2007 AFP Conference Benchmarking Your Defined Contribution Plan Presented by Linda Ruiz-Zaiko President Bridgebay Financial, Inc. www.bridgebay.com Brad Vollmer, CFA Assistant Treasurer Sun Microsystems, Inc. www.sun.com Sue Wuthrich Director, Global Benefits Google Inc. www.google.com
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Benchmarking Your DC Plan - Bridgebay Financial, Inc. AFP Conference Benchmarking Your Defined Contribution Plan Presented by Linda Ruiz-Zaiko President Bridgebay Financial, Inc. Brad
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2007 AFP Conference
Benchmarking Your Defined Contribution Plan
Presented by
Linda Ruiz-ZaikoPresidentBridgebay Financial, Inc.www.bridgebay.com
Launched in 1987, Bridgebay Financial, Inc. has been redefining the standard of excellence in institutional investment strategies for the past 20 years. Bridgebay's client list includes some of the most prestigious Fortune 500 and NASDAQ companies. Bridgebay Financial, Inc. is a registered investment advisor under the Investment Advisor Act of 1940.
Each of our consultants has over 20 years of Wall Street experience advising institutional investors, corporations, foundations and endowments. Our talented dedicated team of professionals have the practical experience at major global institutions in addition to holding MBAs and are CFA charter holders. These credentials empower us to create pragmatic solutions to a diverse range of consulting engagements.
We also advise defined benefit plans. In addition, we have been retained to provide the following consulting services for multi-employer 401(a), 457, 457(b) and 457(f) plans: initial assessment and analysis of plans, benchmark current plan providers, fee analysis, fund lineup, pre-screen and conduct a customized RFP provider search to enhance services, fee and contract negotiation, pricing, and selection of a diversified fund array.
Recent revenue sharing lawsuits name plan sponsors and providers• Fiduciary duty to manage plan costs
Unreasonable expenses and hidden fees• Company stock• ERISA 404( c)
Failed to adequately discloseAllege no Safe Harbor protection
GAO Study on Plan ExpensesNew IRS 5500 Fee DisclosuresPotential conflicts of interest for Plan Sponsor• Revenue sharing can shift costs from sponsor to
The key players• Investment management• Recordkeeping• Third party administration• Trustee Services• Legal counsel• Education and communications• Investment consultant• Financial advisor
Retain independent, third party to benchmark costsVerify
Fees, expenses, revenue sharing Institutional share classes from providers
Use institutional share class no retail fundsUse expense reimbursement accountsRequire providers to disclose all compensationRenegotiate asset-based fees as plan growsBenchmark services and fees• Develop a benchmarking peer group• Renegotiate for additional services
Brad Vollmer, CFAAssistant TreasurerSun Microsystems, Inc.
AFP October 2007
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Sun Microsystems' Plan• Over $4 billion in Assets
• More than 30,000 participants
• Average account balance >$120,000
• Unbundled Plan
• 15 Investment vehicles> Stable Value (1)> Target maturity (1 fund family with 11 funds)> Fixed income (1)> Balanced (1)> Domestic equity (10)> International (1)> No company stock
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401K Trends
Past Current Future
Enrollment Individual's choice Enrollment Auto Enrolled Enrollment Auto Enrolled
Record Keeping Bundled Plans Record Keeping Unbundled Record Keeping Unbundled
Tools Tools Tools
Investment Vehicles Investment Vehicles Investment Vehicles Separate accounts
Fund Choices Fund Choices Fund Choices Brokerage Window
Alternative Assets
Fund Choices
Target Maturity / Lifecycle Funds
Passive Separate Accounts (Indexes)
(Built using customized Separate
Active Separate Accounts (Core Funds)
Investment Advice/Tools
Tiering helps frame the choices available to each participant in an easily understood method
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Db-ing of Defined Contribution Plans• Driver – Economics
> Costs – Separate Accounts can be 10 to 30 bps less than mutual funds> Benefits to Participant – Between $40k and $120k per participant (over 25
years assuming base account return of 10%., 15.5k contribution 7.2k match)
Base 10 BPS 30 BPS
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
2,000,000
2,250,000
2,500,000
2,750,000
3,000,000
3,250,000
3,500,000
Return
Acc
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t V
alu
e
Base 10 BPS 30 BPS
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
150,000
Return
Invr
em
enta
l Val
ue
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Db-ing of Defined Contribution Plans• Driver – Ability to offer Customized Funds
> Construction of Fund – With separate accounts, there is an ability to construct a fund using multiple managers. In a sector where capacity is an issue, this is a potential solution
Benchmarking enabled significant changes to our plan
New bundled provider search, enhanced features of the planIndependent investment consultant
Monitoring and plan enhancementsAutomatic enrollmentIntroduced balanced fund as default fundIntroduced on-line financial planning services
Provides individual advice, financial planning, asset allocationEliminated Lifecycle FundsAdded “mix your own” funds using on-line service
Enhanced fund optionsIntroduced index funds
Lower expensesEfficient asset allocation
Selected top-rated actively managed funds for each asset class404(c) intent
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Auto Enrollment, Default Fund & Advice
Rationale for automatic enrollmentExplosive growth in new hiresEmployee must opt outMany of our new hires are unfamiliar with 401(k) plansWanted to ensure higher enrollment and participation levels
Default FundMoney market was previous defaultReplaced with top-rated balanced fund as default
Conservative and moderate options that still provide growthOn-Line Financial Advice
Employees are highly educated and engagedEngineers that are technologically savvyOnline quantitative system ideal for our populationEnables personal asset allocation
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Results of Auto Enrollment, Default Fund & Advice
Automatic enrollmentSuccessful – few opt outEmployee satisfaction is highParticipation level soared to ~88%
Default Balanced FundOnce selected limited transfers out of fund
Financial Engines – OnLine AdviceNot as widely used as anticipatedLimited usage and too complex to understandExperienced investors use online services
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June 2006 added additional features to the plan
Introduced Roth 401(k)Continue to match through the Traditional 401(k) PlanParticipation continues to grow
Implemented After Tax 401(k) contributions
Other plan sponsors benchmark against our plan features
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What our plan looks like today
Over 9,000 participants with more than $375 million plan assetsIn January 2007, we increased our matching contribution, greater of: 100% up to $2,500 or 50% up to IRS maximum
Participation level is ~96%
16 investment options – better asset allocationDefault fund – balanced fundMoney market fund6 index funds7 actively managed funds1 socially responsible fund
Our plan has seen significant growth over the years
1,4742,556
4,336
7,720 8,180
December December December December March2003 2004 2005 2006 2007
0
2,000
4,000
6,000
8,000
10,000
Number of Participants
$18$45
$97
$190
$274
December December December December March2003 2004 2005 2006 2007
$0
$50
$100
$150
$200
$250
$300
$350Millions
Total Plan Assets
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We take plan governance seriously
Investment Policy StatementReviewed and updated annuallyWatch list criteria for all fundsSpecific process to watch, retain, and replace fundsIndependent investment consultant as fiduciary
Investment CommitteeQuarterly meetingsHighly involved individualsMeetings have specific agenda set in advance Fund and plan due diligence by investment consultantReview feedback from participants
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What are we considering for the future?
Continue plan communicationTargeted communication to educate participants on default fund and default contributionsMaximizing match
Implementation of automatic increase in contributions
New investment alternativesFocus on 3 categories: Do nothing investor, Average investor, Advanced investorLifecycle fundsOpen brokerage window