a guide to commonly used investment vehicles final[3 ... · slide overview of the current landscape...

A Guide to Commonly Used DC Plan Investment Vehicles

January 2017

© 2017 DCIIA: Dedicated to Enhancing Retirement Security


Introduction

DCIIA producedthispresentationtoprovideabetterunderstandingofthevariousinvestmentvehiclesthatarecommonlyusedwithinDCplans,theirbenefitsanddrawbacks,andconsiderationsfordecidingwhichstructuretouse.

DCIIAisanon-profitassociationdedicatedtoenhancingtheretirementsecurityofAmericanworkers.Tosupportthismission,DCIIAaimstomakeitsimplerforDCplansponsorstoimplementappropriateinstitutionalinvestmentmanagementapproachesinDCplans.

PleaseconsultwithyouradvisersformoreinformationontheappropriateinvestmentvehiclesforyourDCplan.

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SlideOverviewofthecurrentlandscape 4

§ Vehicleallocationsbyplansize,2013§ Vehicleallocationsbyyear,2009-2013

Acloserlook: 6§ Definitions§ Commonmisperceptions§ Comparativetable§ Considerationsfordecision-making§ Mutualfunds§ Collectiveinvestmenttrusts§ Separateaccounts§ Fundoffunds

Serviceproviderrequirements 18Lookingahead 19Summary 20Projectcontributors 21


TableofContents

3


Overview oftheCurrentLandscape,ByPlanSize2013

59% 70% 73% 73% 71%64%

31%49%

26% 31% 17% 4% 2%3%

1%

4%

4% 3%4% 6% 9%

15%

35%

22%

8% 9% 10% 10% 10% 10%

10%10%

2% 4% 6% 6% 8% 10%23% 16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

$1Mto$10M >$10Mto$50M

>$50Mto$100M

>$100Mto$250M

>$250to$500M

>$500Mto$1B Morethan$1B AllPlans

Percentageoftotalassetsamongplanswithaudited401(k)filingsbyplansize($),2013

MutualFunds InsuranceCompanySeparateAccount CITs GICs/StableValue Other

Other includes individual stocks (including company stock), bonds, institutional separate accounts, brokerage, and other investments. Participantloans are excluded. The sample is 34,444 plans with $3.3 trillion in assets. BrightScope audited 401(k) filings generally include plans with 100participants or more. Plans with fewer than four investment options, more than 100 investment options, or less than $1 million in plan assets areexcluded from this analysis. Components may not add to 100 percent because of rounding.

BrightScope and Investment Company Institute. 2015. The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans. SanDiego, CA: BrightScope and Washington, DC: Investment Company Institute. 4


OverviewoftheCurrentLandscape,2009– 2013

41% 41% 39% 39% 40%

2% 2% 2% 2% 2%

18% 20% 22% 25% 27%

16% 14% 14% 12% 10%

23% 22% 23% 21% 21%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013

Percentageoftotalassetsamongplanswithaudited401(k)filingsbyyear

MutualFund InsuranceCompanySeparateAccount CITs GICs/StableValue Other

Other includesindividualstocks(includingcompanystock),bonds,Institutionalseparateaccounts,brokerage,andotherinvestments.Participantloansareexcluded.Thesampleis3,533plansacross2009to2013with$1.3trillioninassetsin2013.BrightScopeaudited401(k)filingsgenerallyincludeplanswith100participantsormore.Planswithfewerthanfourinvestmentoptions,morethan100investmentoptions,orlessthan$1millioninplanassetsareexcludedfromthisanalysis.Componentsmaynotaddto100percentbecauseofrounding.Source:BrightScope

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ACloserLook:Definitions

• A Mutual Fund is an SEC registered investment vehicle that can pool togethermonies from many sources for the purpose of investing in stocks, bonds and/orother assets.

• A Collective Investment Trust (CIT) is an unregistered investment vehicle,maintained by a bank or trust company that pools together monies from eligibletax-qualified retirement plans for the purpose of investing in stocks, bondsand/or other assets.

