Did Someone Order a Large?
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Any committee member sitting through their share of plan investment review meetings has heard the term "large cap" come up quite frequently. In our experience, large cap funds are top of list when the review turns to the stand-alone funds in the lineup. Given this place of prominence, it is critical to ponder its definition, its importance and how they can be utilized best in an efficient, participant-friendly manner within plan investment lineups.
Large cap is an abbreviation of "large capitalization" which refers to the market capitalization of a public company with a market value (number of shares outstanding multiplied by stock price) greater than $20 billion. On the upper end, the market cap of the very largest stocks reaches into hundreds of billions of dollars. The largest of large cap stocks are household names such as Apple (topping the list of largest U.S. public companies with a market capitalization of $730 billion¹), Microsoft ($498 billion¹), Amazon ($403 billion¹), Facebook ($398 billion¹), Exxon Mobil ($343 billion¹), Wells Fargo ($293 billion¹), and Walt Disney ($175 billion¹).
Because of their size, large caps collectively comprise the majority of total stock market capitalization even while representing only a small number of individual stocks (approximately 200) out of the thousands of publicly listed
- companies. For this reason large cap stocks represent a prominent role within most equity allocations whether part of a broad asset allocation fund like a target date fund or via a mix of the stand-alone funds in a plan lineup.
Now that we defined a stock as large cap, it's a straight forward extension that large cap funds in a lineup hold
investment positions in these large companies. They follow different strategies referred to as value, growth or blend and each of these may be actively or passively managed.
Value funds invest in stocks deemed "out of favor" or "cheap" (based on dividend yield, price-to-earnings, or price-to-book value, etc.). Growth funds invest in stocks of companies with higher earnings opportunities. Financials, Energy, Telecommunications and Utilities are sectors of the market traditionally associated with value while sectors such as Information Technology and Health Care are considered growth. Blend funds predictably include both value and growth and are aimed at offering a broad exposure across large capitalization stocks. The benchmark against the broad-based Russell 1000 Index contains the stocks found both in the Russell 1000 Value and Russell 1000 Growth Indices.
From a design perspective, both value and growth deserve a place in the lineup. Efficient and effective large cap exposure includes active value and growth and rounded out by a low-cost, passively managed index fund in the large cap blend category. We believe these guidelines constitute best practices of retirement portfolio construction.
¹as of 03/03/2017
The opinions expressed in this commentary are those of the author. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.
All investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. Loss of principal is possible.
Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
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Fortified Decision-Making
Structure your plan committee meetings for success
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Defined contribution (DC) plan committees face increasing scrutiny on the myriad of decisions they make for their respective plans. During quarterly committee meetings, it's no longer enough to run through an agenda of basic responsibilities; now, more than ever, leading plan committees recognize that they need to address all of the issues that they are responsible for, including emerging issues. As such, committee decision-makers need to strategically plan meeting agendas that cover both the micro job of looking closely at each issue affecting the plan today, and the macro job of ensuring emerging issues that may impact the plan in the future are considered over the course of the year.
With the help of the plan's advisor/consultant and an ERISA attorney, committees should develop holistic meeting agendas that keep them informed and compliant. Since most committee members do not spend the majority of their time in the DC marketplace, they should regularly ask experts to describe new and emerging issues, and/or older issues that they may not have addressed, but should.
To begin the discussion, the checklist found below covers current and emerging agenda items that plan committees should consider over four quarterly meetings.
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Q1
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Q2
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Q3
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Q4
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- Review minutes of last committee meeting and report on action items
- Quarterly and annual investment reviews
- Annual review of service provider operations and issues
- Annual review of investment policy statement (IPS)
- Annual report to board of directors
- Open items
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- Review minutes of last committee meeting and report on action items
- Quarterly investment review
- Review of participant-related issues
- Review of participant disclosures and notices
- Open items
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- Review minutes of last committee meeting and report on action items
- Quarterly investment review
- Report on legal changes
- Report on industry trends
- Plan design review
- Review of plan policies
- Review of participant issues and complaints
- Review of insurance and bonding
- Open items
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- Review minutes of last committee meeting and report on action items
- Quarterly investment review
- Review of costs and compensation for service providers and plan operation
- Review of mutual fund share classes
- Report on revenue sharing
- Open items
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Q1-Q4 Unscheduled Items
There are other issues that require a committee's attention. However, not all matters need to be reviewed every year, and in other cases the issues are driven by events, including provider changes, 404(c) compliance, required plan amendments and amendments to service provider agreements.
