From the November 2009 issue of Treasury & Risk magazine

Gold AHA Winner in Retirement & Benefits

Honeywell managed to update the investment offerings in its $9.7 billion 401(k) plan last year while maintaining the plan's low-cost structure despite obstacles thrown up by the financial markets turmoil.

At the end of 2007, Honeywell's savings plan had 11 investment choices; the offerings used an indexed approach and were almost all commingled funds or separate accounts. The lineup, unchanged for more than 10 years, included a set of three lifestyle funds that provided conservative, moderate and aggressive investment options.

When employees were automatically enrolled in the savings plan, the default investment was the short-term fixed income fund. Given new regulations about default investments, Honeywell decided to add target-date funds to the lineup and use them as the default, while eliminating the lifestyle funds to avoid any confusion among participants. "The goal was to eliminate what could be perceived as some duplicate offerings," says Charlie Malone, U.S. leader of savings plan investments at Honeywell. After considering providers of target-date funds and the asset allocations they use over time, Honeywell settled on Barclays LifePath funds.

With the aid of Honeywell's investment consultants, Rogerscasey, Malone decided the lineup also lacked a real estate investment trust (REIT), a U.S. mid-cap equity fund and an emerging markets fund. Honeywell decided to add a passive global REIT and a passive emerging markets fund and convert the small cap fund already offered to a small- to mid-cap fund.

The changes to the investment lineup were scheduled for September 2008. By the time September rolled around, Malone and the rest of the savings investment committee were meeting frequently to assess the plan's exposures, including investments in troubled financial institutions, given the market volatility. The committee decided to eliminate the use of yield-enhanced cash. The savings plan also benefited from an earlier decision to boost the cash requirements of the short-term fixed income fund.

Just two days before the new investment line-up was to be launched, the provider of one of the new funds said it had stopped accepting new investments in the fund because of concerns about securities lending. Honeywell decided to postpone implementing the REIT and emerging markets funds while proceeding with the switch to the target-date funds and the changes to the small-cap fund. Recordkeeper ING, which had incorporated all of the changes into a single new release of the Website, managed to rework the programming to eliminate the REIT and emerging markets funds, back-test and still make the launch date. The change occurred without any weekday black-out period for participants. "The ability to make a change two business days prior to going live with new funds was fairly significant," Malone says.

The savings investment committee then considered the entire plan's exposure to securities lending, and found that as of October 2008, 6% of assets were on loan. By January 2009, it had reduced that to just 2% of assets, and in February Malone succeeded in converting the Barclays target-date funds to non-lending funds. In March, Malone and the committee selected and put in place non-lending REIT and emerging markets funds.

The changes made enhanced the savings plan's low-cost approach. Moving from the lifestyle funds to the target-date funds saved participants $750,000 a year in investment fees and administrative costs. And Malone negotiated fees on the other new funds that saved participants $275,000 a year versus retail funds in those asset classes. Meanwhile, plan participants have more options.

"The ability to round out a diversified lineup with some new investment offerings allows participants to further diversify their assets," Malone says.


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