Employing collective investment trusts for the first time, the New York State Deferred Compensation Plan has engineered a significant change in its investment lineup as it seeks to cut costs, reduce asset allocation overlap and remove poor performing managers.
The revisions were based on the Albany-based plan's issuing RFPs throughout the year covering all asset classes of its mutual fund lineup, or about $12.1 billion of the plan's $19.4 billion total assets.
The board will replace some mutual funds for performance, replace some others with less expensive CITs and add a few CITs. The board also will convert some mutual funds to CITs offered by the same manager, as well as renew several mutual fund manager contracts.
“The finalists were chosen for performance — then we looked at fees,” said David Fischer, executive director of the nation's largest deferred compensation plan. “In all cases, the fees will be the same or less. In most cases, they will be less.” Some of the fees involving CITs are still subject to negotiation, he added.
Mr. Fischer said he couldn't estimate the overall savings for participants. “There should be no meaningful increases to plan administrative costs,” he added.
The deferred compensation plan's three-member governing board voted unanimously Dec. 2 to make the changes. Each new or renewed contract is for eight years with the possibility of two one-year extensions.
Plan executives have not yet decided on starting dates for the new investments or termination dates for other investments, “This will be determined by administrative constraints as well as timing of the communications to participants,” Mr. Fischer said.
Although contracts for existing investments covered by the board's vote are scheduled to expire March 31, those contracts “are expected to be extended for one year,” Mr. Fischer said.
The New York State plan last revised its mutual fund lineup in 2008; but the adjustments were modest compared with the latest changes, said Mr. Fischer, whose plan has 218,516 participants.
When the plan issued RFPs this year, board members wanted to look at both CITs and mutual funds in all asset categories, Mr. Fischer said. The plan didn't consider offering CITs in its 2008 revision because “back then, they were few and far between,” he said.
Since then, the use of CITs has surged, bolstered by their lower fees, greater flexibility in investment management and less complexity in plan management, according to the Pensions & Investments' database that tracks defined contribution money managers. CIT use reached $1.58 trillion in assets at year-end 2015, compared with $895.6 billion in 2008.
Annual surveys by Callan Associates Inc. show that 70.8% of DC plans offered at least one CIT in 2015, up from 60% in 2014. The rate was 51.9% in 2013, 48.3% in 2012 and 43.8% in 2011.
Meanwhile, Vanguard Group Inc. has reported CITs represented 20% of DC plan assets in 2015 among clients vs. 6.7% in 2010.
The New York State plan will employ CITs in multiple settings. One example was the negotiation with T. Rowe Price Group Inc., which provides a mutual fund-based target-date series.
The target-date portfolio contains 10 separate funds, and the net expense ranges from 43 basis points for the most conservative vintage to 60 basis points for the most aggressive fund.
The target-date series will become a collective investment trust from T. Rowe Price, and each component will have an approximate net expense of 38 basis points subject to contract negotiations, Mr. Fischer said. The target-date series represents about $1.37 billion in plan assets.