How do you and your team assist us in meeting our Fiduciary responsibilities?
Oftentimes, we act as fiduciary to the plan and as a partner in assisting your firm with the fiduciary responsibilities associated with the retirement plan. The specifics of our process to assist employees are detailed in the next question.
How frequently will you meet with us to review our plan and its performance? What type of reports will you provide regarding the Plan’s performance? Please provide examples.
- Fiduciary meetings to review the performance of the plan;
- On-site enrollment seminars (as desired);
- Monthly communication updates (via conference call);
- Maintenance and cleaning of a “to do” list compiled with client personnel;
- Monitoring and facilitating full compliance with all applicable filing and reporting requirements.
We provide third party due diligence reporting prepared by an independent CFA.
We use a proprietary performance-reporting system that furnishes flexible, accurate, and comprehensive performance analysis. Performance measurement reports, which adhere to AIMR Performance Presentation Standards, are furnished on a quarterly, semi-annual, or annual basis. Reports are available no later than 30 days after the close of a quarter, given all investment manager information and custodial statements are received in a timely and accurate fashion. On a day-to-day basis, we are available for questions or comments, and are proactive in communicating any relevant information to our clients.
We process stringent quantitative analysis of performance on absolute, relative, and risk-adjusted bases. Additionally, we evaluate manager performance over complete market cycles and consider rolling year analysis to identify consistencies or inconsistencies calculation for each manager, we enter each transaction executed throughout the period and confirm ending market values.
Ongoing performance evaluation will include analysis of the following portfolio characteristics:
- Investment Policy Statement Compliance
- Asset allocation constraints (minimum and maximums for asset classes)
- Manager performance vs. appropriate benchmarks and peer universe
- Historical performance
- Risk adjusted performance
- Sharpe Ratio
- Information Ratio
The following demonstrates the types of investments typically covered in our evaluations:
- Fixed Income Securities
- Short Term
- Intermediate Term
- Long Term
- High Yield
- Domestic and Foreign
- Small, Medium, and Large Capitalization
- Value, Blend, and Growth Styles
- Mutual Funds-all styles
- Alternative Asset Classes
- Sectors (Technology, Healthcare, and the like)
Do you provide services to document the plan’s investment performance, employee education program, etc.? If yes, please describe.
Our reporting system provides attribution analysis that answers the question: What investment decisions have positively (or negatively) influenced performance? We can provide performance attribution from various perspectives. On a total portfolio or individual manager level, our attribution can identify performance due to:
- Index return, which is based on the Plan’s or manager’s target asset allocation and measure the gain/loss due to the selection of the targeted asset allocation;
- Asset allocation decisions, which measures gains/losses due to active asset allocation decisions to deviate from the target benchmark;
- Sector selection, which measures gains/losses from over/underweighting economic sectors
- Security selection, which measure gains/losses due to security selection
We can create portfolio characteristics on the total portfolio as well as individual holdings. Characteristics include: sector weightings, dividend yields, price-to-earnings and price-to-book ratios, earnings growth rates, etc. For international managers, we will review the country weightings across the portfolio relative to their benchmark. For example, if a manager has a mandate to invest in only developed countries, we should not expect to see investments in underdeveloped countries such as Mexico, Brazil, China, or any other emerging market. We also monitor a portfolio manager’s style on a single point and on a rolling time period basis. Zephyr’s Style Advisor uses multiple linear regressions on a manager’s return series to determine what style factors influenced performance. Equity styles that are monitored include all capitalization sizes, value-oriented manager, and/or growth-oriented managers. For bonds, the style can be identified through credit quality, maturity, yield curve structure, etc. International styles can be differentiated by geographic region, developed vs. emerging markets, and capitalization, to name a few.
The outcome would reflect where an individual manager has added/not added value in the areas of asset allocation, sector selection, and security selection.
Our team has access to over 4,000 indices, including standard and other less-commonly used benchmarks. Data sources include Zephyr, Ibbotson, and Mobius M-Search. Most index information is updated monthly on our Zephyr system.
Portfolio characteristics and historical product returns dictate the appropriate benchmark(s) for a manager. As part of the investment policy creation, we recommend that portfolios have predetermined benchmarks against which investment managers are measured. For total portfolio evaluation, we establish “blended” custom benchmarks for institutional clients, which incorporate the target weighting of assets represented in the portfolio. Zephyr, Ibbotson, and Mobius M-Search have capabilities that facilitate blended customized benchmarks, while ensuring historical data accuracy.
The universes in our performance report are asset class and style specific, and are based on manager-reported composite returns. There are over 80 standard peer groups in Mobius M-Watch; additionally, using Zephyr software, we can create custom universes as necessary.
