Outsourcing: To Delegate or Not?

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2 Outsourcing: To Delegate or Not? MODERATOR: Susan McDermott, Chief Investment Officer, Institutional Advisory, Pavilion Advisory Group PANELISTS: Craig Daniels, Manager of Retirement Investments, Treasury, Delphi Corporation Kevin Thomas, Director, Retirement Benefit Services, FIS Global Kevin Knowles, Product Manager Defined Contribution, Russell Investments Christine Loughlin, Partner, Defined Contribution Practice Leader, NEPC, LLC

3 Delphi Corporation Craig Daniels Manager of Retirement Investments, Treasury

4 Delphi Corporation Plan Overview Provider of Active Safety, Electronics and Powertrain products HQ in UK, with regional offices in Troy MI, Luxembourg, Shanghai, Sao Paolo $15B in revenue, 127K employees $2B in 401(k) plan, 15K participants Complete plan redesign and re-enrollment in April 2012 Custom target date funds, multi-manager portfolios, brokerage

5 Delphi Corporation Hybrid 3.38/3.21 Model Key redesign decision: investment consultant and fiduciary role Consultant has 3.38 responsibility (discretion) for custom TDFs and 3.21 responsibility (advisor) for core portfolios View that glide path design/management not part of investment committee s usual scope Valued additional fiduciary coverage in 3.38 designation Consultant and committee work closely on investment decisions

6 Delphi Corporation Governance & Actions Investment Committee meetings: 4-7/year Development of Investment Policy Statement Consultant recommendations to adjust glide path Consultant-led manager watch list and monitoring Joint decisions to adjust allocation of multi-manager portfolios Joint decisions to replace individual fund managers Sponsor-led initiatives to change share classes and reduce fees

7 FIS Global Kevin Thomas Director, Retirement Benefit Services

8 FIS 401k Plan Overview FIS is the world s largest global provider dedicated to banking and payments technologies. HQ in Jacksonville, FL with offices in 49 countries $9B in revenue, 55K employees worldwide $2.6B in 401(k) plan, 20K participants Change in record keeper in December 2014 Auto enrollment & default to target date funds in Dec mutual funds plus target date funds

9 FIS Retirement Plans 401(k) Plan 401(k) Plan for subsidiary NQ Deferred Compensation Plan NQ Split-Dollar Plan NQ Employee Stock Purchase Plan

10 FIS Investment Consulting Investment Committee meetings: Quarterly Development of Investment Policy Statement Consultant is 321 Non-discretionary Consultant recommendations to replace fund managers Consultant-led manager watch list and monitoring Joint decisions to adjust allocation of multi-manager portfolios Joint decisions to replace fund managers Sponsor-led initiatives to change share classes and reduce fees

11 FIS Fiduciary Consulting Investment Committee meetings: Quarterly Develop Governance Charter & Fiduciary Practice Statement Fiduciary Onboarding and Education Service Provider Review and Plan Expense Analysis Annual Compliance Review Annual Governance Review & Oversight Participant Communications & Education Review

12 Russell Investments Kevin Knowles Product Manager Defined Contribution

13 Why is DC outsourcing an emerging trend???? HIGHER BAR BIGGER STICK GREATER COMPLEXITY 13

14 A manageable menu can help your participants make better decisions LCG LCC LCV MCG SCG MCC SCC MCV SCV Simplified menu Non-U.S. equity U.S. large cap equity Emerging markets U.S. SMID cap equity Infrastructure All country intl. equity Commodities Real assets Real estate Core fixed income TIPS Stable value or money market Corporate bonds Treasuries Stable value or money market 14

15 A review of fiduciary duties and resources is critical DC PLAN FIDUCIARIES SETTLOR DUTIES MAJOR DUTIES Establish/terminate plan Vesting Company match STRATEGY Income replacement target Participation/Auto-features QDIA objectives Re-enrollment Menu options Retirement income options IMPLEMENTATION Manager selection and due diligence Investment guidelines Fee negotiation Fund vehicle selection Custom target date fund/ white-label fund assembly ADMINISTRATION Record keeper and trust/custody selection and reviews Disclosure and reporting regulations Fee structure and review Timely deposit of contributions Disputes/withdrawals STRATEGIC INVESTMENT ADVISOR 3(21) Advisor INVESTMENT MANAGER 3(38) Fiduciary INDEPENDENT PLAN ADMINISTRATOR 3(16) Independent Fiduciary STAFF ROLE 15

