LOS ANGELES -- TCW Group Inc. has selected Ibbotson Associates, Chicago, to develop the asset allocation and investment software for its 401(k) participant investment advisory service to be rolled out later this year.
TCW also has enlisted high-profile pension and behavioral finance experts and academics to serve on an advisory board. The board will review the asset allocation and risk tolerance methodologies and the software calculations provided by Ibbotson.
Harry Markowitz, 1990 winner of the Nobel Prize for economics, and regarded as the creator of Modern Portfolio Theory, heads the list of names on the eight-person advisory board.
Other members are: John Carroll, vice president of investments, GTE Corp., Stamford, Conn.; Robert Evans, former head, Xerox Corp. pension plan, and former consulting chief investment officer, State of Connecticut Retirement and Trust Funds; Shlomo Benartzi, professor, Anderson School of Business, UCLA; Roger Ibbotson, professor of finance, Yale School of Management, and chairman, Ibbotson Associates; Jeffrey Jaffe, associate professor of finance, Wharton School of business and finance; Daniel Kahneman, behavioral finance expert and professor, Princeton University; and Richard Thaler, professor of behavioral finance, University of Chicago.
Mr. Markowitz provides an added level of sophistication to the TCW program, which is based on theories he pioneered regarding classification, estimation, risk control and diversification. Because of his research, investors for the first time were able to design "efficient portfolios" that provided clearly established expectation for returns at definable levels of risk.
Mr. Markowitz' affiliation with TCW balances the news that another Nobel laureate, William Sharpe, had entered the 401(k) participant advisory business by starting an Internet-based advisory service. (Pensions & Investments, Feb. 23).
The Department of Labor issued an individual prohibited transaction exemption to TCW in October, allowing TCW to provide investment advice to 401(k) plan participants and receive a variable fee on the assets it manages.
In TCW's program, called Guided Choice, participants would direct their investments into seven commingled trusts. The trusts would contain some combination of TCW's 13 no-load mutual funds.
Under terms of the DOL exemption, each trust fund's investment mix must be determined by an outside financial expert and be designed to accommodate different investment strategies and risk tolerances based on asset allocation modeling developed by the independent financial expert.
Ibbotson will assume the role of the independent financial expert, with the advisory board providing recommendations and input and overseeing the software calculations done by Ibbotson, according to Brian Tarbox, senior vice president of TCW's defined contribution group.
The program, expected to be rolled out by late summer or early fall, will be available to plan participants over a company's intranet system, via telephone or face-to-face meetings. A participant starts the program by providing personal financial information, including nonretirement issues, and answering several questions that will determine how they plan to use their retirement income. The questions will be developed by Ibbotson and cannot be changed by TCW.
Ibbotson will use a variety of sophisticated analytical tools and statistical and financial data to develop multiple forecasts and investment scenarios illustrating the potential range of income a participant can expect in retirement. Ibbotson will recommend an efficient portfolio allocation that will improve the likelihood of achieving those goals.
The participant is free to accept the recommendations or select another more or less aggressive portfolio developed by Ibbotson.
While the methodology uses the investor's entire financial situation to make its recommendations, the Guided Choice program makes recommendations only for a participant's 401(k) portfolio.
Participants will not be charged a fee for the advice, and Guided Choice will carry little or no additional cost to the plan beyond that of TCW's institutionally priced mutual funds.
In addition, Mr. Tarbox said, participants will not be limited to using the TCW trusts. If a participant prefers to retain an existing investment choice, the model will provide recommendations to include non-TCW investment options, he said.
The portfolios created by Ibbotson will have different weightings of institutionally priced TCW mutual funds and will range from a short-term conservative asset allocation to a longer-term, more aggressive investment mix.
One significant change in the TCW proposal approved initially by the DOL last year is the expansion of the number of investment trusts to seven from four.
Mr. Tarbox said the increase was approved by the DOL and was suggested by Ibbotson in order to improve coverage of the investment spectrum.
Mike Hinkle, Ibbotson president, said an odd number of investment trusts makes better sense "because you can always find the middle."