Treasury & Risk's 7th Annual Alexander Hamilton Best Practices Summit — October 1 and 2, 2002
2002 — Retirement Winner: Gold—International Paper; Silver—Equifax; Bronze—EDS
THE JOYS OF UNBUNDLING
International Paper takes the gold
GOLD RETIREMENT WINNER—The goal was simple: Create the best possible savings plan for its employees. After five years of studying approaches to improving its $3.6 billion 401(k) program, International Paper Co. came up with the answer: Unbundle the services and give 401(k) participants a chance to get the best of both worlds—the benefit of a mutual fund company’s expertise in record-keeping as well as the superior investing results achieved by institutional asset managers.
This year, International Paper launched a restructured plan for which record-keeping and asset management are provided by separate companies. IP’s unbundled program has a three-tiered investment structure that offers employees 14 choices, up from six a few years ago.
Suddenly, says Robert Hunkeler, International Paper’s vice president of investments, there are real options. Unbundling “enables us to remove a component of the system if it’s not performing,” he says.
Not all mutual fund companies wanted the record-keeping business without the guarantee of the investing. But J.P. Morgan/American Century Retirement Plan Services offered to do the job and was selected through an RFP.
Even with the unbundling, J.P. Morgan and American Century managed to win significant chunks of the investment business: Three life-cycle funds from J.P. Morgan make up the first tier, while the third tier is a brokerage window provided by American Century. However, doing this as unbundled service deals, Hunkeler points out, allows IP to drop a fund at any time and not jeopardize the record-keeping relationship.
The second tier of investment options provides 10 asset class funds, most of which are IP’s own pension fund portfolios, which the company converted to commingled trusts to allow investments from both the pension program and the savings plan. Hunkeler says the pension plan choices represent his staff’s “very best investment ideas.”
IP is ahead of the curve in many ways: In 1999 it began to liberalize its rules about investing in company stock, which now represents just 27% of the plan’s assets, versus 57% in 1997. It also worked on reducing expenses, which have declined to 16 basis points from 23 basis points in 1997. The cut saved plan participants $17 million over five years. IP also beefed up its employee communications and pared the 401(k) program to two plans from the 13 plans it once had as a legacy of various acquisitions.
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SILVER RETIREMENT WINNER—Equifax has just $413 million of assets in its defined benefit pension plan, but it has worked hard to diversify the plan and keep close watch on its performance.
To reduce the volatility of its returns, Equifax built up holdings of asset classes that aren’t correlated to the S&P 500. It began investing in venture capital in 1983 and now has a portfolio of 23 venture capital funds, which constitutes 6% of plan assets. Because its investments are too small to meet the minimums of many venture capital managers, the Atlanta-based credit reporting agency recently put $10 million into a fund with interests in various VC funds, which gives it broader exposure.
The company’s Internet link to its master trustee allows it to monitor all the plan’s transactions. Equifax leases a copy of WinTech’s ProVal stochastic asset liability model, which lets it keep closer track of the plan’s exposure to Internal Revenue Service and Erisa funding tests and engage in sophisticated “what-if” analysis.
Equifax says its strategy has made its plan better able to “weather difficult markets.” Its pension plan has been achieving a compounded annualized return of 11.5% since 1985, beating its 11.3% benchmark return.
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BRONZE RETIREMENT WINNER—When EDS contemplated the projected 18% annual growth in its pension plan’s liabilities, it decided that it needed to increase investment returns on the plan, which had $635 million in assets in 1995.
EDS had been holding 20% of the pension plan’s assets in fixed income and 80% in equities. It gradually cut its fixed-income allocation to 10% by directing new contributions to other assets. Meanwhile, it diversified its equity holdings by building a private equity program through Adams Street Partners, and by mid-2000, that program made up 20% of the plan’s assets. The private equity component has a large allocation to venture capital partnerships but also includes buyout, mezzanine, distressed and special situation investments.
EDS reviewed its managers to be sure that each was best in class, and replaced a number of them with more aggressive managers. It also shifted from contributing to the plan once a year to making monthly contributions, and used those flows to pay benefits and expenses while keeping its plan assets fully invested. The monthly contributions also helped in its effort to redirect plan assets.
The company estimates that its more aggressive approach to investing its pension plan assets helped its plan outperform the median plan by $729 million over the last six years.
—As seen in the October 2002 issue of Treasury & Risk magazine