N.Y. Deferred Comp Plan goes big with CITs
Changes made to cut costs, reduce overlap, aid returns
BY ROBERT STEYER |
Employing collective investment trusts for the first time, the New York State Deferred Compensation Plan has engineered a significant change in its investment lineup as it seeks to cut costs, reduce asset allocation overlap and remove poor performing managers.
The revisions were based on the Albany-based plan's issuing RFPs throughout the year covering all asset classes of its mutual fund lineup, or about $12.1 billion of the plan's $19.4 billion total assets.
The board will replace some mutual funds for performance, replace some others with less expensive CITs and add a few CITs. The board also will convert some mutual funds to CITs offered by the same manager, as well as renew several mutual fund manager contracts.
“The finalists were chosen for performance — then we looked at fees,” said David Fischer, executive director of the nation's largest deferred compensation plan. “In all cases, the fees will be the same or less. In most cases, they will be less.” Some of the fees involving CITs are still subject to negotiation, he added.
Mr. Fischer said he couldn't estimate the overall savings for participants. “There should be no meaningful increases to plan administrative costs,” he added.
The deferred compensation plan's three-member governing board voted unanimously Dec. 2 to make the changes. Each new or renewed contract is for eight years with the possibility of two one-year extensions.
Plan executives have not yet decided on starting dates for the new investments or termination dates for other investments, “This will be determined by administrative constraints as well as timing of the communications to participants,” Mr. Fischer said.
Although contracts for existing investments covered by the board's vote are scheduled to expire March 31, those contracts “are expected to be extended for one year,” Mr. Fischer said.
The New York State plan last revised its mutual fund lineup in 2008; but the adjustments were modest compared with the latest changes, said Mr. Fischer, whose plan has 218,516 participants.
When the plan issued RFPs this year, board members wanted to look at both CITs and mutual funds in all asset categories, Mr. Fischer said. The plan didn't consider offering CITs in its 2008 revision because “back then, they were few and far between,” he said.
Since then, the use of CITs has surged, bolstered by their lower fees, greater flexibility in investment management and less complexity in plan management, according to the Pensions & Investments'database that tracks defined contribution money managers. CIT use reached $1.58 trillion in assets at year-end 2015, compared with $895.6 billion in 2008.
Annual surveys by Callan Associates Inc. show that 70.8% of DC plans offered at least one CIT in 2015, up from 60% in 2014. The rate was 51.9% in 2013, 48.3% in 2012 and 43.8% in 2011.
Meanwhile, Vanguard Group Inc. has reported CITs represented 20% of DC plan assets in 2015 among clients vs. 6.7% in 2010.
The New York State plan will employ CITs in multiple settings. One example was the negotiation with T. Rowe Price Group Inc., which provides a mutual fund-based target-date series.
The target-date portfolio contains 10 separate funds, and the net expense ranges from 43 basis points for the most conservative vintage to 60 basis points for the most aggressive fund.
The target-date series will become a collective investment trust from T. Rowe Price, and each component will have an approximate net expense of 38 basis points subject to contract negotiations, Mr. Fischer said. The target-date series represents about $1.37 billion in plan assets.
Replace equity funds
The plan's governing board also decided to replace three large-cap domestic equity core mutual funds. Instead, it will offer a collective investment trust from BlackRock (BLK) Inc. (BLK) — the Equity Index Fund — which tracks the Standard & Poor's 500 index. The net expense for the CIT will be approximately 0.9 basis points subject to contract negotiations.
The New York State plan has been offering the actively managed Davis New York Venture Fund Class A with a net expense of 51 basis points, the actively managed Hartford Capital Appreciation HLS 1A Fund with a net expense of 57 basis points; and the passively managed Vanguard Institutional Index Plus Fund with a net expense of 2 basis points.
The Vanguard fund represents $1.48 billion in plan assets; the two actively managed funds have a total of $492 million in plan assets.
Mr. Fischer said representatives of Callan Associates, the plan's investment consultant, told board members that actively managed large-cap domestic core equity funds “don't add value” compared to a passively managed CIT with the same strategy.
The net expense differences between the BlackRock CIT and the two actively managed funds were substantial, so replacing Davis and Hartford was a strategic decision, Mr. Fischer said. The expense difference between the BlackRock CIT and the Vanguard fund was sufficient enough to replace Vanguard, too, he added.
The deferred compensation plan also will remove three small-cap mutual funds for performance reasons when the new lineup takes effect.
The Wells Fargo Small Cap Value Fund and Federated Clover Small Value Fund will be replaced by the Delaware Small Cap Value Fund. The Columbia Acorn USA Fund will be replaced by the T. Rowe Price QM Small Cap Growth Equity Fund.
The plan also will replace the Principal Large Cap Growth Fund for performance reasons. It will be succeeded by the T. Rowe Price Blue Chip Growth Trust, a collective investment trust.
Representatives of the firms whose funds are being replaced for performance reasons declined to comment or didn't respond to a request for comment.
Among other lineup changes, the board voted to:
nreplace the Federated Total Return Government Bond Fund and the Vanguard Total Bond Market Index Fund Institutional Plus shares with the BlackRock U.S. Debt Index with Securities Lending collective investment trust. Also, in the bond category, the board voted to add another CIT — the Voya Core Plus Fixed Income Strategy.
nmap the Vanguard Mid Cap Index Fund Institutional shares and the Vanguard Small Cap Institutional Plus shares into a new offering — the BlackRock Russell 2500 Equity Index Fund CIT. Also, the plan will add the Fidelity Institutional Asset Management Small/ Mid Cap Core Fund collective investment trust to the small/midcap menu.
ntransfer assets from the T. Rowe Price Equity Income Fund mutual fund to the same large-cap value asset style managed by T. Rowe Price as a CIT. The plan also will add another CIT — Boston Partners Large Cap Value — to the large-cap value menu; and
nmerge the Vanguard Capital Opportunity Fund Admiral shares into the existing Vanguard PRIMECAP Fund Admiral shares in the large-cap growth menu.
The board's vote on these changes came about eight months after it decided to stand pat on the deferred compensation plan's biggest allocation — the $6.83 billion Stable Income Fund. The board issued an RFP in January for a stable value structure manager. In May, it rehired Goldman Sachs Asset Management. The new contract took effect Oct. 1 and will run for five years with the possibility of two one-year extensions.
This article originally appeared in the December 12, 2016 print issue as, "N.Y. Deferred Comp Plan goes big with CITs Changes made to cut costs, reduce overlap, aid returns By ROBERT STEYER".
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