California Public Employees' Retirement System's investment committee on Monday changed the asset allocation of the target-date funds in its $1.7 billion in supplemental income plans for county employees, which includes a $1.5 billion 457 plan.
The new asset allocation will become effective Oct. 1 and will make the target-date funds' allocations to equity and real assets slightly higher in the accumulation and derisking phases of a plan participant's career than the Morningstar universe of glidepaths.
The new global equity allocation is 92% for participants expecting to retire between 2035 and 2060, with the equity allocation reduced every five years to a low of 30%. By comparison, the former target had a high of 80% equities for the 2045 and 2055 funds, with the equity allocation dropping to a low of 20% for employees in the 2015 fund and for retirees. Real assets in the new allocation starts at 3% for 2030 to 2060 funds, with the allocation rising to a high of 5%.
CalPERS staff and executives at consultant RVK explained to the investment committee that the increased risk was appropriate because the plan participants also have a defined benefit plan. The deferred compensation plan is expected to provide 5.84% of a participant's retirement income.
The new asset allocation brings the likelihood of participants running short of money in retirement down to 71% from 83% under the former asset allocation, according to a report to the committee.
Rob Palmeri, senior consultant and head of the defined contribution solutions group at RVK, acknowledged that while the new asset allocation improves replacement income retirement and protects against participants taking significant drawdowns due to market turbulence, it also has increased volatility. Mr. Palmeri noted that not only do participants also have a defined benefit plan, but also, historically the average plan participant retired at age 58 but did not start taking money out of the deferred compensation plan until age 65. This long time horizon gives participants the ability to take on more risk, he said.
The investment committee also discussed the increase in companies going public with dual-class and non-voting class shares, which limit or eliminate shareholders' say in how the companies are being run. Theodore Eliopoulos, chief investment officer, said while CalPERS prefers the traditional, one share-one vote regime, some 10% of its equity holdings are in companies that have dual class or non-voting stock structures. Part of the reason is that CalPERS has selected an equity index that provides the broadest diversity, Mr. Eliopoulos said.
"And ... not all companies are either constituted or behaving in the ways that we think (they) ought to be," Mr. Eliopoulos said. "The market's a messy place. It has a lot of participants and styles, and our governance practices are really all about trying to square our own beliefs and our own views of what ought to be with how the market is actually constructed and in this case, how our benchmark is actually constructed in the types of companies that we own."
At the same time, the Securities and Exchange Commission, index companies and rating agencies are looking at the issue.
Some have already taken action, Mr. Eliopoulos said.
Standard & Poor's has gone the furthest and will not allow future dual-class initial public offerings into its flagship composite index, the 1500, said Anne Simpson, investment director for sustainability at CalPERS.
Mr. Eliopoulos noted the committee should wait to take action for two years, when it is scheduled to review its global equity benchmark. The staff expects there to be changes in this area in the coming 12 to 18 months and suggested it would be best to see how the market settles out, he said.
