QDIA Validation V A L I D A T I O N. Great-West Capital Management, LLC. Great-West Lifetime Asset Allocation Funds

Transcription

1 Q alidation Great-West Capital Management, C Great-West ifetime sset llocation Funds pril 2013 BR, nc. udit & ue iligence ivision Federal Reserve Plaza 600 tlantic ve, F 30 Boston, M

2 able of Contents Q SUS S F PR GR 3 RUC 4 GE BSE SSE C YSS 5 PPCBY S Q ERE 6 QUFC YSS 10 RESBEESS S ESME 13 SSE CRS: 13 RSK/REUR YSS 14 PPECES 17. UERYG ESME -RSK YSS 18 B. UERYG ESME -PERFRMCE YSS 20 C. UERYG ESME -EXPESE YSS 22 Page 1

3 Q alidation Status as of pril 2013 BR PPRE E for Q BR has evaluated the Great-West ifetime sset llocation Funds offered by Great-West Capital Management, C to determine if they comply with the requirements to be used as a qualified default investment alternative (Q) as defined by the Employee Retirement ncome Security ct of 1974, as amended [ERS] Section 404(c)(5) and associated regulations. Great-West ifetime sset llocation Funds are referred to as the nvestment and are a series of registered investment companies that are reported to be in compliance with all applicable regulations. Page 2

4 alidation Grid he following table summarizes the ways in which the Great-West ifetime sset llocation Funds qualify as a Q. n each case the nvestment being validated may be applicable as the only one used (stand alone) or may be used in conjunction with other investments (sleeve) in a model portfolio managed by an investment adviser that qualifies under ERS section 3(38). he Q validation determines which Q alternative(s) apply and whether the nvestment may be used stand-alone and/or as a sleeve in a portfolio. Great-West ifetime sset llocation Funds Q lternative Stand lone Sleeve of portfolio 1 ge Based 2 Risk Based o o 3 Managed ccount o 4 Short erm o o 5 Grandfathered o o EWRHY BSERS: he Great-West ifetime sset llocation Funds are offered in three risk levels, conservative, moderate and aggressive. By using all three in one plan, the plan fiduciary can default to the risk level that best matches the risk preference of specific participants as well as use an appropriate level when no preference is expressed. Multiple target date glide paths with differing levels of risk defaults plan participants into more appropriate choices, avoiding the one size fits all weakness of most target date funds. he Great-West Capital Management, C selects underlying investments from an array of best funds from leading investment managers that agree to uniform compensation arrangements. Selections are made in the context of current economic and market conditions, and are based on the investment strategy, risk profile and historical performance, Morningstar ratings, fees and expenses, asset size and managerial style. he unbiased investment discipline used by the Great-West ifetime sset llocation Funds provides a superior set of investments for participants and protects plan fiduciaries from appearing to favor one investment manager over another. Page 3

5 ntroduction his report contains BR s independent analysis of the Great-West ifetime sset llocation Funds and Great-West Capital Management, C and is intended to supplement the duty of fiduciaries to prudently select investments for use as a qualified default investment alternative. Since this is a supplement, the content of this report is intended as a guideline and is not a substitute for the evaluation required by regulations. s an independent expert, BR has no affiliation with the Great-West ifetime sset llocation Funds or Great-West Capital Management, C and has the training, experience and proficiency to conduct this analysis. BR has a 30-year history recognized by industry and government as an independent third-party expert in the business of providing evaluations, ratings and due diligence. BR certifications are recognized as marks of excellence in adviser services, communications, electronic and telephone services. BR is the only ratings firm with an SEC no-action letter exempting certain of its evaluations from the testimonial rule. his analysis consists of four separate evaluations that are designed to validate if the Great-West ifetime sset llocation Funds and Great-West Capital Management, C meet requirements of ERS section 404(c)(5) and related regulations. hese evaluations are: ge Based sset llocation nalysis: comparison of equity mix (glide path) in comparable investments. pplicability as Q lternative: determination of which class or classes of Q are appropriate uses of the Great-West ifetime sset llocation Funds. Qualification nalysis: n evaluation of the qualifications of Great-West Capital Management, C to meet the regulatory requirements for a Q manager. Reasonableness as an nvestment: n assessment of whether Great-West ifetime sset llocation Funds meets the BR standard of reasonableness. For more information concerning this report, please contact BR at: ttn: udit & ue iligence Federal Reserve Plaza 600 tlantic ve, F 30 Boston, M audit@br.com Page 4

