers
• Selection by Committee
+
Effective Manager Structure
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Implement Transition
• As requested
Investment Manager Research – Searches
Qualitative Factors
Quantitative Factors
Evaluation of factors such as:
Evaluation of factors such as:
–
Professional turnover
–
Benchmark comparisons
–
Client turnover
–
Performance attribution
–
Acquisition/change ownership
–
Fee comparisons
–
Compensation policies
–
Portfolio analysis
–
Growth in assets
–
Asset under management
–
Business plan
–
Review of:
–
Succession planning
> Return volatility
–
Performance dispersion
> Beta
–
Adherence to style
> Correlation
> Tracking error
> Information ratios
> Sharpe ratios
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Asset Mapping – Practical Issues
Like (Similar) Funds
¾Asset Class
¾Style
¾Risk/Return Characteristics
¾Broad Asset Class or Index Fund
¾Complicating Factors – Fund Closures
No Like (Similar) Funds
¾QDIA or Default Fund
¾Principal Preservation
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Ongoing Due Diligence
Ongoing
OngoingMonitoring
Monitoring
••Portfolio
PortfolioEvaluation
Evaluation
–– Quarterly
QuarterlyReports
Reports
–– Investment
InvestmentManager
ManagerUpdates
Updates
••Periodic
Meetings
Periodic Meetings
Effective Investment
Program Maintenance
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