Administration April 6, 2008

FAAF: Underlying Assumptions/When You Assume

There are some very different assumptions underlying the construction of the new generation of asset allocation funds and they can make a big difference in how the funds work for your plan.

Reported by

Rebecca Moore

Anne Lester, Senior Portfolio Manager, JPMorgan Asset Management, told attendees at PLANSPONSOR’s 2008 Future of Asset Allocated Funds Conference in Newport Beach, California, that when considering the underlying assumptions of asset allocation funds, plan sponsors should line up the goal of their plan with the goal of the funds. She stressed the importance of considering how participant behavior affects the outcomes of their investments.

align=”center”> The Panel Audio FIle

Lester noted that studies have shown that the more participants save and the fact they have backup savings in a defined benefit or cash balance plan, the more they take loans or withdrawals. Therefore, she said, though the assumption should be that an asset allocation’s glide path can be more aggressive because of the fixed DB savings, due to participant behavior, it cannot be.

Asset Class Diversification

Lester said plan sponsors should focus on the volatility in the construction of the glide path for asset allocation funds and look for diversification that extends into all asset classes.

Eric Freedman, Managing Director, CAPTRUST Financial Advisors, agreed saying the fund’s manager should not assume that long-term thinking will trump behavioral tendencies. Only investing in stocks and bonds is not the most efficient way to match participants’ assets with their future liabilities.

Friedman added that industry and age are two major components of participant assumptions sponsors should use to determine which funds’ glide path philosophy is best for their plan.

Mark Fortier, Defined Contribution Investment Manager – Blend Strategies, AllianceBernstein, suggested funds should be stress tested to determine which design is best for participants’ in the long run.

Fortier pointed out that the effect of participants’ behavior on their savings and investing results testifies to the value of communication. Sponsors should show participants the impact their behavior will have on their income stream in retirement and shoot to have behavior reflect the communication participants have received.