6 ge Based sset llocation nalysis While the allocation of equity and fixed income assets in age based funds and computer models vary widely, a study of age based (target date) funds across the mutual fund industry was used to compute norms for these allocations. he chart below shows these norms. he marker ( ) on the chart illustrates the equity allocation of the Great-West ifetime sset llocation Funds orms for Equity llocations cross arget ate Funds Equity llocation Ranges and orms of arget ate Funds at 3/31/ Highest orm -Hi orm -ow owest ggressive Moderate Conservative Equity llocation for the nvestment at 9/30/ Page 5

7 pplicability as Q lternative here are five types of investments that are named as possible Q alternatives. n each case the nvestment being validated may be applicable as the only one used (stand alone) or may be used in conjunction with other investments (sleeve). he alternatives are: 1. ge Based 2. Risk Based (not applicable here) 3. Managed ccount 4. Short erm (not applicable here) 5. Grandfathered (not applicable here) he pplicability phase of the Q validation examines the nvestmen to determine which alternatives apply and whether it may be used stand-alone and/or as a sleeve. REQUREME FR Q ERE. PPCBY S Q ERE S E SEEE CMMES 1. ge Based - n investment fund product or model portfolio that: a) applies generally accepted investment theories, b) is diversified so as to minimize the risk of large losses, c) is designed to provide varying degrees of longterm appreciation and capital preservation d) through a mix of equity and fixed income exposures he investment approach used is consistent with well established principles and theories. Each ifetime sset llocation Fund seeks capital appreciation and income consistent with its current asset allocation. fter the transition year (year designated in the name of the ifetime sset llocation Fund), the investment objective is to seek income and secondarily, capital growth. nvestment is diversified among asset classes, industries and geographic regions. he asset allocation strategy will generally become more conservative, with greater emphasis on investments that provide for income and preservation of capital, and less on those offering the potential for growth. nvestment contains both equities and fixed income. Page 6

8 . PPCBY S Q ERE REQUREME FR Q ERE e) based on the participant's age, target retirement date (such as normal retirement age under the plan) or life expectancy. f) Such products and portfolios change their asset allocations and associated risk levels over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. 2. Risk Based S E SEEE CMMES nvestment provides an asset allocation strategy and is designed to meet certain investment goals based on an investor s investment horizon (such as projected retirement date), risk tolerance, and personal objectives. nvestment asset allocation strategy will generally become more conservative, with greater emphasis on investments that provide for income and preservation of capital, and less on those offering the potential for growth. SUMMRY: he Great-West ifetime sset llocation Funds qualify to be used as an GE-BSE Q and may be used as part of a qualified model portfolio in conjunction with other investments. SUMMRY: he Great-West ifetime sset llocation Funds do qualify to be used as a RSK-BSE Q either as a standalone investment or when used as part of a qualified model portfolio in conjunction with other investments. Page 7

9 . PPCBY S Q ERE REQUREME FR Q ERE S E SEEE CMMES 3. Managed ccount - n investment management service with respect to which: a) a fiduciary that is either,. an investment manager, within the meaning of section 3(38) of ERS;. a trustee of the plan that meets the requirements of section 3(38)(), (B) and (C) of ERS; or. the plan sponsor who is a named fiduciary, within the meaning of section 402(a)(2) of ERS, b) applying generally accepted investment theories, c) allocates the assets of a participant's individual account d) to achieve varying degrees of long-term appreciation and capital preservation, e) through a mix of equity and fixed income exposures, f) offered through investment alternatives available under the plan, g) based on the participant's age, target retirement date (such as normal retirement age under the plan) or life expectancy. / / / / / / / he nvestment is not appropriate by itself as a managed account but may be included in a managed account by a qualified Q manager of the plan. he investment approach used is consistent with well established principles and theories. Each ifetime sset llocation Fund seeks capital appreciation and income consistent with its current asset allocation. fter the transition year (year designated in the name of the ifetime sset llocation Fund), the investment objective is to seek income and secondarily, capital growth. he nvestment is not appropriate by itself as a managed account but may be included in a managed account by a qualified Q manager of the plan. nvestment may be used as a sleeve if the Q manager of the plan selects it for use with certain participants. nvestment contains both equities and fixed income. he nvestment is appropriate for inclusion in a plan and thus can be made available to a qualified Q manager of the plan. nvestment may be used as a sleeve if the Q manager of the plan selects the participants who are appropriate. Page 8

