Following a merger, a regional bank lost the internal resource who assisted participants with their investments in the company’s 401(k) plan. Prior to the merger, plan participants could speak with a financial services professional for guidance with their personal risk tolerance and to determine appropriate funds for their risk profile and overall asset allocation.
The plan sponsor was concerned not only that the participants would be without assistance, but also that without guidance, employees might over-concentrate their investment in company stock, which was available in the plan. The client looked to Milliman for a cost-effective way to provide investment guidance for its plan participants.
Interactive questionnaire leads to fund-specific guidance
We proposed the bank use Milliman Model Portfolios, a suite of custom-designed asset allocation tools delivered as an educational resource to plan participants through a Web site.
When participants log on to the Web site, they are offered a menu of choices, typically five models (but as many as seven), arranged from low risk/low expected return to high risk/high expected return. The participants’ selections are driven by their answers to a 10-question risk-tolerance/time-horizon questionnaire. When they have responded to the interactive questionnaire, participants receive fund-specific guidance, instead of generic asset-class based guidance. Rather than hunting for and selecting appropriate funds tagged by generic asset-class based guidance, participants can accept the model’s guidance with just one mouse click.
Model Portfolios as diversified as investment options
Milliman Model Portfolios are asset allocation strategies constructed using the 401(k) plan’s investment options. For the plan participant who wants help in selecting funds, a single model choice will give the participant a diversified portfolio of funds in the plan. The information on the Model Portfolios includes the specific funds in the plan and the allocations to those funds. Unlike target-date maturity funds or lifestyle mutual funds, these custom models are diversified across fund families as well as asset classes. Target-date funds are portfolios managed by a single fund family; Milliman Model Portfolios are as diversified as the core choices in the plan. As individual managers are changed or added over time, models are updated.
Our experience in the industry made us aware of another challenge for plan sponsors: keeping the number of options reasonable. We cautioned the client that when plans add target-date funds, they are adding a number of additional choices that sometimes leads to confusion among participants. Milliman Model Portfolios do not add to the number of investment options—they are constructed using the underlying, best-in-class funds already in the plan.
One-click investing plus an unforeseen bonus
The bank implemented the Milliman Model Portfolios and selected one of the models as the default option for the plan. Not only did the participants find the transition to the Model Portfolios a smooth and seamless process, but they also appreciated ease of use and the lack of complexity in asset allocation.
Through effective communication and promotion of the Milliman Model Portfolios, the plan sponsor provided participants with an effective educational tool to assist in their asset allocation decision. And the client discovered an unforeseen bonus—the Milliman Model Portfolios cost less than the previous financial services assistance.
