Case study: Custom target date model portfolios enhance company's 401(k) plan

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By Charles Hodge | 24 April 2009

Milliman was retained by a national hospitality company with more than 12,000 employees to assist in a review of its 401(k) plan investment strategy. The client wanted to add a new investment option to its existing array of 13 funds that would provide more effective asset allocation and to reduce the risk to participants of outliving their savings. The new option also needed to be easy for participants to understand.

The client found that traditional evaluation tools, such as generic questionnaires about age and risk appetite and their associated asset-allocation pie charts, were not specific enough to help participants make informed investment decisions. In discussing their goals, we educated company managers about two existing options, both of which they felt had some downside. Risk-based, plan-specific model portfolios provided effective asset allocation across the funds and fund family, but did not adjust their risk profile as participants approached retirement age. Target-date funds were also an option, but the client disliked that most of these funds were managed by a single fund family. No matter how good a family might be in one investment area—large-cap growth, for example—the client doubted the firm could excel in all markets across all asset classes. In keeping with this philosophy, the company didn't want to hand over its asset allocation funds to a single fund family.

Milliman's custom portfolios bridge the gap

Working with the existing, best-of-class investment options in the plan we constructed a set of five custom Milliman Target Date Model Portfolios. This would allow the client to take advantage of its strong-performing, highly effective current funds. In addition, the company would be able to control overall costs by monitoring the expenses of the target date models' underlying funds. Staying with the existing fund options also simplified both fiduciary due diligence and ongoing communication with participants. Adding a series of new funds would carry the potential for added participant confusion related to adding a number of additional investments, fund-related expenses, and the overall allocation of bond and equity investments in each of the funds.

Each Milliman Target Date Model Portfolio was designed to have a glide path that gradually adjusted the allocation of the fund as the participant's investment time horizon. Milliman developed the Target Date Model Portfolios using sophisticated institutional asset allocation strategies not easily available to individual investors. The glide path formula was developed by an independent firm, providing an objective allocation across funds without bias toward any fund family. In addition, our consultants designed the client's Milliman Target Date Model Portfolios so that if one of the plan's funds needed to be replaced, that same fund would also be replaced in each of the portfolios.

Smooth implementation

Plan managers selected and implemented the Milliman Target Date Model Portfolios, which were tailored to provide asset-class and fund-family diversification to plan participants at a variety of career stages. The client expected cost savings because annual due diligence on the core investment options would be leveraged to evaluate the Target Date Model Portfolios as well. The company also saw the benefit of Milliman's unique glide path approach, which focuses not just on maximizing investment returns, but also on reducing the possibility of a participant outliving his or her investment savings. Milliman's efficient, straightforward solution allowed the client to easily educate plan participants about how to utilize the Target Date Model Portfolios.