PD08: Build or Buy

Asset allocation solutions can be built from pre-existing options in a retirement plan menu, which might be advantageous for some plans over the use of pre-built options.

align=”center”> The Panel Audio File

To help plan sponsors and advisers understand how this process works and how they might be able to use this solution, Stuart Odell, Director of Retirement Investments at Intel Corporation; Robert Boyda, SVP of Investment Management Services at John Hancock; and Michael Case Smith, Member of the Board of Advisers at Avatar Associates, shared their experiences and offered the audience some factors to consider when deciding whether to build or buy a fund.

Intel’s plans in the United States cover about 50,000 employees and utilize a profit-sharing plan with a defined contribution structure as the company’s primary retirement plan, Odell explained.

The company has historically taken a “we know better” approach to retirement planning, he said, managing most of its employees’ funds for them. This practice made the switch to customized lifecycle funds easier for Intel than it might have been for an organization that generally left employees to take care of their own portfolios, Odell said.

In addition to the profit-sharing plan, participants may also choose to defer their salary and bonuses into a 401(k) plan, in which the money is directed into either Intel’s “life stage” funds (the company’s version of lifecycle funds) or other mutual funds. The funds were all set up to be very easy for employees to understand and life stage funds were organized by five-year age groups.

When Intel created the life stage funds, there were certain challenges inherent in the building that do not usually apply to companies that use more traditional asset allocation funds, according to Odell. First, without a performance history or past record of any kind, there was no way to show participants past successes. To combat this, Intel focused on communicating the importance of investment diversification and projections for future transactions.

There was also the issue of active versus passive management; each has the potential to be beneficial in certain areas, he said, so trying to know where each would be most efficient is an important decision.

When brokering trades, Odell recommended that plan sponsors have a custodian or recordkeeper look into the options instead of taking on that responsibility alone. However, above everything else, Osell said, possibly the most important thing to consider when constructing asset allocation funds is glide path construction.

The glide path must be customized to the demographics of the participant base, and requires significant qualitative analysis and discussion with consultants and managers who can help figure out what the optimal allocations are for the participants in a given structure.

Finally, Odell said that having an outside group review and rate the investments objectively helped the company determine whether their plan might be successful and how it compared to other similar plans.

When asked whether he would be willing to do the same thing over again, knowing what he does now, Odell was emphatically affirmative. He explained that, for Intel, the benefits of having made the investment options themselves were "extraordinary."

He enjoyed the freedom of being able to adjust the glide path over time as the demographic changes, and said that being able to add or remove managers and asset classes without worrying about an outside party was well worth the effort.

Boyda explored how plan sponsors might guarantee a positive experience for their participants, saying the key was simplicity.

He explained that by dividing the options within a 401(k) plan into one where participants either decided their investment allocation entirely on their own or received help, most would recognize that getting advice about their investments would be more practical and beneficial than deciding their allocations on their own.

By accepting the help offered by their plan sponsors, participants would agree to enroll in target-risk funds and have a professional review the plan and their accounts and manage their portfolios.

Boyda related survey results that showed that participants who tried to manage their own accounts-even when they were actively engaged-did significantly worse than those who were barely involved.

If plan sponsors want to guarantee their participants are prepared, he said, they must explain what fund options exist, offer comprehensive educational materials that are easy to understand, and always try to keep their participants engaged in what goes on with their portfolios.

As part of enhancing the firm's value to its customers, Boyda said they created an option within their target-risk funds that allows participants to obtain a rider that guarantees income for life.

"For 35 basis points," Boyda said, "any participant in the program can buy one of these target-risk funds and have whatever assets are in their program essentially produce what is something slightly better than a 5% lifetime payout type of defined benefit structure."

Smith said that, at Avatar, they were trying to translate the Intel-type customization programs and apply them down market, catering to small and mid-market companies that are not comfortable with acting as fiduciaries.

Avatar allows plan sponsors to limit their responsibilities to just selecting and monitoring glide path investment managers, without being an agent to transactions.

"The concept is," Smith said, "working with a select group of recordkeepers, taking demographic information about your plans, [and] constructing these QDIAs [qualified default investment alternatives]-balanced, managed account, lifecycle-with low-fee ETFs [exchange-traded funds] so the fees are closer to the Intel kind of world."

Smith advocated third-party involvement-as when Avatar works with a company-to remove conflicts of interest and make the process of plan selection and management safer and simpler for plan sponsors and advisers.

There is, of course, no single option that will perform optimally for all companies and all participant groups, panelists agreed.

For some, like Intel, having the freedom of customized asset allocation solutions is worth the work involved in creating them. For others, it might be easier to purchase "off the shelf" products, make slight alterations to existing options, or employ an outside company to make adjustments for them.

Plan sponsors and advisers have to be aware of the needs of their client base when making this decision, and be sure to explore all the options thoroughly to find-or build-the plan that will best prepare their participants for retirement.

-Sara Kelly