• A Separate Account* is a portfolio of stocks, bonds, and/or other assetspurchased with assets of a single investor, such as a retirement plan.

• A Fund of Funds is an investment strategy that invests in other vehicles, such asthose listed above, rather than directly in stocks, bonds, or other assets. Alsoknown as multi-manager, multi-strategy, or multi-asset class investments.

*This definition and the following discussion are not intended to encompass insurance company separate accounts, which aresimilar to CITs and other institutional separate accounts.

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CommonMisperceptions

MutualFunds• Alwaysthemostexpensiveoption• AllareIRArollovereligibleCITs• Limitedavailableinformation• Limitedregulatoryoversight• NewtotheindustrySeparateAccounts• SimilartoCITs• Primarilyusedfordefinedbenefitplans• NotliquidFundofFunds• Onlyusedformegaplans• Arealwaysassetallocationfunds

Someofthecommonmythsabouteachstructurewillbeaddressedonthefollowingpages

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InvestmentVehicleComparativeTable

MutualFunds CollectiveInvestmentTrusts SeparateAccountInvestor Types Individuals,plans,and

otherInvestorsTax qualifiedemployeebenefitplans(403(b)noteligible)

Singleplan/mastertrust

DailyValuation Yes Yes Yes, viacustodianDailyTrading Yes Yes Yes,viacustodianInvestmentObjective Fixed Maybecustomizable CustomizableFees Fixed schedule

MultipleshareclassesMay becustomizableMultipleshareclasses

Customizable

RegulatoryOversight(ofvehicleandvehicle’sinvestmentmanager)

Securities&ExchangeCommission(SEC)

OfficeofComptrollerofCurrency(OCC) orstatebankingauthority,Departmentof Labor,IRS

Departmentof Labor,SEC,IRS

3RD PartyAnalysis/ScreeningToolsAvailable Yes Yes Casebycase

LegalContract Required Limited Yes YesAssetMinimums Lower Typicallylow tomoderate HigherRevenueSharing Generallyavailable Sometimesavailable No, butcanbestructured

topayplanexpensesImplementation Time 30-60 daysorless 30-90days 30-90daysHoldings Disclosure Limited Depends Yes

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Investment• Investmentobjectivecustomization• Investmentfeeflexibility• Accesstoinvestmentmanager• Currentvehicleassets• Fundcapacityandassetminimums

Administrative• Dataavailabilityandfrequency• Reporting,factsheetproduction,and

communications• Websitemaintenance• Datadeadlines• Plansponsoroversightcapacity

Legal• Doplandocumentspermitvehicle?• DoesthevehicleallowERISAplanassets?• Requireddocumentationforinitialand

futureinvestments• Roleofotherserviceprovidersin

relationship• Interplaywithfiduciaryduties

Operational• Roleofcustodian• Revenuesharing/netfees• Liquiditymanagement• Notificationandtradingrequirements• ImpacttoRKrelationshipandplanfees• Portabilitypost-separation• Assetmappingconsiderations

ConsiderationsforDecision-making

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MutualFunds– BenefitsandDrawbacks


Benefits Drawbacks

ü Information availability at the participant level

ü Generally low asset minimums

ü Participant awareness & familiarityü Standard operating & administrative

proceduresü Generally “portable” at the

participant level*ü Ease of implementation

ü Efficiencies related to pooling and scale

*Generally available for re-purchase in an IRA rollover.

✗ No customization✗ Limited plan sponsor access to

investment team

✗ Unavoidable fixed expenses related to governance & registration requirements

✗ Regulatory investment restrictions✗ Multiple share class structure

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ImplementingMutualFunds

Initialinvestment• Limitedlegalcontractingrequired• Plansponsorprovidesdirectionlettertorecordkeeper

Ongoingcashflows&otheractivities• Custodialrelationshipnotrequired• Understandpoliciesrelatedtoredemptionsandsubscriptions• Generallyuniformadministrative/operationalstandards

