Map maker
How the right mapping strategy
can help participants navigate
from point A to point B
by Laura Nemeth, BARCLAYS GLOBAL INVESTORS
www.bgilifepath.ca
Many of today’s plan sponsors are facing dramatic changes to their
defined contribution plans. Encouraging participants to save for retirement can be difficult enough, but how can sponsors encourage their
employees to select the right fund options—a critical decision that could
make or break their retirement prospects? When a Fortune 500 company
and their consultant added Barclays Global Investors’ LifePath® portfolios
to the company’s plan, they decided to map participants from a balanced
plan option to the new LifePath® portfolios. Read on to learn how one plan
sponsor designed a successful transition plan that prioritized communication, planning, and execution—and even reduced costs along the way.
MAPPING 101
Mapping is the process of transferring par-
THREE STEPS TO
SUCCESSFUL MAPPING
ticipants’ assets from one fund option to
Fiduciaries may want to take note of the
another. Plan sponsors may choose to map
three-step process this company relied
assets if they decide to close a fund, rede-
on to ensure a successful transition.
sign, or introduce new options in the plan.
In this case, participants were notified of the
new fund options and given an opportunity
to change their investment from a balanced
fund to another existing fund of their choice
by a particular deadline. After that date, the
company mapped assets to the appropriate
LifePath portfolio.
Step 1: Define and develop a
transition and participant
communication plan.
Long before mapping takes place, plan
sponsors should consider the best route for
getting from point A to point B. Answering a
few critical questions about participants and
the implementation process can help you
The concept sounds simple enough in
determine the strategy that best meets your
theory, but mapping over US$700 million
needs (see “Questions to ask before embark-
presented several operational complexities.
ing on a mapping expedition” on page 11).
To help navigate through the process, BGI
relied on a fresh perspective to mapping.
Treating the mapping process as a transitional exercise rather than an operational
exercise sought to preserve market value
for participants, despite complexities.
Because participants in this example were
mapping assets into LifePath portfolios, an
age-based mapping approach made sense.
In other words, if an employee’s date of
birth was on or after January 1, 1970, that
employee was mapped into the LifePath
SELECT the right vehicle
According to Financial Research Corporation, target-date funds will receive US$35 billion in net new flows in 2007.*
In a collective trust fund environment, large-client flows or transactions such as mapping can be isolated to the
originating client. Barclays Global Investors estimates that the transaction costs associated with mapping activity will
exceed US$8 million in 2007. By treating mapping flows into the firm’s collective trust funds as a formal transition,
BGI can successfully immunize existing fund holders from these costs.
*Financial Research Corporation, “Lifecycle Fund Economics: Evaluating Next Generation Competitive Dynamics,” June 14, 2006.
2040 fund. In this way, the mapping strategy matched participants to the LifePath
portfolio that may be best suited for their
investment needs.
Alternatively, plan sponsors may consider
mapping participants to a target-date fund
QUESTIONS
to ask before
embarking on a
mapping expedition
based on style or risk preferences, such
as conservative, moderate, or aggressive.
Participant Considerations
However, fewer of today’s plan sponsors
• Will there be a blackout period?
•How will participants be informed
of mapping?
Fewer of today’s plan sponsors choose
to map participants based on risk
preferences because they recognize
participants’ tendency toward inertia.
•Will the participants be mapped
by age?
•What form of communication
campaign will best serve
your participants?
Implementation Considerations
•Is it prudent to fund with cash
choose to map participants based on risk
preferences because they recognize participants’ tendency toward inertia. Consider,
for example, an employee who chooses an
appropriate aggressive balanced fund as a
young investor, but fails to rebalance their
portfolio to a more conservative mix as they
near retirement. Is that participant best
or securities?
•What is the overlap from legacy
to the new portfolio?
•Are there structural or cost impediments to redeeming securities?
• Are there operational risks?
•How will the transition
be implemented?
served by a mapping strategy that transfers
an out-of-date investment decision, or one
that considers their target retirement date?
