Investing June 12, 2018

Custom Investments May Better Fit DC Participant Demographics

Vanguard believes it’s an important part of due diligence to consider custom options.

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With defined contribution (DC) plans representing a growing share of U.S. workers’ retirement savings, plan sponsors may want to consider whether they should offer custom investment solutions in those plans, Vanguard says in a new white paper, “Considering Custom for Your DC Plan.”

But aside from moving to custom investment choices, plan sponsors also need to make efforts to increase contributions, minimize early withdrawals and reduce all-in plan fees. “These strategies typically have more influence on participant outcomes than changes to a target-date fund (TDF) glide path or the creation of a white-label fund,” Vanguard says.

Should a sponsor decide to use a custom approach, one option is white-label funds; their names reflect their asset class or objective and can be single manager, singe asset class multimanager, multi asset class multimanager or custom target-date funds.

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Before selecting a TDF, sponsors need to consider the underlying assumptions of the participants made by the TDF provider. If they are different from their own participant base, they may want to consider a custom TDF, Vanguard says.

Other benefits of customization include broader diversification, simpler naming convention that may minimize portfolio construction errors, tailored asset allocation and the ability for the investment manager to act as a co-fiduciary.

“Customization enables the plan sponsor to create a plan that reflects the unique circumstances, beliefs and demographics of its own employees,” Vanguard says. It also enables sponsors to offer different asset classes: “Customized options can tap specialized managers in different asset classes, potentially increasing the opportunity to add value.”

However, there are challenges, as well, Vanguard warns. Broader diversification increases complexity of oversight, customized solutions may not have a historical track record of performance, and plan sponsors still have a fiduciary responsibility.

In conclusion, Vanguard says, “We believe it’s an important part of due diligence to consider custom options. Each plan is unique and deserving of careful analysis and expert consideration.”

The full report can be downloaded here.

Compliance June 12, 2018

Oregon Halts Move to Public DC Participant Investment Choice

A review found that a bill allowing employees who participate in the state’s individual account plan to select their own investments would violate the state’s legal and fiduciary standards.

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A review by the Oregon State Treasury has determined that legislation that would have allowed public employees who participate in the state’s Individual Account Plan (IAP), an account-based benefit, to select their own investments would violate the state’s legal and fiduciary standards.

An announcement on the Oregon Public Employees Retirement System (PERS) website explains that House Bill 4159 would have allowed IAP plan members to begin selecting the investments for their accounts on their own starting in 2019. However, after a mandated review, it was determined that PERS cannot move forward with implementation of the legislation without additional legislation.

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“PERS will work [with] the Oregon State Treasury, employee groups, and other partners to develop a proposal to be considered during the 2019 legislative session,” the announcement states. “In the interim, members will remain invested in age-based IAP target-date funds until the legal and fiduciary constraints are resolved and appropriate beneficiary protections are in place.”

All IAP plan members’ accounts were invested in age-appropriate target-date funds starting January 1, 2018.

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