Case study: Plan-level remapping to age-based target allocation models

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By Douglas A. Conkel | 06 August 2012

The challenge

A mid-sized electronics manufacturer noticed that its participant 401(k) accounts lacked diversity and long-term investment strategies. Due to participant inertia, routine asset allocation, diversification, and target date fund communications had proven to be ineffective, leaving a large segment of the population invested in allocations deemed inappropriate for long-term investing. Further complicating the issue was the addition of target date funds to the line-up, which also failed to reshape the investment selection demographic across a meaningful segment of participants. Prior to implementing Milliman’s solution, the plan asset allocation and fund usage were as follows:

Chart 1

The solution

Milliman presented InvestMap™, an age- and risk-based target model solution, which provides a unique asset allocation based on each participant’s current age using the plan’s core fund line-up. InvestMap™ starts with the same premise as a target date series of funds – a glidepath, but differs from the typical target date series of funds in being composed of the core plan investments, which can be allocated across “best-in-class” funds from a variety of different fund families.

The InvestMap™ solution also automatically encompasses quarterly rebalances and annual adjustments to the underlying investments, making the individual portfolios more conservative as the participant ages. We refer to this type of solution as a “set it and forget it” tool for participants who oftentimes feel overwhelmed making investment decisions.

The “set it” aspect of the solution was put into play by selecting and communicating a future mapping date, at which time all participants in the plan had their current balances transferred into their appropriate InvestMap™ allocation. The communication of the new strategy clearly outlined for the participants the benefits of the new strategy, and included easy-to-read graphics that showed how InvestMap™ would automatically adjust over time. After the plan-level mapping, participants were free to move out of their InvestMap™ investments and create their own, custom portfolios using the plan’s core funds.

The outcome

The retention rate was exceptionally high: After nine months, most plan participants (87%) were still invested in InvestMap™ allocations. For comparison, the post-remapping asset allocations and fund usage stats are listed below. As you can see, Milliman’s solution had a tremendous impact on the asset allocation patterns across most of the participant demographics:

Chart 2

Even though 13% of the participants opted out of InvestMap™, the diversification message was nearly universally heeded—96% of the participants are now invested in five or more options. In short, most of the plan’s participants now have acceptable allocations geared towards a diversified long-term investment goal.