TACOMA, Wash. - An innovative approach to investment education is key to Frank Russell Co.'s new participant education and investment program.
The new LifePoints program combines a "life events" approach with life cycle commingled funds. The program is "more of a process than a product," said Eric A. Russell, director of defined contribution services.
At the center of the LifePoints program is investment education. While the program - like typical investment education programs already available for the 401(k) plan market - does take into consideration an individual employee's age and risk and return tolerance, the process focuses far more on life events - like retirement, divorce or starting over after losing a job, said Mr. Russell.
The firm will be one of the first large service providers to use an educational program based on life events, rather than traditional age and risk tolerance factors.
One client, Outokumpu American Brass Co., Buffalo, N.Y., with $15 million in assets, will implement LifePoints in January, with an employee communications and education campaign beginning in November, said Rebecca Kirtland, a senior defined contribution services vice president at Russell. And, Russell's own $50.9 million profit-sharing plan will begin using the program at the same time.
The company also is finalizing contracts with five existing defined contribution clients that want to use the service, representing more than 70,000 participants and more than $1 billion in plan assets, said Mr. Russell. He would not identify the companies.
In introducing the LifePoints program, the company hopes to capitalize on its well-known name in the consulting and investment management community to gain market share in the competitive 401(k) plan market. Frank Russell's defined contribution client list already numbers 135 plans, with $5.5 billion in total assets.
Through an alliance struck earlier this year with Hazlehurst & Associates, Atlanta, Frank Russell now can wrap up a fully bundled 401(k) plan service, combining record-keeping services from Hazlehurst with its own investment management capabilities, including the five new LifePoints Funds, 28 manager-of-manager commingled funds, 24 SEC-registered mutual funds and separate account management.
The LifePoints education program is available through the bundled service or can be used as a stand-alone communications program.
The centerpiece of the new education program is a participant handbook that allows each participant to place him- or herself into a Beginning, Midway or Transitions life stage, depending on circumstances rather than age.
For instance, the Beginnings stage might suit a 25-year-old career neophyte or a 45-year-old job veteran who has to begin retirement savings again after a divorce or prolonged job loss.
The handbook is divided into sections dealing with each of the three life stages, and includes a self-scoring investment profile questionnaire that allows a participant to determine which of five basic investment strategies is most suitable. The strategies range from extremely aggressive to conservative and correspond to the five new commingled funds. Russell determines the asset allocation for each fund and selects multiple managers for each fund.
The booklet also contains a basic investment primer, and can be easily customized with the sponsoring company's name and whatever fund options the plan offers.
Frank Russell will be one of the first large service providers to use an educational program based on life events. First Interstate Bank of California, Los Angeles, plans to introduce next year its own series of commingled life cycle funds with a life-event theme (Pensions & Investments, July 25).
One plan sponsor, Aluminum Co. of America, Pittsburgh, with $3.2 billion in defined contribution plan assets, is developing a total benefits delivery system organized around common life stages through a telephone voice-response system with Buck Consultants, New York (P&I, July 25). Partial implementation of Alcoa's new program is planned for 1995.
Outokumpu American Brass will be the first external LifePoints client when the company revamps its salaried employees' 401(k) plan in January. The new plan design will offer participants investment direction for the first time; until now, the company has directed investments for the plan in a fairly conservative manner, said Joseph Serio, director of treasury.
Because employees will be getting their first crack at self-management of their primary retirement assets and because they've been accustomed to a fairly conservative investment allocation, the company's benefits staff was eager to offer a comprehensive investment education program. "Our company feels it is very important for our employees to understand risk and return and how to allocate their asset right. We're worried about our participants investing too conservatively and the LifePoints program, we feel, is very easy to read and is not a straight narrative. The reaction to the program materials has been very good and we think this educational approach will show our workers just how much they need to save for retirement and how not to invest - that is, too conservatively," said Mr. Serio.
Mr. Serio said the company had considered embarking on a customized educational program with Frank Russell, which has been the plan's manager and consultant since 1988. But the cost of a custom project was prohibitive for a $15 million plan of 500 participants. "With this new LifePoints materials, we can put our own logo on the printed materials and include our own investment options at a reasonable cost. Cost is critical for our plan and by taking a program that's mostly off-the-shelf, but of this high quality, we can offer employees a really good education program at much less expense," said Mr. Serio.
Outokumpu American Brass will offer two LifePoints funds - the Global Balanced and the Domestic Conservative Funds - and two other Frank Russell commingled funds - a money market and international equity fund.
In developing the LifePoints program, Russell's research revealed only about 24% of people they surveyed fell into a group that was comprised of committed investors who already knew how to use the basic features of their 401(k) plan. The other 76% could be characterized as reluctant defined contribution plan participants who are involved minimally, or not at all, in the investment process for their own retirement.
LifePoints is designed to appeal to such consumers, said Mr. Russell, and to then guide them to allocate their 401(k) plan assets to investment options in appropriate proportions to meet their risk and reward tolerance.
Mr. Russell said the LifePoints program also helps participants understand what savings levels are required in order to prepare for retirement.
The use of the life stages concept may help trigger an emotional response in an otherwise reluctant participant and motivate him or her to begin to prepare for retirement.
What makes the LifePoints program innovative is its combination of approaches targeted directly at that reluctant participant, said Michael Rybarski, a senior vice president at Age Wave Inc., Emeryville, Calif., which specializes in strategic marketing to the 35 and older population.
Age Wave worked with Frank Russell in developing LifePoints, said Mr. Rybarski.
"What's different about LifePoints is its integrated approach. Other money managers and consultants are doing parts of the LifePoints approach, but no one else has combined the essential elements into a packaged product that will really convince employees of the value of 401(k) plan participation," he said.
But according Richard Koski, a benefits consultant at Buck Consultants, Secaucus, N.J., the 401(k) market is crammed with excess communications and investment education expertise and programs.
"What's really needed by Frank Russell and everyone else are ways to differentiate their product from everyone else's and to recoup the significant product development costs of their educational programs. If their participant education programs are especially attractive and can be shown to be worth the price, it may be a deciding factor for a plan sponsor in whether or not to award investment management business, too. Frank Russell's name is going to carry them a long way in the market place," said Mr. Koski.
In conjunction with the push for defined contribution plan business, Frank Russell is developing new products to serve the market, including a defined contribution plan benchmark to help plan sponsors measure the quality and efficiency of their benefit programs. Mr. Russell said developing a standard set of defined contribution plan benchmarks is extremely difficult, given the high number of variables in such plans.
The model the company is working on would measure efficiency of service against the quantity of benefits offered by a particular company.
The model will be "bullet-proof," Mr. Russell said.
"Whatever we come up with, someone will try to tear it down, so we need to make it theoretically sound. We can do it and will do it, because it's important for defined contribution plan sponsors to be able to measure their own plan features and operations against others," he said.
Two other programs are in the development stages. One is what Mr. Russell termed "atypical" non-qualified compensation plans that actually will help to address the problem of reduced salary caps for defined contribution plan deferrals. Frank Russell will introduce supplemental investment programs for highly compensated employees in the first half of next year.
The company also has developed a prototype annual or semi-annual participant account statement that will be much more personalized than many now available, and will include suggestions for re-balancing asset allocation or increasing savings deferral rates.
Mr. Russell said the company is looking for appropriate systems software to handle the level of detailed required by such personalized statements.
