Exelon powers up major 401(k) plan changes

Exelon Corp. has overhauled the design and investments of its $6.2 billion 401(k) plan, seeking to provide greater diversification and simplicity while reducing costs.

Among the changes, officials at the Chicago-based electric utility created three actively managed multimanager funds and a series of custom target-date funds that use Exelon's defined benefit plan managers. They also sharply reduced the total number of investment options.

The changes were made in conjunction with merging the Chicago-based Exelon's plan with the plan of Constellation Energy, acquired by Exelon in March 2012. The overhauled plan was launched in July. Assets from the old Exelon plan account for about 80% of assets in the merged plan.

The Constellation Energy acquisition “was a great opportunity to combine the plans and get greater leverage and scale and really to start over,” said Douglas Brown, senior vice president and chief investment officer of Exelon. “Both were good plans.”

Behind the broad restructuring was the desire to be “more user-friendly” as well as to increase diversification and cut costs, Mr. Brown said. All of this was done without the help of investment consultants because, he added, Exelon felt confident about handling the changes internally.

Mr. Brown said his team began working on the investment menu and plan design changes in late 2012, completing the work at the end of 2013.

Exelon eschewed mapping, deciding instead to re-enroll Constellation and Exelon employees. They were asked to make an investment re-election a month ahead of the new plan's launch.

If they didn't choose, their assets — other than investments in employer stock — were transferred to the most appropriate target-date fund.

“There was very extensive education” prior to asking employees to make a choice, said Cindy Cattin, Exelon's director of investment options and risk management. The education campaign, which started in April, featured videos, e-mails and intranet communications with a theme of “Power Your Future.” The biggest education effort was conducting approximately 150 group meetings.

Mr. Brown said the most common questions were why Exelon was making the changes and why some funds were being dropped. “People appreciated the question-and-answer sessions.”

The merged 401(k) plan gives participants a choice of investment approaches - “Do It For Me” or “Do It Yourself.”

The first uses the 12 custom target-date funds that blend strategies of 27 of the money managers running money for Exelon's defined benefit plan and/or voluntary employees' beneficiary association.

(Exelon's DB plan and a DB plan for former Constellation employees have combined assets of $14.7 billion, and are managed in a master trust.)

The target-date funds are “actively managed with some passively managed components,” Mr. Brown said. They include “core real estate, real estate investment trusts, emerging market equity, emerging markets debt (and) high-yield (bonds) in addition to more traditional allocations” such as domestic equity, international equity, core fixed income and Treasury inflation-protected securities.”

J.P. Morgan Asset Management is in charge of the target-date funds' asset allocation and manages the core real estate component of the target-date funds.

The custom target-date portfolio accounts for 65% to 70% of assets in the merged plan. “In general, we think target-date funds are the way to go for diversification,” he said.

The legacy Exelon 401(k) plan had passively managed target-date funds from Vanguard Group Inc.; the legacy Constellation plan used active target-date funds from T. Rowe Price Group Inc.

The custom target-date funds count as one option. The other seven — the “Do-It-Yourself” menu — include the three multimanager funds: U.S. equities, containing large-cap, midcap and small-cap strategies using eight money managers; international equities, with six investment managers covering developed and emerging markets; and fixed income, in which four managers invest primarily in Treasuries, agencies and U.S. corporate investment-grade securities.

The other choices in the “Do-It-Yourself” menu are:

• Two passive options — one pegged to the S&P 500 index and one tracking the Barclays Capital U.S. Aggregate Bond index. Both are managed by BlackRock Inc. and both are collective investment trusts.


• An Exelon Corp. stock fund, a holdover from the old Exelon 401(k) plan; and


• The Northern Trust Government Short-Term Investment Fund, also a holdover from the old Exelon plan and also a collective investment trust.

Mr. Brown said the new 401(k) will reduce costs compared to the legacy plans.

“Participants will see their investment management fees on the actively managed core menu offerings reduced by approximately 45% on average from the comparable investments in the legacy menus,” he said. “This reduction is driven by the move away from institutional class mutual funds to separate accounts and the ability to leverage the scale of the combined assets of the legacy Exelon and Constellation plans.”

The new 401(k) plan also provides online investment advice and managed accounts offered by Aon Hewitt and Financial Engines Inc. Although the Constellation 401(k) plan offered investment advice and managed accounts, the former Exelon plan did not.

Aon Hewitt, the record keeper for the legacy Exelon plan, is the record keeper for the merged plan. T. Rowe Price Group Inc. had been record keeper for the Constellation plan.

Mr. Brown said Exelon will assess the performance of the new plan by measuring participation rates and participant contribution rates as well as measuring investment performance. “We can add or remove funds,” he said. “Nothing is etched in granite.”