Mapping Retirement Assets in Down Markets

The following post was written by AIFA designee Lyle Kearns. It is an interesting situation in which he seeks input from you, his peers, in how best to approach a specific retirement plan transition. If you have any thoughts, please leave them for all to see by clicking the "Comments" link below the post. This is the first post written by a designee on the fi360 Blog. It is a great example of how we would like to make this blog a valuable resource available to all AIF/AIFA designees. If you would like to write a post like this one, or of interesting insights you have to offer, let me know by emailing blog@fi360.com to request access.

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Retirement plan transitions can be tricky enough in the best of times but with the market down roughly 40% there are some additional issues that arise.  Now consider a plan in which half of the assets belong to retired participants and a significant number of them are holding 100% equity portfolios.

Facts & Circumstances

Our firm is working with a new client to help improve their $20 Million 401(k) plan.  Over the last year we have worked closely with management to educate them about the retirement plan industry and their fiduciary responsibility; we have also conducted multiple participant surveys and focus groups as well as informational meetings.  Most recently we have completed an RFP process and helped the client select a new bundled retirement plan provider (they previously worked with a regional record keeper that provided no education or advice).  The new vendor will take over the plan on March 31, 2009.

This plan was a trustee directed plan for years and the trustees had placed all the assets with one money manager who ran a US equity multi-cap value strategy.  For the last ten years the manager did a terrific job and posted some exceptional numbers.  Through the downturn in 2000-2003 they provided amazing returns and many participants thought their accounts were invincible.

Approximately three years ago the money manager sold his firm and retired.  It was at this time that the plan trustees decided to open the plan up to participant direction and, in addition to what was now the US large cap value oriented separate account, they added a US large cap growth mutual fund and a total return bond fund.  A simple line up of three choices seemed appropriate for participants that had never exercised self direction before.

As of today, 68% of the plan assets remain in the large value separate account.  Our conversations with participants indicate that their lack of diversification is a result of both the confidence they had in the strategy based on past experience and a lack of sophistication and education regarding investments.

The organization has now approved a fully diversified fund lineup to be used on the new vendor's platform.  18 institutional mutual funds representing various asset classes and styles of investing as well as a series of passive target date funds that have been approved for use as QDIAs.

Mapping Alternatives

In a normal market environment (one that isn't down 40%) we may be content to use a default mapping strategy that moved participants into various target date funds based on their age or years to retirement.  However, given that so many participants are undiversified equity investors (and many of these are retired) this strategy would inhibit their ability to recoup the significant losses incurred over the last 14 months.

Alternately, we could proceed by mapping participants into target date funds based, not on their age, but on their equity allocation.  e.g. If a participant is 100% in the large value separate account, map them to a target date fund with the closest equity allocation.  In this case the 2050 fund is the most aggressive with 90% of the fund in equities.   Yet another alternative is to  map like fund to like fund but this would leave participants in undiversified positions and fail to take advantage of the opportunity to improve their portfolios.

At this point we anticipate at least two meetings with participants prior to plan transition.  The new vendor will conduct one set of meetings at each location and our firm will conduct another in conjunction with management.  These meetings will be supported by multiple forms of other communications.  Retired participants will be invited to the meetings and the current expectation is that many, but not all, will attend.  Given the long lead time to transition and the multiple meeting opportunities we believe the best thing that can be done is to seek signed investment directions from each individual participant.  There are 380 active participants and it is reasonable to expect that we can get most, if not all, to sign the investment directions.  There are another 265 terminated participants (165 with balances under $5,000) and we may be able to get half of them to meet with us and sign directions.

Your Comments and Feedback are Desired

We are eager to hear your thoughts and comments about this case in specific or the general dilemma the down markets create in retirement plan transitions.  Please share any comments you may have.  If you would like to speak with us directly you may contact Lyle Kearns, AIFA or Randy Miller CIMA at 800-377-1449 or via email at lyle@advisory-services.com.

Posted by Lyle Kearns in Designee Posting, Fiduciary Q&A, Putting Process into Practice | Permalink

Technorati Tags: AIFA, diversification, fiduciary responsibility, participant education, QDIA, retirement plan transition

Mapping Alternatives

In a normal market environment (one that isn't down 40%) we may be content to use a default mapping strategy that moved participants into various target date funds based on their age or years to retirement.  However, given that so many participants are undiversified equity investors (and many of these are retired) this strategy would inhibit their ability to recoup the significant losses incurred over the last 14 months.

Alternately, we could proceed by mapping participants into target date funds based, not on their age, but on their equity allocation.  e.g. If a participant is 100% in the large value separate account, map them to a target date fund with the closest equity allocation.  In this case the 2050 fund is the most aggressive with 90% of the fund in equities.   Yet another alternative is to  map like fund to like fund but this would leave participants in undiversified positions and fail to take advantage of the opportunity to improve their portfolios.

At this point we anticipate at least two meetings with participants prior to plan transition.  The new vendor will conduct one set of meetings at each location and our firm will conduct another in conjunction with management.  These meetings will be supported by multiple forms of other communications.  Retired participants will be invited to the meetings and the current expectation is that many, but not all, will attend.  Given the long lead time to transition and the multiple meeting opportunities we believe the best thing that can be done is to seek signed investment directions from each individual participant.  There are 380 active participants and it is reasonable to expect that we can get most, if not all, to sign the investment directions.  There are another 265 terminated participants (165 with balances under $5,000) and we may be able to get half of them to meet with us and sign directions.

Your Comments and Feedback are Desired

We are eager to hear your thoughts and comments about this case in specific or the general dilemma the down markets create in retirement plan transitions.  Please share any comments you may have.  If you would like to speak with us directly you may contact Lyle Kearns, AIFA or Randy Miller CIMA at 800-377-1449 or via email at lyle@advisory-services.com.