Defined Benefit Plans
The challenges confronting sponsors of defined benefit plans are significant today given the likelihood of pension reform and accounting changes. Consequently, we believe it is more important than ever to understand both sides of the pension balance sheet. A pension conflict exists among most plan sponsors regarding the management of pension assets. High potential return investment strategies will likely minimize the ultimate cost of funding a pension plan. However, these same strategies often times result in a significant mismatch between pension assets and liabilities, triggering significant short-term accounting and funding issues. Ellwood Associates' approach is to adopt an asset/liability framework in managing pension assets.
We view an important aspect of our role as being the team's "quarterback" and closely
coordinating the activities of the key service providers to ensure that all issues have been
considered and appropriately evaluated. In particular, we work as partners with a plan's
actuary to incorporate the key actuarial circumstances and needs into the development of
long-term investment strategies. As an example:
- We evaluate a plan's evolving participant demographic trends to understand how the plan may age over time and its resulting impact on an appropriate investment time horizon.
- We also consider how the plan's liquidity needs will change over time so that we may plan for these needs in developing an appropriate investment policy.
- A critical step is to segment the plan's liability into different duration cells in order to understand the impact that fluctuating interest rates will have on the present value of the liability.
Our ultimate goal is to help clients strike an appropriate balance between maximizing investment returns in order to reduce the ultimate cost of funding a plan and minimizing capital market risk and interest rate risk in order to avoid a significant deterioration in funded status.
Defined Contribution Plans
With the growing trend toward defined contribution plans as the primary retirement vehicle for employees, it is imperative that plan sponsors adopt appropriate fiduciary duties and procedures to guide all investment and administrative activities surrounding these plans. We assist clients, in consultation with their ERISA counsel, to develop a Statement of Investment Policy that serves as an important fiduciary document to follow.
A key aspect of our involvement is to assist clients to develop and maintain a diversified array of separate and distinct investment options from which participants can allocate assets based upon individual risk tolerances. The key is to offer the appropriate number and blend of options that: (1) meets the collective needs of participants; (2) can be distinguished clearly in participant education materials; and (3) are cost effective and can be administered easily. To assist clients in benchmarking their choice of investment options, we provide significant survey information on what other sponsors are doing in this area.
The criteria to select investment managers should be well documented and included in a Statement of Investment Policy. The selection of investment managers that possess a balanced blend of quantitative and qualitative characteristics is important to the success of these plans. Often times, a temptation exists to compromise on the selection of a top fund choice at the expense of a fund that will share a larger percentage of revenue with the plan's record keeper. Ellwood Associates' approach is to develop a keen understanding of the revenue requirements of the record keeper at the onset of the relationship. We then are in a better position to structure the right combination of investment managers that meets the needs of the plan sponsor.
It is critical to have a formal and disciplined review process of the investment options relative to predetermined investment objectives and criteria. We assist clients in meeting their fiduciary duties by compiling detailed performance reviews on a quarterly basis. Our reports are customized to meet the specific needs of each client. Ellwood Associates has developed a proprietary "scorecard" that we use to evaluate the performance of each investment option relative to various benchmark measures. The scorecard serves as an early warning signal to plan sponsors that corrective action may need to be considered in the near future.