For more information on potential agenda topics or assistance putting together your next committee meeting agenda, contact your plan advisor.
This is an expert of BNY Mellon Dreyfus's article Fortified Decision Making - Structure your plan committee meetings for success.
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Fiduciary Risk when Using Industry Average Reports to Determine Fee Reasonableness
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This is a very important and often misunderstood issue. Industry average fee data can serve as a good general "second opinion" of fee reasonableness. The industry recognizes that fees can be very plan-centric in nature. National averages may not capture the nuances of plans that drive cost (both in a positive and negative manner). Thus a more tailored approach (such as what is provided in a live-bid environment, like usage of the B3 Provider Analysis™) may not only be best practice, but can be more determinative of what a plan's actual value on the open market is at any one point in time. The detail of the B3 Analysis can be more determinative of fee reasonableness as it is based on what other providers would actually charge to provide the same services for the specific plan. It is a direct apples-to-apples comparison.
Moreover, benchmarking fees in a vacuum can paint an incomplete picture. In addition to providing benchmarking of fees, the B3 incorporates benchmarking of services and investment opportunities. All three of these elements must be viewed in conjunction with one another to fully vet "reasonableness" of an engagement. Also, the B3 Analysis serves as an educational tool for fiduciaries in addressing the various components of plan fees including revenue sharing.
Based on Department of Labor (DOL) expressed intent and related fee litigation, use of averages and estimates have not been considered sufficient for determining fee reasonableness as they likely do not reflect the specific plan considerations which may impact pricing. The DOL has stated that plans should solicit live bids on a pro-active basis. Only a periodic (every 3-4 years) robust live-bid process, like the B3 Analysis, is most likely to be considered a sufficient and prudent process for determining fee reasonableness by plan fiduciaries.
A related recent case in point involves fee reasonableness litigation against City National where the court found that in City National's determination of fee reasonableness by use of "...averages and estimates," rather than directly tracked expenses was not satisfactory.
For more information on benchmarking and the B3 Provider Analysis, please contact your plan advisor.
The B3 Provider Analysis™, RPAG's proprietary retirement plan fee benchmarking and request for proposal (RFP) system, utilizes live-bid benchmarking to provide a comprehensive benchmarking of a plan's fees, services and investments in one robust report.
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Are Your Written QDRO Procedures in Place?
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A QDRO, or a Qualified Domestic Relations Order, is a court mandate to divide the assets of a retirement account among divorcing spouses. While there are probably few QDROs that will need to be processed by your plan over its lifetime, it's still important to confirm that you are in QDRO compliance. ERISA Section 206(d)(3) (G)(ii) requires that a plan have
written QDRO procedures in place and that the QDRO procedures are sent to the participant and each alternate payee upon receipt of a domestic relations order. Every plan sponsor should confirm that such written procedures exist and further, should easily be able to furnish the document upon request (by an IRS or DOL auditor for example). Contact your plan advisor to help you with this important task.
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Communications Corner:
Test Your Retirement IQ
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This month's employee memo quizzes participants on five important retirement facts that they probably don't know.
Call or email your plan consultant if you have questions or need assistance.
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Dan Halle, Regional Director
Direct: (716) 362-5405 E-mail: Click
here.
Richard Swanson, Regional Director
Direct: (716) 362-5404 Cell: (585) 330-2566 E-mail: Click
here.
Chad Wilkinson, Director of Retirement Plan Sales
Direct: (716) 362-5401 Cell: (315) 415-8254 E-mail: Click
here.
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The "Retirement Times" is published monthly by Retirement Plan Advisory Group's marketing team. This material is intended for informational purposes only and should not be construed as legal advice and is not intended to replace the advice of a qualified attorney, tax adviser, investment professional or insurance agent.
(c) 2016. Retirement Plan Advisory Group.
Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.
Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
Distributions before the age of 59 ½ may be subject to an additional 10% early withdrawal penalty. ACR#176314 03/16
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. P&A Group is not affiliated with Kestra IS or Kestra AS. This e-mail message and all attachments transmitted with it may contain legally privileged and/or confidential information intended solely for the use of the addressee(s). If the reader of this message is not the intended recipient, you are hereby notified that any reading, dissemination, distribution, copying, forwarding or other use of this message or its attachments is strictly prohibited. If you have received this message in error, please notify the sender immediately and delete this message and all copies and backups thereof.
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