Legislation & Governance

Planning for Success: Simplifying Asset Allocation for Participant-Directed Plans

POSTED 3475 DAYS AGO

One of the key factors in long-term investing success is maintaining an investment portfolio with a diverse array of assets. Known as asset allocation, this strategy helps to protect against market fluctuations from any single investment and to capitalize on positive returns.

Defined benefit (DB) plan, or pension-type, investors such as Colorado PERA generally have a very long-term time horizon for managing most investments. As a result, long-term investors like PERA are able to structure investment portfolios by determining a core asset allocation strategy to both achieve their investment goals, such as growing wealth or preserving liquidity to pay benefits, and to protect against risk, such as over-investment in any particular industry or class of assets.

Review PERA’s current DB Plan asset allocation.

Once an asset allocation strategy is in place, institutional investors will choose underlying investment managers to manage assets in accordance with guidelines dictated by their goals and policies. Investment decisions are made by focusing first on broad asset classes that will achieve the institution’s long-term objectives.

However, defined contribution (DC) plans, or 401(k)-type plans, have historically been structured to provide their participants with a menu of investment options. Participants choose from the various options to build personal investment portfolios.

Participants in DC plans often choose their investments based on the brand names or labels of the investment funds available within their plans. A challenge with this approach is that certain funds may not be labeled in a way that represents the actual investment objective or philosophy of the fund. In addition, participants often allocate their investments to funds with which they are familiar, without regard to the investment objectives and philosophy of the fund. This approach to long-term investing may not produce optimal results.

In an effort to aid participants in the PERA defined contribution (PERAPlus 401[k] and 457 and PERA DC) Plans to meet their personal investment objectives and strategies, PERA has structured the investment options for its DC plans as “white label funds.” White label funds are titled based on the investment options they contain. (For example, the PERAdvantage U.S. Large Cap Fund will generally invest in large capitalization stocks in the U.S.)

According to a recent study conducted by AonHewitt and reported in PlanSponsor, among approximately 75 large employers, nearly one-quarter (24 percent) are currently using a white label approach to naming DC plan investment options.

The PERAdvantage funds are not labeled with the names of their underlying investment managers—hence the name “white label.” Using white labels helps to achieve the goal of encouraging DC plan participants to focus on the allocation of their assets rather than on a fund manager’s brand name. This white label approach also avoids promoting funds with names that may not be wholly representative of the underlying fund objectives.

PERAPlus and PERA DC Plan participants are also able to access allocation advice at no charge (via the Plan website) which incorporates the participant’s age, risk parameters, return objectives, desired retirement age, and replacement income, to help determine an appropriate allocation to the white label funds. Plan participants may also opt to have their account professionally managed for a fee of approximately $5 for every $10,000 in the account. Fees are proportionately lower for accounts with balances over $50,000.

High-quality, institutional investment managers continue to oversee the investments that comprise the generic white-label funds. In fact, because of the way the white label funds are structured, participants may have even lower investment management fees. The average total fee for funds in the PERAPlus Plan is 0.35 percent or 35 basis points. In many instances, because of the white label structure, PERA can access separately managed accounts with lower costs than if it relied solely on mutual funds. This additional institutional element is a competitive advantage for the PERAPlus Plans and directly benefits plan participants.

PERA staff, Board of Trustees, and the Board’s investment consultant are responsible for monitoring the underlying investment managers within the PERAPlus white label lineup. The consultant, along with PERA staff and the Board of Trustees, also periodically revisits the allocation to the underlying managers within each of the funds.

Ultimately, PERA’s white label funds are designed to break down the breadth and complexity of investing into the fundamental risk and return drivers for plan participants.

Asset classesA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.LiquidityThe ease with which an asset can be converted to cash without a significant loss of value.Defined benefitAlso known as a pension, this is a type of pooled retirement plan in which the plan promises to pay a lifetime benefit to the employee at retirement. The plan manages investments on behalf of members, and the retirement benefit is based on factors such as age at retirement, years of employment and salary history.Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.Asset allocationAn investor’s mix of stocks, bonds, and other investments. PERA’s strategic asset allocation is set by the PERA Board of Trustees.Basis pointOne hundredth of one percent. 100 basis points = 1%.Asset classA category of similar investments. Common asset classes include global equity (such as publicly traded stocks), real estate, and cash.