Reporting/communications• Informationavailabilityisstandardacrossmostmutualfunds• Factsheetsprovidedbyfundcompanyorrecordkeeper

Oversight• InvestmentCompanyActof1940• SecuritiesActof1933• SecuritiesExchangeActof1934• Mandatedperiodicreporting/proxymaterialstoSECandshareholders

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CollectiveTrusts– BenefitsandDrawbacks


Benefits Drawbacks

ü All qualified retirement plan investors ü No fixed expenses related to registration

requirements

ü Potential fee flexibilityü Low to moderate asset minimums

ü Efficiencies related to pooling and scaleü Morningstar and Lipper coverage has

increasedü Potential customization for larger plans

✗ Limited publicly available information at participant level

✗ Lack of vehicle awareness and familiarity at participant level

✗ Administrative, operational and documentation requirements may vary by manager

✗ May need to hire a 3rd party for information delivery to participants

✗ Only tax qualified employee benefit plans eligible (403(b) not eligible)

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Implementing CollectiveInvestmentTrusts

Initialinvestment• Participation/Adoptionagreementgenerallyneedstobeestablishedbetweenplansponsorandtrustee

• RecordkeeperandtrusteegenerallyhaveaServicesAgreement• Ensureplandocumentspermitinvestmentinthisstructure

Ongoingcashflows&otheractivities• Custodialrelationshiptypicallynotrequired• Understandpoliciesrelatedtoredemptionsandsubscriptions• Generallynon-uniformadministrative/operationalstandards

Reporting/communications• Informationavailabilityisdeterminedbytrustee• A3rd partymayneedtobehiredtocreatefactsheetsandpopulateplanwebsite

Oversight• OfficeoftheComptrolleroftheCurrencyorstatebankingauthorities• DepartmentofLabor• IRS 13

Separate Accounts– BenefitsandDrawbacks


Benefits Drawbacks

ü Investment strategy customizationü Potential fee flexibility

ü Insulated from issues and cash flows of other plans and providers

ü Plan sponsor access to investment team

ü Daily transparency of holdings, liquidity, trades, etc., at plan sponsor level

ü Strategy information can be tailored to participants

✗ Limited publicly available information at participant level

✗ Asset minimums may be prohibitive for some plans

✗ Liquidity management; overlay structure may be needed for cash buffer

✗ Operational, administrative, anddocumentation complexity

✗ May need to hire 3rd party for information delivery to participants

✗ May require increased level of governance unless governance is delegated or outsourced

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Implementing SeparateAccounts

Initialinvestment• Legalcontractbetweenplansponsorandinvestmentmanagerand/orconsultants• RecordkeeperandtrusteegenerallyhaveaServicesAgreement

Ongoingcashflows&otheractivities• Custodialservicesarerequired• Generallynon-uniformadministrative/operationalstandards

Reporting/communications• Informationavailabilityisnegotiatedbetweenplansponsorandmanager• A3rd partymayneedtobehiredtocreatefactsheetsandpopulateplanwebsite

Oversight• DepartmentofLabor• InvestmentmanagersregisteredwithSECaresubjecttoInvestmentAdvisersActof1940andrelatedActsorotherregulatoryauthorities

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FundofFundsinDCPlans

FundofFundsstructuresusedbyDCPlansgenerallyfallintooneofthreecategories:

v Custom investment structurev Model or virtual strategyv “Off-the-shelf” or pre-packaged

Regardless of how they are structured, they share commonbenefits, including:

ü Investmentstrategycustomizationü Potentialtoreducecoremenucomplexityü Enhancedcoremenudiversificationü Reduceopportunityformarkettimingü Potentialtomitigateportfolioconcentrationatparticipantlevelü Efficientmethodtodeliveralternativesandlifetimeincomestrategies

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FundofFundsinDCPlans

CustomInvestmentStructureo Builtwithtwoormoreunderlyingportfolioso Unitizedtooperatelikeasingleseparateaccountinvestmentoptiono Underlyingportfoliosmaybeamixofmutualfunds,CITs,andseparateaccounts,which

mayormaynotbestand-aloneoptionsonthecoremenuo RefertoSeparateAccountBenefitsandDrawbacksandConsiderations,Slides14-15