When recommending performance benchmarks for a manager, the manager’s past performance is analyzed to determine which benchmark(s) are the most representative of the manager’s stated style (i.e. correlation analysis). The rationale in establishing a performance benchmark is to determine, on an ongoing basis, whether or not the manager is performing well and should continue to be included as part of the portfolio. We use style inverses to measure investment manager performance as to its peers. Benchmarks are established for various asset classes. For example, the Russell 2000 would be used in determining the benchmark for the small cap portion of the total portfolio. For risk, we consider the manager’s Sharpe Ratio (risk adjusted return) and how they compare historically to the benchmark and peer universe. Strong risk-adjusted performance is preferred.
In addition, we offer custom reporting to meet the needs of the specific client.
Describe the plan consulting services provided by your firm.
We provide consulting services in two primary areas: Administrative/Compliance consulting and Investment Due Diligence services.
Maintaining a retirement plan is very much a process. The Employee Retirement Income Security Act (ERISA), the law which governs the qualified plan world, is every changing. A company’s plan document is a living item requiring constant review and development.
Vendor selection is the first step into the Administration/Compliance foray. JRS assists the client to ensure that a proper due diligence plan of action is in place to protect the client in the ever evolving legal realm of qualified plan maintenance. We will help the employer with the Request for Proposal (RFP) as the first process in ensuring the success of the retirement plan.
Selection is merely the beginning of the relationship. JRS looks to add value by assisting employers in asking the right questions of various potential vendors, ensuring the plan finds a correct home.
Upon completion of the initial phases, we will partner with the organization, supporting the implementation of the successful vendor. This process can be challenging. JRS will work diligently with the prior record-keeper to ensure a smooth transfer of plan information and plan assets. In today’s environment, with the use of technology, a plan can often transfer in a short time period with minimal “blackout.”
In addition, we will work with Human Resources to develop a creative communication strategy in order to inform employees about the available retirement plan opportunities within the company. JRS will educate employees with regard to the retirement plan and investment choices, and will listen to make sure that the plan fully accommodates the company’s desires. We will develop the Investment Policy Statement.
Once the implementation is completed, we will be proactive in providing support with regard to the administration and investment due diligence of the program. JRS, with the successor vendor, will provide the tools to actively maintain the plan level activity and monitor the funds’ performance on an on-going basis through the use of third party tools.
What is your role in assisting us with plan design issues?
Justin Retirement is extremely comfortable with all aspects of the plan design. JRS has the ability to leverage its national resources with the various vendors to ensure that the client receives efficient and effective plan design, consulting, and on-going support. In addition, JRS assigns an ERISA attorney to assist with the many complexities associated with plan design and compliance.
Can you assist us in developing and maintaining an Investment Policy Statement (IPS)? If so, how?
We provide and maintain an Investment Policy Statement, prepared by ERISA counsel.
Our formal analysis of a new client’s portfolio structure is the initial step in a new relationship. We are very dedicated to the development and annual review of the Investment Policy Statement, believing it to be the blueprint for the entire investment program. The Policy Statement establishes the infrastructure for all investment related activities: from the definitive investment goals to allowable risk levels; from guidelines delineating allowable investments to prohibited transactions; and from benchmarks for evaluating performance to service expectations for investment consultants and other service providers.
How is investment performance monitored? What reports are provided to assist with monitoring investment performance?
The client will have a Certified Financial Analyst responsible for tracking investment performance and reporting, and this person will report information to JRS for review and explanation to the client.
The enclosed review will demonstrate our ability to track these items. The Zephyr software, in particular, reviews investment style and risk in addition to various other criteria pertinent to the fund review process.
What steps are taken if an investment is not performing as expected? What is the process for replacing an investment that is not performing as expected?
We currently use a 10-point scoring system that is based on the quantitative and qualitative characteristics of each investment. The score is 80% quantitative and 20% qualitative, and typically is based on the latest five years of data. The following quantitative tests gauge a portfolio’s relative return and risk, and are helpful when evaluating whether to retain an existing manager.
- An existing manager’s investment style should be consistent as evaluated on a single data point as well as on a rolling time period basis.
- An existing manager’s R-squared should be at least 90% to the benchmark index.
- An existing manager’s risk/return relationship should not fall in the “southwest quadrant” as plotted on a risk/return scatter chart.
- An existing manager’s up/down capture ratio should be favorable, that is, greater than one.
- An investment manager’s information ratio should not be negative.
- Relative to the appropriate peer group, an investment manager’s median rank should be superior to the median as measured by:
- Total Return
- Information Ratio
Qualitatively, portfolio management tenure as well as the investment’s level of expenses should be better than average. Other qualitative factors may be manifested in the qualitative score, such as regulatory difficulties or significant change in ownership or operations.
Generally, an investment must score nine or ten points in order to be considered top tier. Investments scoring six, seven, or eight points are acceptable. Investments scoring five or fewer points are to be avoided, and if currently among plan investment options, they would typically be candidates for watch list or removal
A manager that is not performing as expected is typically watch listed formally in the Committee Notes, and ultimately replaced if the reasons for watch listing are not corrected by the manager.
