Custom target-date funds are rarely used by public defined contribution plans, although they are becoming increasingly common among large 401(k) plans.
But off-the-shelf offerings didn't sound very appealing to Carol Cypert and her team at the $2.3 billion City and County of San Francisco Employees Retirement System's deferred compensation program. So when they decided to use target-date funds, they not only chose custom ones, but also picked ones with alternative investments.
That's what caught the attention of the Innovator Award judges, who named Ms. Cypert one of five innovators in the inaugural awards sponsored by Pensions & Investments and the Defined Contribution Institutional Investment Association.
Ms. Cypert was cited in the "investment' category.
“It is great to see a public plan implementing custom target-date funds,” said one judge. Another said the move to target-date funds using some non-traditional asset classes was “a really nice effort in (the) public plan industry (that should) be applauded.”
Ms. Cypert, manager of the plan that covers more than 24,000 participants, said: “Off the shelf didn't factor in any of our unique plan demographics.” She said she was put off by the expense and the rigidity of proprietary funds as well as the inflexibility in dealing with underperforming managers.
“We wanted the ability to have full fee transparency and flexibility in choosing managers,” she said.
Russell Investments was hired to create the custom portfolio — consisting of 18 funds from 12 managers — and the glidepath. The funds investments' include emerging markets debt, high-yield bonds and alternative investments such as commodities and global real estate investment trusts. Consultant Angeles Investment Advisors identified the money managers.
“We didn't have to be as aggressive with equity exposure”because participants also have a defined benefit plan, Ms. Cypert said. “This provides an offset to our defined benefit plan so our members can achieve 80% to 100% of income replacement” when they retire.
The process took about two years from planning to implementation. The funds became available to participants in late April as the default investment option.
Ms. Cypert said Great-West Retirement Services, the San Francisco plan's record keeper, played an important role in communicating the plan changes to participants. San Francisco plan officials, meanwhile, have “received a lot of phone calls (from participants) saying, "thank you,'“ she said. n