10 . PPCBY S Q ERE REQUREME FR Q ERE h) Such portfolios are diversified so as to minimize the risk of large losses and i) change their asset allocations and associated risk levels for an individual account over time with the objective of becoming more conservative (i.e., decreasing risk of losses) with increasing age. S E SEEE / / CMMES nvestment may be used as a sleeve if the Q manager of the plan selects the participants who are appropriate. nvestment may be used as a sleeve if the Q manager of the plan selects the participants who are appropriate. SUMMRY: he Great-West ifetime sset llocation Funds do qualify to be used in a MGE-CCU Q by itself but may be used as part of a qualified model portfolio in conjunction with other investments. 4. Short erm SUMMRY: he Great-West ifetime sset llocation Funds do qualify to be used as a SHR-ERM Q. 5. Grandfathered SUMMRY: he Great-West ifetime sset llocation Funds do qualify to be used as a GRFHERE Q. Page 9

11 Qualification nalysis o violations of self-dealing prohibitions were found and he Great-West ifetime sset llocation Funds were found to meet the Q requirements for the alternatives shown in the table in the alidation Grid section of this report. he analysis included the following findings: REGURY GUEE B. QUFC YSS BR EU RESU CMMES 1. SEF-EG PRHBS - fiduciary with respect to a plan shall not: a) deal with the assets of the plan in his own interest or for his own account, b) in his individual or in any other capacity act in any transaction involving the plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the plan or the interests of its participants or beneficiaries, or oes Manager have discretion to vary its compensation based on changing holdings within the nvestment? oes Manager have interests that are adverse to those of participants? Pass Pass Manage receives a flat 12 bps management fee from each of the underlying funds. his compensation does not change based on the selection of underlying funds. ndirectly, the Manager s compensation will vary based on the selection of individual proprietary underlying funds. he average expenses of the Manager s proprietary funds are 87 bps, which is 19% lower than the average of all other underlying managers. his creates a 19% advantage for participants when the Manager s proprietary funds are used. Manager s interests are not adverse to participants by virtue of the fact that Manager s compensation increases with growth in asset value in participants accounts and decreases if assets decline. Page 10

12 B. QUFC YSS REGURY GUEE c) receive any consideration for his own personal account from any party dealing with such plan in connection with a transaction involving the assets of the plan. BR EU oes Manage receive compensation from another party for managing the nvestment? 2. CS FR Q FUCRY REEF a) Consider investment fees and expenses in choosing a Q b) Material is provided to participant relating to his/her Q. c) otice must be written in a manner calculated to be understood by the average plan participant. 3. Q Requirements a) Q shall not permit employer securities except as investments within regulated investment companies or as employer match. o expenses for this nvestment fall within the normal range of other investments of this type? s nvestment material appropriate for plan participants? s the information provided for inclusion in the required notice understandable to an average participant? ote: Plan fiduciary must determine that the entire notice can be understood. oes nvestment permit use of employer securities outside of the Q exceptions? RESU Pass Pass Pass Pass Pass CMMES he Manage reports that there is no additional compensation. ctual Expenses for all 15 funds of thegreat-west ifetime sset llocation Funds are below respective benchmarks. See ppendix C -Expense nalysis for details. Material contains description that can be extracted to be appropriate for participants with only minimal investment knowledge. Under most circumstances, the average plan participant will be able to understand the information extracted from the materials. nvestments are registered investment companies and qualify under the exemption applicable to employer securities. Page 11

13 B. QUFC YSS REGURY GUEE BR EU RESU CMMES b) Q may not impose financial penalties or restrict the ability of a participant to transfer. c) Q is either managed by an investment manager, as defined in section 3(38) of ERS, or plan trustee, or plan sponsor who is a named fiduciary or is a registered investment company or a stable value fund under State or federal regulation. re there restrictions or fees to transfer out of nvestment which are prohibited under Q regulations? oes the Manager meet the criteria appropriate for the type of Q being validated? Pass Pass o restrictions, except that Manage reserves the right to use restrictions in the event that market timing is discovered. nvestments are registered investment companies. Page 12

14 Reasonableness as an nvestment Q regulations require that investments be reasonable, which BR has further defined as falling within a normal range of comparable investments. he Reasonableness nalysis presented reflects this standard. Plan fiduciaries are responsible for reviewing current investment information and making the determination that the Great-West ifetime sset llocation Funds are reasonable investments for a plan. Plan fiduciaries, including plan sponsors, are encouraged to seek independent expert advice in making the selection and monitoring of investments. n order to assist in the determination BR provides the following observations based on information available at the time of this evaluation. sset llocators: ESME CR otal Years Exp. Yrs With Fund Great-West ifetime sset llocation Funds S. Mark Corbett, Committee Chair 26 4 Page 13

