Only a tailored solution would meet the needs of this manufacturing corporation who brought on Russell Investments as their Outsourced CIO (OCIO) to update their plan design and fund menu and help increase employee participation in the plan. The solution is a real life example of how a customized, simplified core investment menu can make a difference in employee contributions in the plan.
A public utility with a 401(k) savings plan and a 457(b) deferred compensation plan totaling more than $400 million in assets supports 2,100 employees, most of whom also participate in the state’s public pension system. The client is motivated to hire a discretionary investment consultant to allow their committee to focus on strategic issues while also enhancing the investment line-up to benefit participants.
The plans’ core investment menu included more options than necessary to cover the full risk/reward spectrum. The plans did not offer target date funds, but rather offered a series of three risk-based portfolios ranging from conservative to aggressive. The committee wanted to replace these with target date funds that could adequately reflect the access employees had to the state’s defined benefit (DB) plan.
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The client hired Russell Investments as the delegated investment consultant and, based on our comprehensive Defined Contribution (DC) plan structure review, aligned their investment beliefs with our recommended baseline investment structure, which includes three tiers and a streamlined active and passive mirror for the core menu.
The investment committee agreed to collapse the core investment menu, eliminate the target-risk portfolios and reenroll all participants into the age-based target date funds, which resulted in most assets moving to the plan’s qualified default investment alternative (QDIA). The committee believed the best way to help participants determine the most appropriate asset allocation was to guide most of them to professionally managed, age-appropriate portfolios that automatically de-risked over time.
To simplify the existing menu of single-manager mutual funds, the committee worked with Russell Investments to add multiple-manager investment options that could help provide downside risk management. White labeling the investment menu with asset class names instead of fund brand names also made it easier for participants to understand each fund’s investment strategy and allocate to it properly.
Responsibilities and tasks that were once the purview of the plans’ committee and investment staff were transferred to Russell Investments as the outsourced chief investment officer (OCIO) for both the 401(k) and 457(b) plans. The investment policy statement, which governs the committee’s responsibilities, was also updated to reflect the external resources gained through the OCIO arrangement and the new balance of roles and responsibilities in order to ensure all parties remain fully aligned and accountable.
The less-is-more investment menu accommodates the investment needs of most plan participants. The resulting plan structure simplifies participant investment decisions and maintains economies of scale with plan assets invested in fewer options. The multiple-manager funds allow complexity to be embedded into the funds, rather than being presented directly to participants, resulting in increased diversification with fewer fund options.
The fiduciary oversight provided by Russell Investments shifts the responsibility for selecting underlying fund managers away from the committee and ensures constant monitoring of investment managers and asset allocations. In addition, the enhanced plan was delivered at a lower price tag. The investment fees paid by participants were reduced by $921,000 annually, which represented a 47% reduction in cost.
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