April 16, 2014 (PLANSPONSOR.com) – Credit unions providing a 401(k) program to 100 employees or more can save money and streamline their administrative tasks by joining a new multiple employer plan (MEP) administered by CUNA Mutual Group.
An MEP is a single plan adopted by a group of employers,
which may have a common interest though not common ownership. By comparison, a
single employer plan covers employees of one employer, or several employers
that are part of the same related group of employers.
The Credit Union Retirement Plan Association 401(k) Plan
became available January 1. “This is the first national MEP designed
exclusively for credit unions and their affiliates. When the Department of
Labor published its Advisory Opinion in 2012 on open MEPs (that they are not
single ERISA plans), we worked hard to come up with a solution so credit unions
could get the full benefits of an MEP, including not having to do an annual
audit of their plan,” says Paul Chong, senior vice president of CUNA Mutual
Retirement Solutions, based in Madison, Wisconsin. ERISA plans are plans
covered by the Employee Retirement Income Security Act.
The new MEP includes advantages such as the elimination of
annual plan audit expenses, reduction of employer’s fiduciary responsibility,
and elimination of annual Form 5500 filings by individual employers.
“The plan administrator appointed by the association is
responsible for the annual audit of the MEP, so credit unions can save audit
costs, which typically run from $5,000 to $20,000 per year,” says Chong. “They
also save staff time by not having to file the annual Form 5500.”
Chong says to be a member of the Credit Union Retirement
Plan Association, an employer must be a member of the Credit Union National
Association, Inc. (CUNA). Affiliates of CUNA members, such as wholly owned
CUSOs, and credit union leagues, are also eligible to join the association.
There are no association membership dues.
Active share helps investors
identify just how active their equity managers’ portfolios really are, but it
is also proving to be a versatile fiduciary risk management tool for plan
sponsors by providing quantitative evidence in three areas of fiduciary
oversight:
While equity managers with
complementary investment philosophies and styles can help diversify aggregate
plan assets, sometimes things get out of whack. One manager’s stock pick can
cancel out the sale of the same security by another manager, for example. And a
plan whose assets are allocated across a variety of investment mandates and
styles can still produce an equity aggregate that looks like a closet index
fund. Both are symptoms of overdiversification.
By analyzing the active share of
the plan aggregate versus its benchmark, sponsors can see how active—or not—the
aggregate really is and take corrective action.
2. Hire and monitor investment managers.
Active share analysis is
best-known for uncovering closet indexers—something most plan sponsors want to
avoid. But active share has many other useful applications.
It can shed light on an active
manager’s investment process by evaluating what type of active decisions a
manager makes, identify how sectors contribute to the process and even help
determine whether a manager’s chosen benchmark is appropriate for their
portfolio.
Holdings analysis: How a manager achieves
active share
The chart below illustrates the types of active
investment decisions a manager has made to contribute to its portfolio’s active
share:
By breaking out active share into
the holdings categories shown on the right of the chart, you can see how a
manager’s investment approach manifests in portfolio holdings versus the benchmark.
In the above example, we see a portfolio where the largest active share is
coming from avoiding certain securities held in the index. Virtually no active
share is derived from underweighted positions in index securities.
This type of active share analysis
can also be performed over various time series. The more consistent the pattern
of active share by holdings types is over time, the more likely it is that the manager’s
investment philosophy is being applied consistently.
Sector analysis: How sectors
contribute to active share
The chart below illustrates the active share of
each sector in the portfolio—demonstrating the extent to which each sector’s
holdings vary from those in the index. The weights of each sector in the
portfolio and the index, as well as the relative weight, are also displayed to
provide context.
This
type of sector-level active share analysis treats each sector as its own
portfolio and does not take into account the weight of the sector in the
portfolio. Any sector not held in the portfolio, like Sectors 9 and 10, above,
has an active share of 100%, since that sector is completely (i.e., 100%) different
from the index sector.
Benchmark analysis: Is a portfolio true to its
benchmark?
If a manager is true to its investment
mandate, the portfolio’s active share should be relatively low versus its
primary benchmark, since its holdings have the most overlap with that index. Conversely,
the portfolio should have a high active share versus a different style
benchmark, demonstrating little overlap in holdings. If the lowest active share
aligns well with the benchmark, that’s good news. If not, it could be an
indication that something is wrong. Perhaps it should be monitored against
another benchmark or perhaps the portfolio is drifting away from its mandate.
Either case should trigger questions from the plan sponsor.
In the chart below, let’s assume the manager was
hired to run an active small-cap growth portfolio using the Russell 2000 Growth
Index as their primary benchmark—“index 1,” below. The plan sponsor runs an
active share analysis of the portfolio versus the R2000 Growth, and also includes
the Russell 2000, Russell Mid-Cap and Russell 2000 Value indices in their
analysis.
The portfolio’s active share
versus the R2000 Growth is the lowest of the four at 93.31%. The portfolio’s
active share also increases with each additional benchmark—from 93.62% vs. the
R2000 to 99.05% vs. the R2000 Value. This is powerful evidence that a) the
manager is staying true to its small-cap growth mandate and b) the portfolio
has not drifted into small-cap, mid-cap or value territory.
3. Determine
whether investment fees are reasonable. Plan
fiduciaries are charged with a responsibility to ensure plan investment fees
are reasonable. Paying active management fees for a portfolio that is a closet
index fund is a real and present danger for plan sponsors. Active share
analysis helps fiduciaries quantify how “active” a portfolio is and make sure
the fees they are paying are justified.
If a
manager’s active share is less than 60% versus its benchmark, it is safe to say
the portfolio is bordering on a closet index fund. The same is true of an
aggregate portfolio. The prudent fiduciary will take corrective action to avoid
paying active management fees for passive management.
This is the second article in a
three-part series. Part One explained what active share is and how it is used
as a portfolio monitoring tool. Part Three will examine how active share can help identify style
drift in active portfolios.
Thusith Mahanama, CEO, Assette,
provider of client communications solutions headquartered in Boston
NOTE: This feature is to provide general information
only, does not constitute legal advice, and cannot be used or substituted for
legal or tax advice.
Any
opinions of the author(s) do not necessarily reflect the stance of Asset
International or its affiliates.
