Page 57 - NovDefComp

NAGDCA Conference 2019 Summary of Conference Sessions Page 2 of 8

EQUITY INVESTMENT OPTIONS
This session provided an update on the current market and focused on which asset classes should be included
in a core lineup along with available structures – i.e., mutual funds, collective investment trusts, separate
accounts, etc.

The panelists provided an overview of the current market – the main theme being that we are currently in a low
return world where the credit markets are slowly turning and we’re seeing less variability in monetary policy.
Additionally, they focused on the relationship between active and passive investment styles and the strong
movement toward passive where there’s been a massive outflow from actively-managed funds since 2008.
The growth of index funds in DC plans in 2008 was around 17% – in 2018, above 33%. Other recent trends are
the consideration of ESG, Smart Beta, Sector-focused and geographic funds.

Finally, there has been some movement away from more choices to a more diverse and tier-structured
approach using “white labeled” funds built from five pools – Global Equity, Spread Fixed Income, Investment
Grade Fixed Income, Private Real Estate and Inflation Protection. Using this model, a sample DC Core lineup
consisting of three choices can be built: Growth (Global Equity and Spread Fixed Income), Income (Investment
Grade Fixed Income, Spread Fixed Income and Private Real Estate) and Inflation Protection (Inflation
Protection and Private Real Estate).

ROLE OF FIXED INCOME INVESTMENTS IN A PORTFOLIO
Fixed Income Investments are a component for evaluation and due diligence for both the accumulation phase
as well as the decumulation phase in governmental retirement plan portfolios. Due diligence is especially
important now because rates have been volatile despite minimal intervention from the Federal Reserve rate
setting tools or Open Market Operations action. Stability takes on a new meaning than it has in the past when
the Federal Reserve is actively trying to anticipate economic cycles.

The most common role of fixed income in the Defined Contribution participant portfolio is to layer in stability of
principal for appropriate asset allocation. It is the role of the plan fiduciaries to provide fixed income options
that provide, not only, yield with appropriate risk, but also stability of principal. Stable value products come
primarily in two-part varieties: (1) Insurance company general accounts (GA) where the book value protection
is provided by the full faith and credit of a particular insurance company and (2) Synthetic GICs or “pooled”
products where a stable value investment manager runs an intermediate-term bond portfolio and the book
value protection is provided by “wrap” providers. General Account (GA) products are like bank CD products –
they are both commonly referred to as “spread” products because the fee the issuer receives is the difference
between the gross and net crediting rates. This lack of transparency is partially offset by a generally higher
crediting rate and depending on the specific product, perhaps even a guaranteed minimum crediting rate (e.g.,
a 1% floor). In a Synthetic GIC pooled product, the participant does not receive an explicit guarantee of return.
However, the plan is not subject to single insurer risk – the product fees are disclosed and the underlying fixed
income investment portfolio that drives the overall return of the stable value fund is transparent.