Step 2: Educate and
Step 3: Implement and activate
communicate to participants
transition, trading, and post-
Educating and communicating to plan par-
trade performance management
ticipants is a crucial part of the mapping
Once the mapping plan is in place, it is time
process. Early planning and straightforward
to map the assets. Assets are transitioned,
communications ensure that participants
trading and rebalancing occurs, and com-
understand plan changes and can act
plete portfolios are delivered. To isolate
accordingly. Participants need to under-
transaction costs associated with the map-
stand how, when, and why plan changes
ping activity in this example, BGI used
occur, and they often need to be educated
temporary mapping accounts throughout
about new fund options.
the transition. Similar to restructuring
In addition to participant communications,
all parties involved in the mapping should be
on the same page, including record keepers,
trustees, and legacy managers.
accounts, mapping accounts offered the
advantage of isolating all mapping activity
and associated transaction costs from other
LifePath investors.
By transitioning assets, the client’s partici-
transaction costs and gap risk) were approxi-
pants benefited from continuous market
mately 16 basis points. However, crossing
exposure, minimized benchmark risk, and
savings brought the actual realized costs
maximized transaction cost savings. Daily
down to 11 bps.
transition reporting and post-transition
performance reporting ensured that all
moving parts were on the right track
Destination: success
throughout the process.
Overall, the client and their consultant were
Perhaps the most important benefit of
a mapping transition is the potential for
cost savings. Because this mapping process
was handled as a transition, BGI was able
to cross nearly 25% of the client’s trading
activity to minimize transaction costs. Prior
to the transition, estimated costs (including
pleased with the transition results. If you
are a plan sponsor considering mapping,
take the time to develop and execute a plan
of action that works best for you and your
participants, and to find a transition manager
who can meet those needs (see “Choose your
guide carefully” for more information.) dc
CHOOSE YOUR GUIDE CAREFULLY
1
Minimize and isolate transaction costs:
A transition manager should estimate
implementation costs well ahead of the
4
Preserve market value: Remember
that participants’ account balances are
at stake. A transition manager can help mini-
mapping exercise. Crossing can help reduce
mize tracking error and slippage throughout
commission, spread, and impact costs. Isolat-
the process of switching funds in order to
ing transaction costs associated with one
preserve participants’ account value.
client’s mapping activity from other investors
5
in the fund will also benefit all investors with
better fund performance.
2
Address operational complexities:
Determine which operational hurdles
exist and how to address them. Will there be
Maintain market exposure: A transi-
a blackout period? An experienced transition
tion manager should employ equitization
manager should be able to accommodate the
techniques to ensure that participant balances
plan’s needs either way.
are invested in the appropriate markets
6
throughout the mapping period.
3
Determine the appropriate timing: Any
Communicate, communicate, communicate: Never underestimate the
importance of communicating to participants
tradeoffs between market liquidity and
early and effectively. It’s also crucial to keep
the target launch date should be addressed
all parties—from record keepers to trustees
well in advance. A flexible and creative transi-
to legacy managers—involved and informed.
tion manager can help achieve a solution that
minimizes the impact of illiquid markets.
Barclays Global Investors Canada Limited and its affiliates form Barclays Global Investors (BGI), a division of Barclays PLC. BGI Canada LifePath® portfolios are
managed by Barclays Global Investors Canada Limited, an indirect subsidiary of Barclays PLC. Crossing is used only where permitted by the LifePath portfolio’s
investment guidelines and applicable laws or regulations. This publication is intended for accredited investors in Canada only. The information and opinions herein
are provided for informational purposes only, are subject to change and should not be relied upon as a basis for your investment decisions. Past performance is not
necessarily indicative of future performance. This document is not and should not be construed as a solicitation or offering of units of any fund or other security in
any jurisdictions. No part of this publication may be reproduced in any manner without the prior written permission of Barclays Global Investors Canada Limited.
© 2007 Barclays Global Investors Canada Limited. All rights reserved. LifePath,® LifePath 2010,® LifePath 2020,® LifePath 2030,® LifePath 2040® are registered
trademarks of Barclays Global Investors, N.A. The LifePath products are covered by US patents 5, 812, 987 and 6, 336, 102. Used with permission.