15 Risk Return nalysis of Great-West ifetime sset llocation Funds his comparison presents only one share class since other classes are derivative and peer group comparisons would therefore be repetitive and provide no additional insights other than that they exist ESME. F YERS UP YERS W YERS G. % UP YERS G. % W YERS BES YER % Portfolio Class WRS YER % Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Portfolio Class Summary 75% 25% (3.43) (3.43) Page 14

16 C. RESBEESS ESME YSS BR ESME CRER 1. Minimum track record he average history for each underlying asset class investment strategy should be at least three years. 2. Stability of the organization he average tenure of the portfolio management team for each underlying asset class investment strategy should be at least two years. 3. ssets in the product he average underlying asset class investment strategy should have at least $75 million under management (can include assets in other funds with the same strategy). 4. Holdings consistent with style a) he allocation to equities is evaluated against the peer group highest allocation to least - the screening threshold being set at the bottom quartile; b) he allocation to fixed income is evaluated against the peer group highest allocation to least - the screening threshold being set at the bottom quartile. 5. Correlation to style or peer group he number of asset classes that make up the Q are evaluated against the peer group - most asset classes to least - the screening threshold being set at the peer group median. 6. Expense ratios/fees a) he wrapper expense is evaluated against the peer group cheapest to most expensive - the screening threshold being set at the bottom quartile. b) he average expense ratio of each underlying asset class investment strategy is evaluated against the peer group - cheapest to most expensive - the screening threshold being set at the bottom quartile. BSERS he history of underlying asset classes is well over three years. he nvestment has a history of three years. enure of management of each underlying asset class investment strategy exceeds the threshold. he assets under management of the nvestment and each underlying asset class exceed the threshold. he equity allocation of the Great-West ifetime sset llocation Funds are within the norm for target date funds, with the exception that the aggressive portfolio exceeds the norms in out years. he fixed income allocation of the Great- West ifetime sset llocation Funds are within the norm for target date funds. he underlying assets of Great-West ifetime sset llocation Funds are primarily highly diversified mutual funds, covering a large variety of asset classes. otal management fee for the Great-West ifetime sset llocation Funds is 12 bps which is within the normal range for the peer group. f 37 underlying investments 1 has expenses that are above its respective peer group. Page 15

17 C. RESBEESS ESME YSS BR ESME CRER 7. Performance relative to assumed risk his analysis evaluates historical performance within the context of overall risk. t examines the number of positive and negative annual returns, the average of the positive and negative annual returns, and the best and worst annual returns, for a minimum of three years (max: 10 years). 8. Performance relative to a peer group he average 1-, 3-, and 5-year performance of each asset class investment strategy is evaluated against the peer group s median. BSERS For the 35 funds and classes that comprise the nvestment over the three years ended 12/31/12, the returns were positive in 75% of the cases. verage positive return: % verage negative return: -3.43% Best annual return: % Worst annual return: -3.43% Underlying investments outperformed peer groups in 80% of cases for the combined 1, 3, 5 and 10 year periods. Page 16

18 ppendices Underlying nvestments:. Risk Return nalysis B. Performance nalysis C. Expense nalysis Page 17

19 . Underlying nvestment -Risk Return nalysis nvestment ame llianz FJ Small Cap alue merican Century nfl-dj Bond nv Cohen & Steers nternational Realty Goldman Sachs Mid Cap alue Great-West merican Century Growth nit Up Years own Years vg of Up vg of own Best Year % Worst Year % Great-West Bond ndex nit Great-West Federated Bond nit Great-West nternational ndex nit Great-West Janus arge Cap Growth nit Great-West oomis Sayles Sm Cp al nit Great-West MFS nternational Growth nit Great-West MFS nternational alue nit Great-West Money Market Great-West Putnam Equity ncome nit Great-West Putnam High Yield Bond nit Great-West S&P 500 ndex nit Great-West S&P Mid Cap 400 ndex nit Great-West S&P SmallCap 600 dx nit Great-West Short uration Bond nit Page 18

20 nvestment ame Great-West. Rowe Price Equity nc nit Great-West. Rowe Price Mid Cap Gr nit Great-West empleton Global Bond nit Up Years own Years vg of Up vg of own Best Year % Worst Year % Harbor nternational nv nvesco eveloping Markets R5 nvesco Global Real Estate R5 nvesco nternational Growth R5 nvesco Small Cap iscovery Janus riton S Metropolitan West High Yield Bond M uveen Real Estate Secs ppenheimer eveloping Markets ppenheimer nternational Bond Perkins Mid Cap alue S PMC Real Return dmin Rowe Price Real Estate dv hird venue Real Estate alue nstl Wells Fargo dvantage Common Stock Summary 83% 17% (21.64) (33.54) Page 19

