Secrets to Investment Menu Simplification

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2 Secrets to Investment Menu Simplification Moderator: Jake O Shaughnessy, Senior Consultant, Arnerich Massena, Inc. Speakers: Diana Greenstone, Principal, Mercer Michelle Kelley, Retirement Plan Manager, Nevada System of Higher Education W. Robert Phillips, Senior VP, Consultant Relations, BNY Mellon Investment Management Marvin Tong, Senior Project Manager, Investments Division, Southern California Edison

3 Investment Menu Simplification As retirement outcomes are increasingly prioritized over a wide array of choices, menu simplification is taking on new emphasis from Plan Sponsors Today we will take a deep dive into the considerations, process, and techniques associated with streamlining your menu Hear the feedback that other sponsors have received from their participants after simplifying their menus 2

4 In constructing your plan s investment menu, how would you prioritize participant choices versus participant outcomes? 1. It is all about participant choice 2. Both are important, but participant choice has greater emphasis 3. Both are important, but participant outcomes have greater emphasis 4. It is all about participant outcomes

5 What types of investment vehicles does your plan utilize? 1. Only mutual funds 2. Mostly mutual funds, and 1 or 2 other vehicles (e.g. commingled fund such as stable value, or separate account) 3. Mostly commingled funds or separate accounts, and 1 or 2 mutual funds 4. A white label array of customized investment options

6 Edison 401(k) Savings Plan $4.0 Billion in assets, 22,500 participants Overall participation rate 90% Three tiered structure Custom TDFs 7 Core Options (multi-manager structure) SDBW Company matches 100% of the first 6% 2

7 Edison 401(k) Savings Plan Tier 1 Structure prior to 2011 Risk-Based Balanced Portfolios Conservative Moderate Aggressive Current Structure Custom Target Date Funds 5-Year increments (Retirement Allocation to 2060) Tier 2 Core Funds 6 Institutional Funds and EIX Company Stock Core Funds 7 White Label Funds and EIX Company Stock Tier 3 Mutual Fund Window 33 Mutual Fund options Brokerage Window Mutual Funds and Individual Securities 7

8 Current Investment Lineup Structure Target Date Funds* Core Funds and EIX Stock Self-Directed Brokerage Account Lower Risk (More Fixed Income) Income Fixed Income / Lower Risk Money Market Fund Treasury Inflation Protected Securities Bond Fund Bonds Mutual Funds Large Stock Index Fund (S&P 500) Exchange Traded Funds Higher Risk (More Equity) Equity / Higher Risk Large Cap Fund Small / Mid Cap Stock Fund Non-U.S. Stock Fund EIX Stock Fund Stocks Passive Active Lower Participant Involvement Higher * Composed of Core Funds (excluding EIX Stock) with different percentage allocations 8

9 Nevada System of Higher Education $2.4 billion in assets, 13,000 participants. 401(a), 415(m) & 403(b). Mandatory retirement plan for faculty, post doctoral fellows and professionals. Participant contribution rate set by statute with 100% match Tiered structure Tier 1 - Vanguard Target Date Funds Tier 2 Core Options Tier 3 Specialty Funds Tier 4 - SDBW

10 Prior to menu simplification Three vendors offering proprietary funds 300+ investment options Significant underperformance Retail pricing, embedded fees

11 Investment performance as of September 30, % 77% 32% 49% 44% 28% 41% 27% 25% 54% 20% 1 Yr 3 Yr 5 Yr 10 Yr Goal: 75% to 80% of the Plan s investment managers match or outperform their benchmark 28%

12 After simplification 22 investment options (open architecture) One record keeper Transparent fee structure Below average fees (best fit universe)

13 BENCHMARKING PLAN STRUCTURE & OPTIONS

14 BENCHMARKING PLAN STRUCTURE & OPTIONS Investment 5+ & 10+ funds by age group Funds 10+ Funds Investment in single fund by age group Single Fund (including TDF) Single Fund (excluding TDF) Note: Samples include ~5,200 employees Fund usage patterns explain: Participant behavioral biases Potential misunderstanding of investment choices Ability to leverage plan for longterm benefit The basis for making structural changes requires: Understanding and profiling misuse of current structure Defining structure alternatives that improve retirement outcomes 14

