DEERFIELD, Ill. -- Fort James Corp., formed from the 1997 union of James River Corp. and Fort Howard Corp., is merging its defined contribution plans and expanding its defined benefit plan.
The new 401(k) structure borrowed features from two very different defined contribution cultures.
Fort James hired Northern Trust Retirement Co., Chicago, to provide administration, master trust, record keeping, participant education and benefit payment services for the company's merged, but unbundled, $1.5 billion 401(k) plan, said Jane Lateer, director of employee benefits, who headed the integration team.
The company also selected State Street Global Advisors, Boston, to manage the passive allocations to Fort James' defined benefit and defined contribution plans, said Jerry Allen, the company's director of global benefit investment. He was a member of the integration team.
SSgA will manage about 40% of the defined benefit plan's assets; the remainder is managed actively.
State Street Bank & Trust Co., Boston, is master trustee and global custodian of the defined benefit plan; it had the same job for James River before the merger. (Fort Howard had no defined benefit plan.)
Towers Perrin, Philadelphia, provided actuarial expertise; and Frank Russell Co., Tacoma, Wash., was the consultant, Mr. Allen said.
The revamped 401(k) plan will use a two-tiered approach featuring eight investment portfolios. The first level will include three premixed portfolios that will be rebalanced daily.
"Because of the volatility of the markets, funds don't wait until the end of the month to go out of whack," Mr. Allen said.
The conservative portfolio will contain 60% fixed income, 30% U.S. equities and 10% non-U.S. equities; the moderate one, 40% fixed income, 45% U.S. equities and 15% non-U.S. equities; and the aggressive one, 20% fixed income, 60% U.S. equities and 20% non-U.S. equities, Mr. Allen said.
The premixed 401(k) portfolios have the same allocation of passive to active as the defined benefit plan.
The company is in the process of re-evaluating the allocation and expects to make changes sometime next year, he added.
The second tier will feature five core options: money market, U.S. fixed income, U.S. equity, Fort James stock and an EAFE fund.
"We offer plenty of choice for those who want choice," Mr. Allen said. "For those who don't, they can seek safe harbor in the premixed funds."
Fort James executives decided to improve diversification by using a multimanager approach. For example, the domestic equity component of each premixed fund has an underlying portfolio developed by eight managers. Fort James also is using three international and two fixed-income managers.
Many of them had worked for the separate companies, and several will run money for both the defined benefit and defined contribution plans.
In addition to SSgA, those working on both plans include: Alliance Capital Management LP, New York, large-cap growth; Turner Investment Partners Inc., Berwyn, Pa., large-cap growth; Numeric Investors LP, Cambridge, Mass., large-cap value; American Century Investments, Kansas City, Mo., large-cap value; Oechsle International Advisors, Boston, active international; and Dodge & Cox, San Francisco, fixed income.
Managers running portfolios for only the defined benefit plan include: Rainier Investment Management Inc., Seattle, small-cap stocks; J.P. Morgan Investment Management, New York, fixed income; and Marathon Asset Management Co. Inc., Tucson, Ariz., active international equities.
Managers working solely in the 401(k) plan are: Ark Asset Management Co. Inc., Bellevue, Wash., market-oriented equity fund; Aronson + Partners, Philadelphia, small-cap stocks; Bankers Trust Co., New York, active international equities; and Firstar Investment & Trust, Milwaukee, fixed income.
All but Alliance and Aronson had managed money for James River or Fort Howard before the merger.
Rather than invest in popular mutual funds, Fort James' executives decided to use separate accounts and pooled funds -- and to use many managers for both the DB and DC plans -- to cut costs, Mr. Allen said.
"We're bringing in funds at less than half the cost the mutual funds are offering," he said. "And for economies of scale we are using defined benefit managers."
For example, the conservative premixed option will cost participants 34.6 basis points; the moderate mix, 36.9 basis points; and the aggressive portfolio, 39.2.
In addition, he said, "we want participants to focus on investment objectives instead of focusing on brand names."
Fort James also chose to use separate accounts and pooled funds to give company executives more control over the investment process, Mr. Allen said.
"We have investment policy guidelines that are unique to our organization," he said.
The 401(k) plan's investment policy borrowed heavily from the existing defined benefit investment policy guidelines, Mr. Allen said. The guidelines help prevent style drift, he added.
"The main thing we wanted to do is to keep the process pure," Mr. Allen said. "If we hire a large-cap growth manager, we really want large-cap growth."
Merging the defined contribution plans involved dealing with two distinct retirement plan philosophies, Mr. Allen said.
Fort Howard, the smaller of the two companies, had a 401(k) plan of just under $1 billion, but no defined benefit plan, he said. Its defined contribution plan contained solely premixed portfolios.
"We only had a defined contribution plan and so we invested the money in a defined benefit fashion," said Mr. Allen, who was Fort Howard's director of benefits before the merger. "We could not afford to have people make mistakes with their retirement investment."
James River had a $1.2 billion defined benefit plan and a 401(k) plan of less than $500 million, he said.
The 401(k) plan started out as primarily a company stock vehicle, Mr. Allen said. In the early 1990s, mutual funds were added to provide diversification, but there were restrictions -- which have since been lifted, he said.
The defined benefit plan will be expanded and offered to all employees. To do this at no cost to the company, Fort James executives deleted a profit-sharing feature of Fort Howard's old 401(k) plan, Mr. Allen said.