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  2. DEFINED CONTRIBUTION
July 13, 2015 01:00 AM

Disrupting DC plan status quo

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    Roger Schillerstrom

    Updated with correction

    The success of the Illinois State Board of Investment's recent re-enrollment program ought to encourage other defined contribution plan sponsors — public or corporate — to embrace such a move or at least consider it, especially for plans with concentrated allocations, including company stock.

    The Illinois State Board in April re-enrolled all 52,000 participants in the $4.1 billion Illinois State Employees' 457 Deferred Compensation Plan, whose assets it oversees.

    In the ISBI re-enrollment process, all assets of all participants automatically were allocated to the plan's default option, an age-appropriate target-date fund, unless each participant affirmatively chose to exercise the discretion allowed by the plan to continue with their present allocation, or reallocate to any combination of the 15 single investment choices and 13 target-date funds.

    Re-enrollment should become an important part of the plan sponsor tool kit for defined contribution plans.

    It is a deliberately disruptive process intended to compel participants to give thought to their retirement income objectives and allocations to achieve them.

    Through a re-enrollment process, plan sponsors can steer participants to better asset allocation choices in their self-directed plans in an effort to improve outcomes and to achieve their retirement income objectives. Improving outcomes is an important fiduciary duty of plan sponsors.

    Plan sponsors that offer their own company stock in their 401(k) plans do so at peril to their participants, putting the participants at a double risk. Employees already are vulnerable to a loss of employment because of a downturn in company fortunes, and investment in company stock makes them vulnerable in their defined contribution assets if the price of the company stock plunges also.

    At some major companies, participants have outsized company stock allocations in the 401(k) plan.

    At ExxonMobil Corp., the aggregate allocation to company stock is 61.5%; Chevron Corp., 51.4%; and ConocoPhillips Co., 42.2%; while at General Electric Co. it is 41.5%; Costco Wholesale Corp., 33.4%; and Wells Fargo & Co., 31.6%.

    Prudent diversification would not permit such large allocations to any single stock, or even for any investment choice, save for allocations to target-date funds.

    In the private sector, defined contribution plans — once at many companies a supplement to a defined benefit plan that provided lifetime retirement income — now serve as the main retirement programs for most plan sponsors and participants.

    In the public sector, defined contribution plans play an increasing role as more public sponsors add them and as their assets grow, even though they serve primarily as supplemental plans for participants whose principal retirement program is a defined benefit plan.

    Especially for those for whom it is their only retirement program, a defined contribution plan is supposed to provide a means for participants to accumulate savings that can be converted into income in retirement, offering a diversified array of investments to enable a balance of risk and return objectives.

    An objective of the Illinois State Board re-enrollment process was to drive members out of the 457's most popular investment option and push them into the age appropriate target-date fund. At time of the re-enrollment in April, some 23.3% of the aggregate assets of the 457 participants were in the Columbia Acorn Z, a small-cap growth equity mutual fund, which at its peak in 2011 accounted for 29.9% of the assets. At the same time, the plan's stable value fund, a low-risk investment choice, accounted for 20.5% of total assets, while target-date funds, considered a more balanced approach to risk and return, represented only a combined 11.9% of total assets.

    ISBI sought to push participants into the target-date fund default option, which it considered best practice as defined by the Department of Labor. ISBI executives look to the DOL for guidance even though the 457, as a public plan, isn't under DOL regulation. ISBI executives believed too many participants were taking too much risk in the Columbia fund or too little risk in the Invesco stable value fund. In short, ISBI sought to make sure participants thought out their decisions.

    The re-enrollment was a success, resulting in participants putting 62% of their combined asset allocation into target-date funds, while placing only 5.2% in the Franklin Small Cap Growth Fund R6, a mutual fund managed by Franklin Templeton Investments, which replaced the Columbia fund in the 457 plan investment lineup, and 9.7% in stable value.

    Participants in a 457 plan who also have a defined benefit plan can afford to take more risk in the defined contribution plan than those who must rely solely on a defined contribution plan.

    Corporate plan sponsors who do not have defined benefit programs should make sure the participants in their defined contribution plans think through their investment choices and their goals. Are participants seeking to build assets, or attain lifetime income objectives, and how well are their allocations on track to achieve such goals?

    Company stock is more highly concentrated in big companies, while smaller employers are less likely to offer it, according to a December 2014 study by the Employee Benefit Research Institute.

    For companies that offer the company stock option, the average participant allocation ranges from 12.4% to 20.5%, depending on the age group of participants.

    Re-enrollment offers a way for plan sponsors to help the many participants who haven't the inclination or skill to form retirement income and risk-and-return objectives, or to monitor the progress toward the goals, and improve chances for better outcomes. n

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