Managed Accounts and Advice

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Managed Accounts and Advice
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Speakers

• Moderator
• Gregory Dyson, ICMA-RC
• Panelists
• Ray Martin, CitiStreet Associates, LLC
• Chuck Osborne, Iron Capital Advisors
• Regina Hilbert, Suffolk County

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Ray MartinCitiStreet Associates, LLC
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2006 Marketplace Overview

• Pension benefit reduction with increased focus on
  401(k)
• Acceptance and implementation of automatics
• Pension Protection Act ERISA and IRC regulations
  for Investment Advisors
• Proposed DOL guidance challenging use of
  traditional defaults
• Expected safe harbor for managed accounts,
  balanced and lifecycle funds
• Significant increase in ERISA litigation, some
  hiring independent trustee
• Lifecycle fund utilization challenges
• Overall adoption and/or inappropriate usage
• Interest in providing more help for pre-retirees
  and retirees

Trends driving increased demand for advice and
managed account services
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Education, Guidance, Advice, etc.

• Self-help Tools range from retirement
  calculators to workbooks to online resources
• Education communications programs designed to
  explain the features of the employers retirement
  plan
• Guidance general asset-class account and/or
  investment strategy suggestions
• Advice specific and personalized investment
  strategy and recommendations
• Managed Accounts investment advice program that
  includes ongoing account management and
  maintenance by an investment advisor

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Who Is Using Managed Accounts?
Online Advice users
Managed Account users
44.0
48.5
Average age
39
49
Female
57,300
41,600
Median salary
50,688
32,442
Median balance
109,451
70,225
Average balance
8.5
6.6
401(k) Contribution
Managed Accountstends to appeal to slightly
older, lower salary, lower balance reluctant
investors.
High
Low
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Managed Accounts Opt-In Enrollment Results
Examples of managed account enrollment across
industries
Total enrollment rate to date based on active
population as of 5/3/06 Plan sponsor
subsidized for certain eligible participants
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Improving Risk Diversification
¹Sample includes all managed account members as
of 5-31-06 excluding any members who were
defaulted into the program ²Sample includes all
managed account members who were enrolled in the
program for 6 months as of 5-31-06 excluding any
members defaulted into the program
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Using Managed Accts As Default Opt-out

• Whos doing it?
• International Diversified Resources company
• Auto enrolling new participants into managed
  accounts
• Fortune 500 Telecommunications company
• Defaulting annual profit sharing contribution
  into managed accounts
• Fortune 500 Semiconductor company with
  auto-enroll
• Replacing lifestyle funds with managed accounts
• Fortune 100 Telecommunications company
• Replacing balanced fund for existing default and
  new participants with managed accounts
• Fortune 500 Auto Parts company
• Enrolling all salaried participants into managed
  accounts w/opt-out

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Using Managed Accts As Default Opt-out (cont)

• Why do it?
• Clear fiduciary protections for sponsor
• Personalized service and communications for
  participants
• Participant impact is favorable
• Fees are cost competitive with lifecycle funds
• DOL guidance to Plan Sponsors on qualified
  default

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Chuck OsborneIron Capitol Advisors
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Managed Accounts Completing the Investment
Process
Plan Sponsor
Participant
Investment Policy Statement
Asset Class Identification
Individual Fund Analysis Selection
Asset Allocation
Participant Portfolio
Investment Consulting
Managed Accounts
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Should You Offer Managed Accounts?

• What would a prudent investor do?
• Trust their assets to your employees? Or
• Hire a professional to manage their assets?

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How to Select a Managed Account Provider

• Match the service to the users need.
• What does your employee base look like?
• Do you have a large number of default
  investors?
• Do you have poor participation?
• How does the providers service meet those needs?
• How will they interact with your employees?

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How to Select a Managed Account Provider
(cont)

• Does the managed accounts providers investment
  philosophy match yours?
• Do they have any control over the fund line-up?
• How do they make asset allocation decisions?
• Are there risk controls?
• Do they have a track record of adding value?

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How to Select a Managed Account Provider (cont)

• Are they truly independent?
• Do they have a relationship with your
  recordkeeper?
• Is revenue shared?
• Have they given up any right to control the fund
  line-up from which they select?

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Does Control of the Fund Line-up Matter?

• Real life example Two Plans, different funds
  same managed account provider, same inception
  date.
• Most aggressive (100 equity model)
• Plan A 12.45 average annual return since
  inception net of all fees.
• Plan B 10.90 average annual return since
  inception net of all fees.
• Over 30 years assuming the out performance
  continues, Plan A will have 49.56 more wealth.

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How to Select a Managed Account Provider (cont)

• How much will it cost?
• What will the total cost of the portfolio be for
  the participant?
• Has the managed account provider added value
  beyond their fee in the past?

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Summary

• Should you do it? Yes.
• Match the service to the need.
• Match the investment philosophy.
• Assure independence.
• Dont forget the importance of the fund line up.
• Measure the cost for best value.

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Regina HilbertSuffolk County
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Why Rollout a Managed Account Program?

• Recognize Participants need for help in
  establishing retirement goals.
• Offer service that will help Participants
  understand the probability of meeting their
  retirement goals.

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Why Rollout a Managed Account Program? (cont)

• Acknowledge the demand for specific advice on
  investment options available within Plan rather
  than general guidelines
• Enhancement to the Plan
• Use as tool to enroll employees in Plan
• Identify and target employee groups who
  under-utilize the Plan

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Operational Issues to Initiate Program

• Amendment to Service Provider Agreement
• RFP Requirements
• Negotiating separate contract
• Existing Vendor Relationship
• Option to Offer Clause

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Operational Issues (cont)

• Any Participant eligibility restrictions?
• Retirees, those who have reached NRA
• Possible conflict with in-house policy that
  choice must be made available on same terms to
  each member of the group of employees eligible
  for the Plan.

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Issues to Address

• Participant Expectations, Complaint Procedures,
  Ability to Drop Out
• Disclosure of Fees, Costs associated with
  Program, Time Commitments
• Operating in a multi-provider environment.
• Limitation of Asset Allocation based upon
  existing menu of options.

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• Measuring Success
• Meeting Retirement Goals-satisfaction surveys
• Incremental Increases in Plan enrollment,
  participation rates or contribution amounts
  and/or sign-ups for managed accounts
• Diversification-improved asset allocation
• Retention of Participants assets in Plan

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Rollout

• Education
• - Distinguish among programs that offer
  guidance, advisory services and account
  management.
• On-site meetings
• Distributions of Initial information
• Impact of Pending Federal Legislation

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Questions and Comments