WILMINGTON, Del. - Du Pont's $13 billion 401(k) plan is revamping its investment lineup and adopting a program that automatically rebalances portfolios in three new options.
The E.I. du Pont de Nemours & Co. plan is one of the first to use the rebalancing program, developed by Merrill Lynch & Co., that automatically maintains targeted asset allocations in three new Du Pont-designed asset allocation funds.
The program is part of an expansion of the Du Pont plan, which in July will get the three asset allocation funds, two new index funds and a mutual fund window for its 80,000 participants.
The new options will be offered through Merrill Lynch Group Employee Services, Princeton, N.J., the fund's bundled service provider.
Du Pont is keeping its eight original options; it now will have 14.
Every quarter, participants in Du Pont's asset allocation funds will see their portfolios adjusted automatically to maintain the asset mix pre-selected by Du Pont.
The asset allocation funds will comprise varying percentages of the two new index funds plus an existing Standard & Poor's 500 index fund and the existing stable value fund.
The new index funds are a small-company index fund, which tracks the Russell 2000 index, and an international equity index fund tracking the Morgan Stanley Capital International Europe Australasia Far East Index. Both will be managed by Merrill Lynch, as will the three asset allocation funds.
The Du Pont fund already offers participants three active equity funds and the S&P 500 fund from Merrill Lynch, as well as the Fidelity Magellan Fund and a tactical asset allocation fund managed by Barclays Global Investors. Other investment options are company stock and the stable value fund.
Mike Wyatt, portfolio manager-savings plans at Du Pont, said while the stable value fund contains the bulk of participant assets (65%), the plan revisions were not aimed specifically at encouraging participants to shift to other asset classes.
"The goal was related more to providing more decision-making to our employees," Mr. Wyatt said. "We wanted to provide employees with the best opportunity to meet their long-term investment goals. We also have had the same investment lineup since 1992-'93 and felt it was the right time to make a change."
The three asset allocation funds will follow conservative, moderate and aggressive models in their approach to equity and fixed-income exposure.
The conservative portfolio will be 70% stable value, 20% S&P 500 index and the balance from the other index funds. The aggressive portfolio will have 20% stable value, 40% S&P 500 index, 20% of the small-cap index and the balance from the other index funds.
The importance of automatic rebalancing has become more significant in view of the record-setting equity market performance in recent years coupled with first-quarter market volatility, said Edmund Martinez, vice president and director of investments for Merrill Lynch Group Employee Services.
Many employees focus attention primarily on initial asset allocation and too little attention afterward. Depending on market performance, that can result in over- or underexposure to desired market sectors, he said.
Mr. Martinez said the automatic rebalancing service can be applied at the plan level, like Du Pont, or at the participant level.
He said most plans probably will first use the rebalancing feature at the plan level through predetermined model funds and portfolios and later introduce rebalancing at the participant level, after participants have learned how the program works.
In the case of Du Pont, he said, once the feature is introduced at the participant level, each of Du Pont participants will be able to design their own portfolio and individual asset allocation. Merrill Lynch will maintain the account in accordance with the participant's desired asset mix.
Mr. Martinez said rebalancing model portfolios "lessens the variability of returns" in the portfolio and enhances overall long-term return performance.
Also, he said, rebalancing "reinforces the asset allocation process being communicated to plan participants by the plan sponsor."
Rich Koski, principal with Buck Consultants, Secaucus, N.J., said there may be value in the rebalancing service but the "issue is one of fees," he said.
The rebalancing service is provided by Merrill Lynch at no additional cost to the sponsor when delivered at the plan level. At the participant level, Mr. Martinez said Merrill Lynch will rebalance a portfolio as often as quarterly for $25 annually for the first five funds involved and $5 for each additional fund.
Mr. Koski said automatic rebalancing may be more valuable "if we get to a market where asset allocation becomes the name of the game." In addition, he said, the value of rebalancing "increases with the complexity of the plan."
To demonstrate the benefits of portfolio rebalancing, Merrill Lynch commissioned a study by Ibbotson Associates, Chicago.
The study examined five rebalancing scenarios, from no rebalancing through monthly rebalancing, for portfolios with risk profiles from conservative to aggressive.
Each portfolio was analyzed for return, standard deviation and Sharpe ratio (excess return per unit of risk) for the period from January 1970 through September 1996.
The study found that risk-adjusted performance was enhanced for all rebalancing frequencies, as measured by the Sharpe ratio, compared with a static target asset allocation.
Rebalancing also reduced portfolio volatility (standard deviation) by an average of about 60 basis points annually, according to the study.