Modelorvirtualstrategyo Allocationstrategyimplementedbyrecordkeeper/otherserviceprovider,oftencalled

“modelportfolios”o Underlyingportfoliosarestand-aloneoptionsonthecoreinvestmentmenu,the

strategysimplycombinesandvariestheallocations.o Notunitized,performanceandfeesarethatofunderlyingvehicleso RefertoMutualFundorCITBenefitsandDrawbacksandConsiderations,Slides10-13

“Off-the-Shelf”orPre-packagedo Generallyofferedbyaninvestmentmanageroradvisoro TypicallypackagedinamutualfundorCITvehicleo RefertoMutualFundorCITBenefitsandDrawbacksandConsiderations,Slides10-13 17

ServiceProviderInformationRequirements


Belowisasamplingoftheinformationthatmayberequestedbytheplan’sserviceproviderstoaddanewstrategy

q Basic vehicle facts q Redemption fees/trade blocks

q Capacity constraints/limits q Historical performance & benchmark

q Expenses and fee tiers q Standard format for activity and position files

q Whether pricing is net/gross q Deadlines for participant communications information

q Asset minimums q Rebalancing protocols

q Investor restrictions q Liquidity management

q Securities lending programs q Fee processing

q Trading and NAV details q Contact information of vehicle sponsor

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LookingAhead:ETFsinDCPlans

RoleofExchangeTradedFunds(ETFs)inDCPlans

§ AnETFisaSECregisteredopenendmutualfundthattypicallytracksanindexandthatistradedonastockexchange

§ Notcommonlyavailableasacoremenuoptiontodayduetotradingcharacteristics,althoughsomeplatformsprovideaccesswithoncedailytrading

§ PlansmayprovideaccesstoETFsthroughaself-directedbrokerageaccount

§ SometimesETFsareusedwithintargetdateandfundoffunds

§ Frequentlydiscussedasavehicletowatch,althoughmanydetailsstilltobeworkedout

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Summary

MostDCplansutilizeamixofvehicles,benefitingfrom:v Accesstoavarietyofassetclasses/strategiesv Potentialforcustomizationv Wideselectionofoptionsatvariouspricepointstosuitplanneeds

However,thereareadditionalconsiderations:v Termsthatmayvaryacrossvehicletypev Additionalcoordinationamongserviceprovidersv Informationparityacrossvehicles

Regardless of the vehicle chosen, DCIIA recommends that plan sponsorsdocument the reasoning behind the strategies selected for the plan anddevelop a policy to revisit the decision periodically.

PleaseconsultwithyouradvisersformoreinformationontheappropriateinvestmentvehiclesforyourDCplan.

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Contributors

DCIIAthanksthefollowingmembersfortheircollaborationonthisproject

CraigBellarosaBlackRock

WinfieldEvensAonHewitt

GregSchneiderLord,Abbett&Co.LLC

MichelleBonicosBankofAmericaMerrillLynch

BrooksHermanBrightScope,Inc.

MarthaSpanoUBSFinancialServices

JayBrasseurBlackRock

NeilHickeyCharlesSchwabInvestmentManagement

SteveUlianBankofAmericaMerrillLynch

DanCampbellAonHewitt

MarlaKreindlerMorgan,Lewis&BockiusLLP

TimWalshTIAA

ChatCowherdAmericanCenturyInvestments

TomLauerNorthernTrust

BetsyWarrickInvesco

GaryDeMaioBankofAmericaMerrillLynch

EmekaLintonPartnersGroup(USA)Inc.

ScottWebsterGoodwinProcter

JohnDoyleCapitalGroupCompanies

BillMarxMorgan,Lewis&BockiusLLP

JodiEpsteinIvins,Phillips&Barker

MichaelRiakPantheonVentures(UK)LLP

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a guide to commonly used investment vehicles final[3 ... · slide overview of the current landscape...

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