After being placed on the Watch List, if we observe material improvement in the manager’s area(s) of noted deficiencies, we may recommend removal from the Watch List. Using the example of a manager who is watch listed due to sustained style drift: significantly less style drift, an increased R-squared, and decreased tracking error may be cause for removal from the Watch List. While we are mindful of making timely recommendations, we also want to avoid excessive placement/removal of managers from the Watch List. To avoid this problem, we look for sustained trends rather than isolated occurrences over one or two quarters. If we feel that the firm is materially weaker due to events such as the loss of key personnel, investment discipline deviation, and/or weak long-term performance, the team will likely recommend watch listing the manager. When entrusting the management of your assets to an investment manager, it is important to know that the firm you employ epitomizes continuity of people, investment philosophy, and decision-making processes.
How are investment style and investment risk monitored?
If an investment manager passes our initial screening process and meets our minimum criteria, then the investment manager is subjected to a more stringent quantitative analysis. This analysis includes but is not limited to:
- Absolute Performance
- Risk & Downside Exposure
- Risk-adjusted Performance
- Style Analysis & Consistency
All of the above noted measurements are arbitrary unless measured against something meaningful. Based on an intensive review of an investment manager’s style, the team determines the manager’s style and the most appropriate benchmarks for comparisons. The team evaluates an investment manager’s performance, absolute and risk adjusted, based on the following:
- Index Comparisons—identifies the most appropriate index benchmarks for each manager. For example, if a manager invests in small companies, then it would not be fitting to measure performance against the S&P 500 (a broad index of larger co’s.), but against the Russell 2000 would be appropriate. In this vein of thought, if a manager invests in small companies that are in an aggressive growth phase, then an index (i.e. Russell 2000 Growth) that is highly correlated with growth would be appropriate.
- Universe Comparisons—similarly, it is important to measure an investment manager’s performance relative to a universe of investment managers that manage assets in a similar fashion. Universe comparisons are a great supplement to index comparisons, as indexes do not provide meaningful comparison in all market environments.
- Rolling Periods Analysis—evaluating a manager’s performance on a fixed time period (e.g. three-year) is often arbitrary. For example, if a manager’s three-year analyzed return is favorable due to a strong recent quarter return, and this is removed from the data to expose performance which reflects poorly, then an investor may experience tremendous swings in the manager’s returns from period to period. Due to shortcomings of fixed time period analysis, the team evaluates performance over a variety of different periods, including rolling periods that allow an investor to identify trends in a manager’s performance.
Please describe your approach to employee education.
Because employee education is key to a successful retirement plan, your organization needs an effective education program that is powerful enough to help participants achieve their retirement plan goals. We are dedicated to raising employee awareness about your organization’s retirement plan benefits, and will work with you to encourage your participant education needs. Also, we will help develop the best approach to meet those needs. We will coordinate, conduct, and participate in your interactive enrollment meetings along with your service provider. The format, method, material used, and timing of the meetings will be guided by the plan sponsor, the custom communication campaign, and the provider’s timeline.
We will work with Human Resources to develop a creative communication strategy to inform employees about the retirement plan opportunities that exist at the company. JRS will educate employees with regard to the retirement plan and investment choices. We typically customize materials provided by the vendor offering the 401 (k) services.
Will you provide ongoing education to our participants?
We will conduct a series of education meetings to specifically address topics relevant to the retirement planning process. These services are developed around the needs of the client.
We facilitate access to resources to help your participants with those difficult questions about the best way to manage their retirement assets. When your employees change jobs or retire, they often face complex financial decisions. When your participants have questions about appropriate ways to manage their retirement assets, they will often ask difficult questions. It is the plan fiduciary’s responsibility to make available information in order to allow the plan participants to make informed decisions. Amongst the easiest and most popular strategies in the market place today are Asset Allocation Funds or Lifestyle, Life Point funds. These funds are managed in accordance with the risk tolerance of the plan participant or in accordance with a specific retirement date.
This manager of managers approach is available through many investment managers in both registered mutual funds and sub advised accounts, with the most popular being investments managed by Russell, Fidelity, Scudder and Dryden. Additionally, we can coordinate access to outside advice, including advice offered by service providers like Financial Engines, who offer online advice or full management of the participant accounts.
Will a professional from your organization train our benefits staff? If yes, please describe the training we’ll receive.
Yes, as we develop a relationship with the client, we (along with the vendor representatives) will provide on-site educational training sessions regarding the education process and employee informational meetings. We advise your employees not to give investment advice to the plan participants; we ask that they only provide information on how the plan operates and why it is important for individuals to save for retirement.
Our fees are based on the specific services selected and the frequency with which reporting is provided. Model pricing would be .25% of assets for the services and frequency of the services selected by the client. We amortize our cost in this annual fee for all of the one-time services requested. We are very flexible with regard to client charges, and are happy to work together in the fee structure deemed most suitable: whether paying compensation or billing directly.