15 CASE STUDY #1 (BEFORE) Tier I Target Date Options Tier II Passive Core Options Tier III Active Core Options Capital Preservation (MM) Short Term Fixed Income Tier IV Specialty Options Diversified Fixed Income Diversified Fixed Income High Yield Bond Target Date Funds Large Cap Equity Large Cap Value Equity Small/Mid Cap Equity Large Cap Growth Equity All Cap Equity Small and Mid Cap Equity Global Equity World ex-us Equity World ex-us Equity Company Stock Fund Intl Small Cap/EM Brokerage Window CLIENT SITUATION $2.8B in 401(k) assets; internal pressure to reduce costs in all business areas 21 investment options with style specific equity options as well as specialty offerings Desire to lower risk to the organization by employing more comprehensive governance model Considered outsourcing to be more proactive with DC strategy, shed more of the fiduciary burden, and reduce fees 15

16 CASE STUDY #1 (AFTER) Tier I Asset Allocation Options Tier II Passive Options Tier III Active Options Tier IV Specialty Options Capital Preservation US Fixed Income Diversified Fixed Income Target Date Funds Diversified Inflation Large Cap Equity Small/Mid Cap Equity Global Equity Company Stock Fund No change Change to current option World ex-us Equity Brokerage Window RESULTS Implemented streamlined line-up including custom global equity multi-manager option (see next slide) Reduced investment management and operating fees by $2.1 million per annum, which allowed for plan sponsor to shift payment of administrative costs to participants without net increase in fee Resulted in $640k net savings to participants and $1.5 million net savings Enhanced governance structure/support

17 CASE STUDY #2 (BEFORE) Conservative Aggressive Tier I Asset Allocation Asset Allocation Target Date Funds Core 57 Non-core 312 # of Options Brokerage 2,000+ Tier II Core Options Capital Preservation Money Market Stable Value Fixed Income US Treasury Bond Core Plus Fixed Income Balanced Balanced Fund Large Cap Equity Large Cap Value Large Cap Blend S&P 500 Index Large Cap Growth Global/International Global Equity Fund International Equity Fund Small-Mid Cap Equity Mid Cap Value Fund Mid Cap Blend Fund Mid Cap Growth Fund Small Cap Value Fund Small Cap Blend Fund Small Cap Growth Fund Tier III Specialty Option Large Cap Equity Socially Responsive Vendor Selected Options Brokerage Window CLIENT SITUATION $700mm in 403(b) assets; multi-vendor open architecture non-profit plan 360 investment options with style specific equity options as well as many specialty offerings Desire to lower fees, increase participation and create a more user friendly DC plan 17

18 CASE STUDY #2 (AFTER) Conservative Tier I Asset Allocation Funds Tier II (A) Passive Core Options Tier II (B) Active Core Options Tier III Options Specialty Money Market Annuity Option Fixed Income Index Core Plus Fixed Income Diversified Inflation Option Large Cap Value Target Date Funds Large Cap Stock Index Socially Responsive Option Large Cap Growth International Equity Index International Equity Small / Mid Cap Equity Index Small / Mid Cap Equity Aggressive Brokerage Window RESULTS Implemented streamlined vendor and investment option line up Reduced investment management and operating fees by and estimated $700K per annum Enhanced governance structure/support

19 Investment Menu Considerations White labeling & Custom Target Date Why this works for 401(K) and presents difficulty for 403(b) Steps that need to be followed for success, process and governance Striking the unit value for these solutions

20 Investment Menu Considerations Fact sheet are important Concept of offering multi asset diversified bond, equity along with a stable value option and TDM Why this can work Global Fixed Income as Core

21 Secrets to Investment Menu Simplification Moderator: Jake O Shaughnessy, Senior Consultant, Arnerich Massena, Inc. Speakers: Diana Greenstone, Principal, Mercer Michelle Kelley, Retirement Plan Manager, Nevada System of Higher Education W. Robert Phillips, Senior VP, Consultant Relations, BNY Mellon Investment Management Marvin Tong, Senior Project Manager, Investments Division, Southern California Edison

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