Defined contribution plan executives are sticking with their investment options, even as plan participants continue to shovel money out of equities and into stable value and other fixed-income-heavy strategies.
“No one is going to change managers or strategies in this type of market environment,” said Margaret Haering, assistant director in the retirement and benefit services division, office of the Connecticut comptroller, Hartford. “We are making changes based on our regular review process, and there are not going to be any wholesale changes,” Ms. Haering said of the state's $7 billion defined contribution plans.
Silvia Frank, manager of defined contribution plans at Trinity Health, Farmington Hills, Mich., said that because equity market turmoil has occurred before — she noted Oct. 19, 1987, and the post-9/11 market tumble — the best approach is to regularly monitor fund performance, rather than conduct impromptu reviews during times of market unease.
“We monitor our funds as they perform compared to their appropriate benchmarks,” Ms. Frank said. Trinity, she said, categorizes problem managers as either on watch or on replace status.
“The likelihood that we will have additional funds put on replace status is not great since we recently completed a total investment fund review.” Trinity has $1.3 billion in defined contribution assets.
Wyatt Crumpler, vice president, trust investments at American Beacon Advisors, Fort Worth, Texas, agreed.
“We're not looking at the activity of the last month to fire or terminate a specific manager,” Mr. Crumpler said, “Even in looking back nine to 10 months, despite it factoring into a manager's three- to five-year performance, (we) would have a hard time (with performance) prompting us to change managers.”
American Beacon oversees American Airlines' $7.3 billion 401(k) plan.
Even in cases of severe underperformance, Mr. Crumpler said, he is reluctant to drop a manager. Instead, he prefers to temporarily freeze a fund, not allowing any additional assets to flow into it and picking another manager with a similar investment approach to handle any new allocations.
Robyn Credico, national director of Watson Wyatt Worldwide's defined contribution practice, Arlington, Va., said the best practice for executives at DC plans with more than $150 million is to evaluate the plans at least twice a year, and preferably quarterly.
“In addition to dealing with the work force management risks, 401(k) sponsors should be stepping up the oversight and governance of their plans,” she said. “On the investment side, plan sponsors should always be looking at the inherent risk in their managers. If there are concerns about inherent risks (such as exposure to insurance companies or subprime loans), now is the time to address these concerns. It might even be time to purge these managers, but a basic drop in the equity markets (should) not prompt anything in the short term.”
Ms. Credico said Watson Wyatt consultants haven't advised clients to make any changes because many investment managers are posting dismal returns. Furthermore, given the recent spate of managers being bought, sold or put up for sale as a result of capital-raising needs of a troubled parent company, changing managers or offerings could be unwise, she said.
“You don't know who is going to buy whom next, so unless your vendor is badly underperforming the market benchmarks, it is risky to move in this environment,” Ms. Credico said.
Ms. Frank said that in turbulent markets such as the current one, plan executives should be even more cautious about reviewing their funds.
“For example, if only a small percentage of funds stayed within the benchmark and most funds did not compare to the benchmark, sponsors need to take this into consideration, and more qualitative investigation may be necessary, such as a call with the fund manager,” Ms. Frank said. “The decision to map funds and replace funds entails a great amount of participant communication and adequate time to get this communication out to the participants ... not to mention the selection of the replacement fund — including more investigation and analysis.”
Contact John D'Antona at [email protected]
