JM Family Enterprises' DC plan is big on alternatives

Seeking to reduce risk and volatility in the company's defined contribution plans, officials at JM Family Enterprises Inc. have been adding alternative investments ranging from commodities and hedge funds of funds to global tactical asset allocation and direct real estate.

Plus, the company's $296 million defined benefit plan has 33% of its assets in alternative investments, including hedge funds of funds, commodities, core real estate, opportunistic real estate and GTAA. Most of the alternatives have been added to the DC and DB plans since 2010.

The DB plan's allocation to alternatives closely matches the $528 million profit-sharing plan's target of 34% in alternative investments.

The $216 million 401(k) plan gives participants a choice among three asset-allocation options with alternatives' target exposures ranging from 25% to 30%.

Most defined contribution plans don't use alternatives, and such investments are not common for defined benefit plans the size of JM's. Also, the percentage allocations in both the DC and DB plans are unusually high.

“After the economic crisis of 2008, we realized that we basically had a 60-40 portfolio (60% equities, 40% bonds), but 90% of the risk was related to equities, primarily U.S. equities,” in the DB and DC plans, explained Ronald Virtue, director of investments for JM. The Deerfield Beach, Fla., company's businesses include vehicle distribution, financial services, insurance and auto dealerships.

“Our goal was to diversify, reduce risk and perform in many types of economic environments,” Mr. Virtue said. He noted JM wanted to provide similar alternatives' exposure among the plans because “we have a total return mandate for all three plans.”

Mr. Virtue's efforts earned him an Award of Excellence at the third annual Innovator Award ceremony during Pensions & Investments' West Coast Defined Contribution Conference, held last month in San Diego. The awards are co-sponsored by P&I and the Defined Contribution Institutional Investment Association.

His strategy for reducing volatility, increasing diversification and maintaining returns “is an admirable goal and unusual for a plan and a company of their size,” wrote one of the Innovator Award judges.

The $216 million participant-directed 401(k) plan uses alternatives such as GTAA, real assets/commodities and direct real estate in its three multimanager asset-allocation investment options:

nThe conservative option has a target of 25% alternatives, 30% bonds, 25% stocks and 20% short-term investments.

nThe moderate allocation has a target of 28% alternatives, 50% stocks, 19% bonds and 3% short-term investments. This option is the plan's qualified default investment alternative.

nThe aggressive allocation has a target of 30% alternatives, 65% stocks and 5% bonds.

JM doesn't offer a target-date fund series, which is the QDIA for many companies. “We offer more choices” with the asset-allocation options, Mr. Virtue said. “The target-date funds take on more risk than we would want.”

The other options in the 401(k) plan are five single-manager stock mutual funds, two single-manager GTAA mutual funds, two single-manager bond mutual funds and a stable value fund.

The $528 million profit-sharing plan is employer directed. Described by company officials as a “custom strategy fund,” it has a target allocation of 34% alternatives, 46% stocks. 17.5% bonds, and 2.5% short-term investments. The alternatives are global TAA, commodities, direct real estate and hedge funds of funds.

JM executives had lengthy discussions with consultants at NEPC LLC, Boston, about the cost and performance of alternatives for its DC plans, Mr. Virtue said. “We talked a lot about different ways to achieve a similar return pattern (as the pre-alternative investment lineup) with less risk,” he said. “We didn't want to reduce long-term returns.”

As a result, he added, the DC plans have achieved “similar returns with less volatility,” although he didn't quantify the changes.

As for cost, “we considered fees the whole way through the process,” he said. JM was able to reduce the fees for some existing investments and, as a result, “when we put everything together, our fees weren't that much higher” than before the plans began adding alternatives. Mr. Virtue declined to provide fee information.

For the 401(k) plan, Mr. Virtue added direct real estate in 2012; commodities in 2011; and global TAA in 2010. The various components are contained within three mutual funds and a collective trust to ensure daily valuation.

For example, the 30% alternatives target in the aggressive allocation option consists of 5% in the PIMCO Commodity Real Return Strategy Institutional Fund; 10% in the PIMCO All Asset Fund Institutional Class; 10% in the BlackRock Global Asset Allocation Fund institutional class; and 5% in the JPMCB Diversified Commercial Property Fund., the only collective trust in the group.

For the moderate allocation option, the alternatives and percentages are the same as the aggressive option, except for a 3% target for PIMCO's commodity fund. The commodity fund isn't part of the conservative option.

Although JM doesn't provide a corporate match, it does contribute 3% a year in pay to eligible employees regardless of their 401(k) contribution. Employees are eligible immediately.

For the profit-sharing plan, the most recent change to its alternatives portfolio was the December 2013 addition of more GTAA managers. The plan had added hedge funds of funds in 2012 and direct real estate and commodities in 2011.

JM makes a contribution to the profit-sharing plan that varies based on employees' tenure. The contributions increase incrementally over three years to a goal of 12% of pay, subject to the company's profitability.

In the defined benefit plan, core real estate was added last year, and GTAA and opportunistic real estate were expanded. About 80% of the investment managers for the DB plan also manage money for the profit-sharing plan.

Despite the changes in the three retirement plans, Mr. Virtue said “there was not a lot of commentary” from participants. “They believe JM Family Enterprises is taking care of them,” but, he added, “We can do a better job of educating the workforce about the improvements we made.” n