Helping employees invest wisely - profit-sharing plans - Financial Planning

HR Magazine, Nov, 1993 by H. Kenneth Ranftle, Michael J. Keppler

Like other employers, Towers Perrin faces the challenge of encouraging employees to participate in the company's profit-sharing plan as an integral part of their retirement resources.

In 1992, the Towers Perrin board of directors appointed a task force made up of representatives from the human resource department and members of its benefits and finance committees to undertake a thorough review of the firm's employee profit-sharing plan, a defined-contribution plan.

During the fact-finding phase, the task force found that most plan participants--active employees, retirees and other inactives--were making conservative investment decisions. Approximately 60 percent of the plan's money was invested in the fixed income fund.

Generally, the task force determined that employees did not have a long-term view of the plan, nor did they appreciate the importance of the plan as a retirement resource. This attitude about the plan, which the task force felt was reflected in employees' investment choices, was also based on a general lack of understanding of the basics of choosing investments.

The initial review of plan design suggested that some positive changes could be made in the investment choices themselves. In addition, the task force found that plan governance procedures--though consistently applied--could be clarified and documented.

Time for change

Working in tandem with Towers Perrin consultants, the task force set clear objectives for implementing changes to the profit-sharing plan. They were to ensure maximum potential return on participants' investments, provide participants with clear investment choices and assistance in managing risk and designing appropriate investment strategies, and manage plan fees appropriately and effectively.

To achieve these goals, the task force decided to adjust the asset-mix strategy of the plan and then review and select appropriate investment managers and educate employees about the role of the plan and their investment choices. The resulting changes were well-received and understood by employees at all levels.

Innovative investment strategy

The first step in the redesign process was to thoroughly review the investment choices offered through the plan. Towers Perrin asset consultants, who help identify effective long-term investment strategies for defined-benefit and defined-contribution pension plan assets, recommended that the task force consider an approach based on "efficient frontier optimization" technology. This approach identifies the mix of investments that provides the highest expected return at any given level of risk. To carry out this approach the asset consultants advised the following changes, which Towers Perrin implemented effective January 1, 1993:

* Offer investment choices in different asset class portfolios with distinct risk and return characteristics. No changes were made in the fixed income portfolio, since it was redesigned in 1991. However, three new equity asset-class portfolios were introduced: Large Company Domestic Equities, Intermediate and Small Company Domestic Equities and International Equities. These portfolio choices replaced the Equity Growth, Equity Income and Social & Urban Funds.

* Select new investment managers for each of the equity asset-class portfolios. Successful candidates were chosen unanimously after a thorough review by the task force. Managers were judged on a wide array of selection criteria, including investment approach and philosophy, investment methodologies, historical performance, and commitment to service and fees. Two investment managers were chosen for each of the three equity-asset classes to provide a balanced approach to investing these funds. Each of the plan's investment managers will be reviewed quarterly by Towers Perrin asset consultants. This periodic review allows the company to meet plan governance requirements and monitor performance standards.

* Offer employees portfolio mixes to take advantage of professional investment strategies. Towers Perrin asset consultants assembled the basic asset-class building blocks into diversified portfolio mixes. Each mix is a modern, balanced investment fund combining equities that are expected to provide greater long-term returns with fixed income investments, which provide greater stability in value. To further manage the potential fluctuations in the mixes' values, investments in equities are diversified among the three new equity asset-class portfolios.

The plan offers the following five preselected portfolio mixes, which are designed to provide the optimal expected return at the level of risk involved:

* Mix A is the most conservative, with fixed income investments predominating.

* Mixes B, C and D are progressively more aggressive, with an increasing percentage of holdings invested in equities.

* Mix E is a 100-percent equity choice, the most aggressive of the plan's mixes.

Participants who don't find a mix that fits their personal investment strategy can create their own portfolio from any of the plan's underlying asset classes, both fixed income investments and equities.