PLANSPONSOR - October/November 2019 - 29

Paul D'Aiutolo, Rochester, New York-based senior vice president,
investments, with D'Aiutolo, Malcolm & Associates
Investment Consulting Group at UBS Financial Services Inc.,
describes how his team's investment discussions play out at a
typical committee meeting:
" Every quarter, when we get in front of a committee, we will
highlight the funds on the watch list and where we are with our
recommendations on those funds, " D'Aiutolo says. UBS goes
over the results of its scorecard for the plan's investments, with
each fund getting a grade, and summarizes the funds' performance
relative to their peers. The advisory team has each plan's
IPS evaluation criteria " hardwired " into its quarterly reporting,
he says, so the adviser explains at the meeting whether any menu
options now fall short of requirements.
" We want the committee to understand, 'Here is the lens
we're looking at all the mutual funds through,' " D'Aiutolo says.
" If we recommend that the committee hold onto a fund on the
watch list, we'll pick out one or two data points that help substantiate
that. And if we recommend making a change, we'll pick out
two or three data points to substantiate that. "
A sponsor working with a 3(21) adviser has to make the final
call about taking action on watch-list funds. " If it's a 3(21) relationship,
the client has the ultimate responsibility for making the
decision, " Wetzel says. " To help it make those decisions, it can
get in-depth information on the investments from its consultant
on a quarterly basis. And, over time, if a client has a good 3(21)
adviser, it learns to trust the adviser and have confidence in [his]
recommendations. But I don't think the committee members
should ever blindly follow their adviser's recommendations. "
How much a committee depends on the adviser's recommendations
varies based on factors such as committee members'
investment knowledge, Olsen says. " It's in large part related to
the relationship we have with the committee, and its dynamics
and personalities, " he says. " We can help lead the [members] to
their decisions; we can give them advice. But, as a 3(21) adviser,
we can't make the decisions. "
Although it is true that a 3(21) adviser does not make the
investment decision, the adviser is still a fiduciary when recommending
investments to the committee, according to Summer
Conley, a partner at Drinker Biddle & Reath LLP in Los Angeles.
Using a 3(21) adviser is a great way for committees to expand their
knowledge and get the assistance and information they need to
go through a prudent process, she says. Ultimately, the process
of reviewing all of the relevant facts and circumstances is what is
required, not making the " correct " decision. As part of the prudent
process, the committee should be getting advice and recommendations,
but should consider and discuss them rather than rubberstamping
whatever the adviser says, Conley stresses.
Olsen says that most committee members are not Chartered
Financial Analysts (CFAs) or chief financial officers (CFOs)-
they are not numbers people. " For us, the challenge is taking
something that is very numbers-driven and making it understandable, "
he says. The PlanPILOT team will pick out the three
or four most salient points it wants the committee to understand
about the investment analysis and will underline their importance
in the meeting.
young to use such a metric. ... Rather
than judging these strategies based on a
personal opinion of the proper amount
of equity exposure at each point in the
glide path, it's a good idea to compare
performance [with] peers [having] similar
philosophies and with the same target
dates over as long of a period as possible. "
Newport Group suggests evaluating
the following components: investment
methodology and portfolio construction,
including glide path; organizational
strengths such as manager experience;
and quantitative measures, including
expenses and risk-adjusted returns.
Advisers can provide the additional
support a plan sponsor might require.
" On a quarter-by-quarter basis, target-date
funds are subject to the same criteria as
any other funds we evaluate, " D'Aiutolo
says. " But we do a separate benchmarking
report on a plan's target-date funds that
runs 15 to 20 pages, and typically we do
it every 18 months. " The report, which
walks a client's committee through the
glide path and portfolio construction of its
plan's TDFs, typically compares the funds
with three or four peer TDF families.
Writing about the benchmarking of
target-date funds, attorneys Fred Reish
and Joan Neri of Drinker Biddle & Reath
LLP, suggest that plan sponsors evaluate
the following TDF components: performance-i.e.,
investment returns; asset
classes and the underlying investments
held by the TDF; principal strategies
and risks of the underlying investments;
the glide path; and investment fees and
expenses. They also say plan sponsors
should consider and evaluate whether
the TDF's characteristics align with the
demographics of the plan participants
and periodically determine whether there
have been significant changes to the
information considered when the TDF
decision was made; they suggest the inclusion
of language to this effect in the IPS.
D'Aiutolo wants a committee to understand
the glide path in each of its three
main phases: the accumulation phase,
including how money is allocated; the transition
phase into retirement; and the decumulation
phase. He also wants committee
members to understand key aspects of
their current portfolio's construction such
as whether it is static or dynamic, whether
it invests in less traditional asset classes
such as alternatives and real estate, and
whether the TDF family is structured as
a fund-of-funds or holds the individual
underlying securities. " With our analysis
of target-date funds, " he says, " we try to put
a little more 'color' around them. " -JW
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