The Markets June 5, 2013

Considering Alternatives as DC Investments

Plan sponsors should consider using alternative investment structures for better risk balance and the reducing of volatility experienced by retirement plan participant, a paper said.
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The Defined Contribution Institutional Investment Association (DCIIA) released “Is It Time to Diversify DC Risk with Alternative Investments?,” which explores the potential for greater inclusion of alternative investments in defined contribution (DC) plans. “DCIIA’s interest in exploring this topic stems from the potential diversification and performance benefits offered by non-traditional asset classes and alternative strategies to a participant’s asset allocation,” said Lew Minsky, DCIIA’s executive director.

Early DC investment menus consisted of guaranteed investment contracts, large-cap equity funds, balanced funds and company stock, and then expanded to include equity funds, multiple fixed-income funds, and self-directed brokerage accounts, as well as target-date funds, the paper points out. Despite these changes, many portfolios are not diversified enough and are dominated by equity risk.

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DCIIA encourages plan sponsors to provide better risk balance to reduce the volatility experienced by the typical plan participant. One solution is providing access to an asset category broadly referred to as alternatives. DCIIA believes that the potential benefits of incorporating an alternative strategy include: potential for improved total-return performance; reduced reliance on traditional equities and bonds; incremental portfolio diversification; lower portfolio volatility; increased consistency of returns.

“While the diversification and performance benefits offered by non-traditional asset classes and alternative strategies to a participant’s asset allocation are clear, the team working on the paper believes that the best way to incorporate these types of investments into a DC plan is through either an asset-allocation solution, such as a target-date fund, or through a bundled alternative-assets portfolio,” Minsky said. “In doing so, we believe plan sponsors can meet their fiduciary duty to provide better potential outcomes for their plan participants.”

In evaluating how to incorporate alternatives into their plans, the paper recommends that DC plan sponsors consider factors such as:

In evaluating how to incorporate alternatives into their plans, DC plan sponsors should consider factors such as:

  • Quality of investment managers;
  • Liquidity;
  • Fair value;
  • Leverage;
  • Transparency;
  • Fees;
  • Participant education;
  • Fiduciary responsibility;
  • Legal documentation;
  • Benchmarking; and
  • Integration with financial advice tools.

The paper was co-authored by David Zug, Harbourvest Partners; Kevin Vandolder, Hewitt EnnisKnupp; Kurt Walten, NAREIT; Scott Brooks, Deutsche Asset & Wealth Management; and Jed Petty, Wellington Management Company. A copy of the paper can be downloaded here.

 

Products June 5, 2013

A Roadmap for Long-Term Care Options

Long-term care needs and how they fit into financial and estate planning are examined in “The Advisor’s Guide to Long-Term Care.”
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Advisers will find much assistance in addressing long-term care issues with clients. The book establishes the topics and trends for care, and covers critical matters in funding and planning for long-term care insurance. The full range of long-term care options is examined, and the book explains how to best address long-term care in the estate plan as a prudent risk-management choice. 

As Baby Boomers age, many will likely need extended health care at some point in their lives, statistics show, making the book’s release a timely one. Addressing long-term care needs at the time it is actually needed generally has a devastating impact on an individual’s financial situation. The ability to remain independent and the quality of life of the person’s loved ones are also affected.

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Incorporating long-term care insurance into a financial plan can ultimately help protect assets, reduce the burden of care that would otherwise fall on family members and enable clients to receive care in the setting they most prefer, including their home. Advisers can establish a plan to place the family back to where they were—emotionally, physically and financially—as optimally as possible before an event requiring long-term care.

Starting with the funding of long-term care, the authors explain the options for self-funding, as well as governmental programs such as Medicare, Medicaid, veterans’ benefits, and the Federal Long-Term care insurance program, among other funding considerations.

The authors consider using long-term care for estate planning and wealth preservation. A discussion of an employer’s options and benefits in establishing long-term care coverage for their employees is included.

Topics include the definition of long-term care; the need for long-term care services; funding options; long-term care insurance; legislation such as the Health Insurance Portability and Accountability Act (HIPAA) and the Pension Protection Act (PPA) that affect such insurance; and estate planning and wealth preservation. 

The guide is the product of a partnership between the American Bar Association and M Financial Group, a financial services design and distribution company. The editors, Erik T. Reynolds and R. David Watros, are staffers of M Financial Group’s corporate benefits division.

The cover price is $79.95; the book can be ordered by calling 800-285-2221 or from the American Bar Association’s website.  

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