by: Roxanne Fleszar
from:  Employee Benefit News
March 1999

Does the buzz around your company’s water cooler include employees’ growing concerns about their retirement accounts?

Not to worry. Plan sponsors can remove the asset allocation guesswork for employees, notes Larry Marshall, chief operating officer of NECX, a computer products commodity exchange in Peabody, Mass. Marshall confronted these concerns in 1995 when he suggested the company’s retirement plan include managed options.

Desiring to give employees participant direction, NECX reviewed several proposals for their 401(k)/profit-sharing plan. Instead of the ubiquitous (and confusing) cafeteria-style name brand mutual funds, the company chose to offer numerous managed funds ranging from conservative to aggressive through SEI Investment’s multi-asset funds.

Life-cycle funds
Managed funds, also known as asset allocation funds, life-cycle funds, or multifunds, invest in a portfolio of mutual funds - providing investors with ongoing manager due diligence and professional asset allocation decisions. They’re particularly effective as a 401(k) investment option.

Managed fund portfolios generally range from conservative such as an 80% bonds and 20% equities allocation, to an aggressive portfolio of 99% equities and 1% cash. Each fund’s asset allocation mix is monitored and adjusted to macroeconomic conditions within pre-designated weightings to meet specific goals. Also, the funds are automatically rebalanced for plan participants due to market volatility.

"As a former Certified Financial Planner, I am aware of the importance of asset allocation for successful long-term investing," Marshall says. "I like the idea that our employees benefit from professional manager selection and portfolio rebalancing. The use of asset allocation funds also removes the need for both employees and plan fiduciaries to monitor individual mutual funds. This is done by SEI Investments, leaving the day-to-day management to professionals. This, in turn, provides employees with greater security and control over their retirement funds and, consequently, we have more productive employees."

Fiduciary duty
The inclusion of a managed fund option in a qualified retirement plan provides employees with the professional management they received under a defined benefit plan. At the same time, it reduces the employer’s potential liability, should a participant some day blame the employer if his retirement funds are inadequate for a secure retirement.

"Our investment advisor monitors SEI’s performance against appropriate benchmarks. We’re really comfortable about meeting our fiduciary responsibilities while providing a terrific benefit to our employees," Marshall says. "In addition, SEI’s institutional pricing is very attractive."

Participants complete a professionally designed investment time horizon/risk tolerance questionnaire to determine the appropriate managed fund to meet their objectives. This removes the asset allocation guesswork for employees. During the recent market decline, not one NECX participant changed a fund selection.

Combating insecurity
"Most of our employees are aggressive investors. Participants were surprised and very pleased the highest risk fund held up so well," NECX Benefits Administrator Julie Borrelli reports. "They also have heard the education story enough times to have taken the long-term view. They certainly didn’t want to sell at the low in the market."

The results of the 1998 Retirement Confidence Survey, co-sponsored by the Employee Benefit Research Institute, American Savings Education Council, and Mathew Greenwald & Associates, points out that less than half of retirement savers (46%) are confident that they are investing wisely.

That leaves more than fifty percent of retirement savers, who are less than confident about their ability to save wisely for a secure retirement. Although education is key in helping participants make proper decisions, you cannot reach every participant one hundred percent of the time.

As an experienced 401(k) plan investment advisor, I strongly recommend that all plans offer at least one managed fund option, and preferably three ranging from conservative to aggressive, for participants who lack the knowledge, skills or desire to make critical investment decisions.

As an advisor to NECX, I noticed that the initial response to the managed fund options was tentative for some of the more investment savvy investors (i.e., those capable of and used to making their own investment decisions).

During the past three years, however, participants have been very pleased with both the results and simplicity of their plan.