The Younger Members Convention

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The Younger Members Convention
abcd

• 2-3 December 2002
• The De Vere Daresbury Park Hotel, Warrington,
  Cheshire

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Investment options for members of DC schemes

• December 3
• Andrew Hancock

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Background

• DB to DC
• DC transfer
• Bear market
• State/citizen relationship
• Media interest

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Statistics (1)

• 7 of UK pension assets are in DC
• so currently around 60 billion pounds
• But growing, and fast
• Expected to be 21 within 10 years

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Historic DC approach

• Few options, maybe none
• Often just a balanced managed fund
• Little education
• And even less advice
• No understanding

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Issues to consider

• Member choice
• Number of options
• Range of options
• Default option
• Communications / Advice
• Monitoring and changing managers

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Member Choice?

• One size unlikely to fit all
• so choice generally advisable
• Assuming the members are financially aware enough
  to make reasonable decisions
• 80 UK DC funds currently offer choice

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Quiz 1

• The average number of investment funds offered in
  a 401 (K) is
• - a) 1-5
• - b) 6-10
• - c) 11-15
• - d) 16-20

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Criteria for Number/Range of options

• Diversification
• Expenses
• Choice
• Litigation risk
• Communication
• Demographic profile of employees

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Appropriate investment options

• Consider offering
• - cash funds
• - bond funds
• - equity funds
• - lifestyle funds
• - property funds
• - other asset classes?

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Default option

• Yes/No
• Stakeholder requires
• Could be considered advice ? Litigation risk?
• Which fund?

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Quiz 2

• What proportion of DC members never rebalance
  their investments?
• - a) 35
• - b) 45
• - c) 65
• - d) 85

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Lifestyle funds

• Increasingly popular
• Designed to match employees risk profile
• Equities young, gradually switching to
• Gilts and cash as approach retirement
• Automatically rebalancing

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Lifestyle funds - Issues

• How many funds?
• One manager (expenses)
• or several (expertise)
• Flexibility around NRA
• Still equity investment!
• And relatively few switching dates

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Quiz 3

• The percentage of US DC sponsors offering
  investment advice is
• - a) 15
• - b) 22
• - c) 29
• - d) 36

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Communication - principles

• Education and/or advice?
• Risk return trade off and ways of conveying
  this
• Long term nature should be stressed
• Expenses, and who is paying

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Communication

• Various media
• - use as many as possible
• - electronic increasingly popular
• - booklets
• - seminars
• - free phone lines
• - bulletin boards

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Quiz 4

• What proportion of US 401 (K) funds changed an
  investment manager in the last year?
• - a) 28
• - b) 36
• - c) 45
• - d) 51

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Monitoring the options

• No less than quarterly, looking out for
• - Demographic changes
• - Performance issues
• - Style drift
• - Market practice evolution
• - New funds in marketplace

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Changing the options

• Several issues
• - Whole review may be advisable
• - Lead time, plan well in advance
• - Communication issues
• - Black out periods

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Risks

• Sponsors held responsible, for losses caused by
  any of
• - Poor selection of managers
• - Poor diversification of options
• - Misleading education materials
• - Bad advice / advisors

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The Future?

• Much greater fund choice
• Much more education
• and from younger ages
• And more advice, onsite?
• Legal actions on behalf of members
• DC to DB?

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Case Study 1 small UK employer

• Manufacturing company
• US parent, closed DB scheme to new hires
• DC scheme commenced 2001, 1 fund
• Lifestyle fund

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Case Study 2 medium size US employer

• Had 13 funds, replacing one of the equity
  managers
• Replaced fund with like for like, considering the
  total situation, filling in a few blanks also
• Final result 17 funds many equity funds Large
  Value, Small Growth etc
• And several lifestyle funds, bond funds also

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Case Study 3 7/11

• Large US based retailer, many part timers
• 401 (K) Plan wholly invested in property
• No decision making by employees
• Bought property from parent company
• And leased it back, at guaranteed rents
• Historical returns excellent
• But largely due to company success?

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The Enron story

• 401 (K) match provided as company stock
• In addition, many employees directed own
  contributions to company stock
• The share price soared
• and then crashed
• After fraud and accounting irregularities came to
  light

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The Enron Story (cont)

• Enron stock 82 (January 2001)
• 26 (19 Oct 2001) disclosed blackout start
• 15 (26 October 2001) actual blackout start
• 10 (13 November 2001) end of blackout
• 0.28 (30 November 2001) then bankruptcy
• Executives sold private holdings during blackout
  period
• Resulting legislation

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Useful References

• www.plansponsor.com
• www.greenwich.com
• www.prc.wharton.upenn.edu/prc