21 B. Underlying nvestment -Performance nalysis ote: tems in B indicate at or above average peer group results. 1 Year 3 Year nvestment ame Return % Return % 5 Year Return % 10 Year Return % nvesco eveloping Markets Y ppenheimer eveloping Markets Peer Group: iversified Emerging Mkts Great-West nternational ndex nit Harbor nternational nv Peer Group: Foreign arge Blend Great-West MFS nternational Growth nit nvesco nternational Growth Y Peer Group: Foreign arge Growth Great-West MFS nternational alue nit Peer Group: Foreign arge alue Cohen & Steers nternational Realty nvesco Global Real Estate Y hird venue Real Estate alue nstl Peer Group: Global Real Estate Great-West Putnam High Yield Bond nit Metropolitan West High Yield Bond M Peer Group: High Yield Bond merican Century nfl-dj Bond nv PMC Real Return dmin Peer Group: nflation-protected Bond Great-West Bond ndex nit Great-West Federated Bond nit Peer Group: ntermediate-erm Bond Great-West S&P 500r ndex nit Peer Group: arge Blend Great-West merican Century Growth nit 6.17 Great-West Janus arge Cap Growth nit Peer Group: arge Growth Page 20

22 nvestment ame 1 Year Return % 3 Year Return % 5 Year Return % 10 Year Return % Great-West Putnam Equity ncome nit Great-West. Rowe Price Equity nc nit Peer Group: arge alue Great-West S&P Mid Cap 400r ndex nit Peer Group: Mid-Cap Blend Great-West. Rowe Price Mid Cap Gr nit Wells Fargo dvantage Common Stock Peer Group: Mid-Cap Growth Goldman Sachs Mid Cap alue Perkins Mid Cap alue S Peer Group: Mid-Cap alue Great-West Real Estate ndex nitial uveen Real Estate Securities Rowe Price Real Estate dv Peer Group: Real Estate Great-West Short uration Bond nit Peer Group: Short-erm Bond Great-West oomis Sayles Sm Cp al nit Great-West S&P SmallCap 600r ndex nit Peer Group: Small Blend nvesco Small Cap iscovery Janus riton S Peer Group: Small Growth llianzg FJ Small-Cap alue Peer Group: Small alue Great-West empleton Global Bond nit ppenheimer nternational Bond Peer Group: World Bond Page 21

23 C. Underlying nvestment -Expense nalysis nvestment ame 12b-1 Fee Front oad eferred oad Expense Ratio nvesco eveloping Markets Y ppenheimer eveloping Markets Peer Group: iversified Emerging Mkts Great-West nternational ndex nit Harbor nternational nv Peer Group: Foreign arge Blend Great-West MFS nternational Growth nit nvesco nternational Growth Y Peer Group: Foreign arge Growth Great-West MFS nternational alue nit Peer Group: Foreign arge alue Cohen & Steers nternational Realty nvesco Global Real Estate Y hird venue Real Estate alue nstl Peer Group: Global Real Estate Great-West Putnam High Yield Bond nit Metropolitan West High Yield Bond M Peer Group: High Yield Bond merican Century nfl-dj Bond nv PMC Real Return dmin Peer Group: nflation-protected Bond Great-West Bond ndex nit Great-West Federated Bond nit Peer Group: ntermediate-erm Bond Great-West S&P 500r ndex nit Peer Group: arge Blend Great-West merican Century Growth nit Great-West Janus arge Cap Growth nit Peer Group: arge Growth Page 22

24 nvestment ame 12b-1 Fee Front oad eferred oad Expense Ratio Great-West Putnam Equity ncome nit Great-West. Rowe Price Equity nc nit Peer Group: arge alue Great-West S&P Mid Cap 400r ndex nit Peer Group: Mid-Cap Blend Great-West. Rowe Price Mid Cap Gr nit Wells Fargo dvantage Common Stock Peer Group: Mid-Cap Growth Goldman Sachs Mid Cap alue Perkins Mid Cap alue S Peer Group: Mid-Cap alue Great-West Real Estate ndex nitial uveen Real Estate Securities Rowe Price Real Estate dv Peer Group: Real Estate Great-West Short uration Bond nit Peer Group: Short-erm Bond Great-West oomis Sayles Sm Cp al nit Great-West S&P SmallCap 600r ndex nit Peer Group: Small Blend nvesco Small Cap iscovery Janus riton S Peer Group: Small Growth llianzg FJ Small-Cap alue Peer Group: Small alue Great-West empleton Global Bond nit ppenheimer nternational Bond Peer Group: World Bond Page 23

25 Federal Reserve Plaza 600 tlantic ve, F 30 Boston, M Page 24