Florida State Board moves to target-date funds for 401(a) plan

Updated with correction

Florida State Board of Administration, Tallahassee, plans to offer target-date funds for the first time in the Florida Retirement System's $8.5 billion 401(a) plan, while reducing the number of active investment options to bring in more multimanager approaches, effective July 1.

The restructuring includes dropping the plan's three risk-targeted balanced funds, mapping the assets into the 10 target-date funds. In addition, actively managed investment options will be reduced to eight from 13.

With 44.7% of the plan's assets directed by participants into the 401(a) plan's three balanced funds, the board hopes to steer participants to more age-appropriate target-date funds to better align their risk tolerances with their career time horizons, said Dennis MacKee, director of communications.

The FSBA plans to structure the 10 target-date funds in five-year increments, from 2015 to 2055.

“We don't plan to pick up any new managers or drop any managers as a result of this” restructuring, although some managers' assignments and allocations will change, Mr. MacKee said.

The FSBA, which oversees a total of $175.4 billion in assets, including the 401(a) plan, plans to map the balanced fund assets into the new target-date funds as recommended by Aon Hewitt, an FSBA investment consultant.

BlackRock (BLK), Prudential Investments and Pyramis Global Advisors manage the conservative- and moderate-risk balanced funds, which have $666 million and $2.3 billion of the 401(a) plan's assets, respectively, while BlackRock, Jennison Associates, Prudential and Quantitative Management Associates manage the aggressive-risk balanced fund, which has $757 million in assets.

The target-date funds will be made up of FSBA's existing 401(a) funds, selected and allocated under the discretion of Financial Engines, an FSBA investment consultant that now determines the rebalancing of the balanced funds. The target-date managers and funds haven't been selected yet. FSBA expects Financial Engines to rebalance the target-date funds at least quarterly.

Hewitt EnnisKnupp, an FSBA investment consultant, assisted with the changes.

Aside from the restructuring, the FSBA is considering developing and internally managing investment strategies for the 401(a). Such a move would require legislative authority. But the FSBA hasn't made a proposal for the 2014 Florida legislative session, Ron Poppell, FSBA senior defined contribution programs officer, said at a recent FSBA investment advisory council meeting.

Among the other changes, FSBA plans to:

  • drop as separate investment options a $404 million Fidelity active U.S. growth equity fund; a $296 million active U.S. large value equity fund, managed by BlackRock and QMA; and a $136 million active U.S. large growth equity fund, managed by BlackRock and Jennison. Instead, the FSBA plans to create a combined U.S. large-cap equity fund, tilting to growth and having a passive component, that is allocated 45% to the Fidelity growth equity fund, 35% to a QMA value equity fund, and 10% each to a Jennison growth equity fund and, adding for liquidity, a BlackRock Russell 1000 value index fund.
  • drop as separate investment options a $254 million Pacific Investment Management Co. total return bond fund and a $155 million Prudential-managed high-yield fund. Instead, the board plans to create a core-plus fixed-income fund, allocated 65% to the PIMCO total return bond fund and 35% to the Prudential high-yield fund.
  • drop a $179 million BlackRock Treasury inflation-protected securities fund. Instead, it plans to offer a real assets fund, allocated 75% to a new PIMCO inflation-response multiasset strategy fund and 25% to the BlackRock TIPS fund.
  • drop as separate investment option a $414 million QMA active U.S. midcap quantitative core equity fund, $175 million Capital Research and Management's American Beacon active U.S. small-cap value fund and a $317 million T. Rowe Price active U.S. core small-cap equity fund. Instead, FSBA plans to create an active U.S. smidcap equity fund, allocated 45% to the QMA midcap fund, 30% to the T. Rowe Price small-cap fund and 25% to Capital Research's American Beacon small-cap fund.

The FSBA plans to retain three passive investment options: a $536 million Russell 3000 index fund and an $186 million MSCI All-Country World index ex-U.S. index fund, both managed by BlackRock; and a $125 million U.S. bond enhanced index fund, managed by BlackRock and Prudential.

In addition, it plans to retain a $72 million Pyramis intermediate-duration bond fund; a $185 million Capital Research American Beacon Euro Pacific growth fund and $235 million global large-cap growth fund; and a $911 million BlackRock money market fund; as well as a participant-directed brokerage account, managed by Hewitt Financial Services.

The FSBA and 401(a) values are as of Jan. 5 and the individual fund values as of Nov. 30.