16 Is it time for a more efficient fiduciary model? Gain simplicity and accountability TRADITIONAL DC PLAN MODEL: Multiple relationships, multiple fees Plan sponsor responsible for all DC sponsor DC FIDUCIARY OUTSOURCING MODEL: Single relationship with clear accountability & direction DC sponsor DC fiduciary outsourcing team INVESTMENT MANAGERS STRATEGIC ADVICE RECORDKEEPER PARTICIPANT COMMUNICATIONS STRATEGIC ADVICE INVESTMENT MANAGEMENT VENDOR MANAGEMENT PARTICIPANT COMMUNICATIONS CONSULTANT 16

17 Maintain control of what is important to you delegate the rest Plan sponsor Maintains control of strategic decisions relating to your unique employee population (which could include asset classes, active/passive styles, QDIA choice) Outsourcing provider Delegate investment manager selection, monitoring, and replacement and recordkeeper management/oversight 17

18 3(38) investment management fiduciary What fiduciary responsibilities do I retain? QDIA and Core menu advice Investment manager selection Implementation Prudent selection of the 3(38) Monitoring of the 3(38) QDIA selection Core asset class menu selection PLAN SPONSOR Monitoring of managers Hire, fire, replacement decisions Performance monitoring Management of investment policy statement Plan sponsor 3(38) oversight decisions 3(38) fiduciary Investment Management Decisions 18

19 Case Study: Results Re-enrollment got 92% of participants into the plan s QDIA QDIA updated from one moderate allocation balanced fund to a series of open architecture target-date funds Number of fund options reduced from 21 to 7 Implemented with third party investment managers (no proprietary funds) Replaced mutual funds with collective investment trusts Put in place a self directed brokerage window for the board designated Non-qualified & supplemental employee retirement plans Added auto-enrollment feature, adding auto-escalation feature in 2016 Eliminated revenue sharing For illustrative purposes only; results may be atypical of other plan sponsor outcomes.

20 Case Study: Streamlined plan sponsors Previous options (21) Balanced Fund Current options (7) Target Date Funds Large Cap Value (1) Large Cap Value (2) Large Cap Value (3) S&P 500 Index T Rowe Price Value Large Cap Growth (2) Large Cap Equity & Income Large Cap Growth (1) US Large Cap Equity Index Fund Small Cap Value Mid-Cap Value Small Cap Growth Small-Mid Cap Growth US Small Cap Equity Fund International International Growth International Value US Emerging Small Cap Markets Value International Equity Fund (including Emerging Market Equity) Capital Preservation Stable Value Fund Core Bond (1) Core Bond (2) Short Duration Fixed Income Fund Inflation Protected Real Assets Fund p.20

21 Important information Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification does not assure a profit and does not protect against loss in declining markets. Copyright Russell Investments All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an as is basis without warranty. Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group. The Russell logo is a trademark and service mark of Russell Investments. Date of first use: February 2016 USI THIS CONFERENCE MATERIAL WAS CREATED BY RUSSELL AS AN EDUCATIONAL TOOL, AND IS NOT FOR FURTHER DISTRIBUTION. 21

22 NEPC, LLC Christine Loughlin Partner, Defined Contribution Practice Leader

23 Outsourced CIO: Defined Contribution Plans Nascent, very early days May ultimately differ substantially from traditional outsourced CIO Less total return focused More process and compliance oriented

24 Outsourced CIO: Defined Contribution Plans The operational complexity of defined contribution plans has grown

25 Outsourced CIO: Defined Contribution Plans Pros Addresses a need Enables better solutions to be implemented in DC plans Cons Costs more than traditional consulting, e.g., higher fees Can never abdicate fiduciary responsibility o Need documented selection process o Need documented review process Hardest decisions are often policyrelated

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