Sometimes corporate changes like a merger can help plan sponsors revamp their defined contribution (DC) plan, especially their investment line-up which is what happened for the new American Airlines plan which merged with US Air late 2015. Let’s take a look at how they dramatically improved their investment menu.
The two main goals going into the process were to keep fees low and to make it simpler for employees. So the $13 billion plan covering 70,000 participants used a mix of index and active funds as well custom Collective Trust (CIT) target date funds (TDFs) to keep expenses low and also created a four tiered structure with white label funds to keep it simple. The plan for pilots, who are required to retire at 65, is separate from other employees.
- Tier 1:
- Custom TDFs which use the active and index funds from Tier 2 and Tier 3 acting as the default – Pilot TDF are more conservative at age 65
- Tier 2:
- Four passive white label CITs tracking indices – pilots have six additional funds
- Tier 3:
- Six active white label CITs
- Three legacy funds
- Money Market
- Stable Value
- Bank account from Credit Union
- Tier 4:
- Self-directed brokerage accounts
- Managed accounts
By tiering the investments, participants make the decision whether they want a professional to manage their money rather than mixing the TDFs with other options. Using the funds in the line-up for the custom TDF gives the plan sponsor ultimate decision making over which “ingredients” are being used.
The white labeled funds included many underlying investments but seem simple because there is only one choice. Previously, there was a risk of overloading one asset class with participants able to choose from a myriad of funds.
More plans are moving to indexing although not exclusively and even smaller plans are getting access to CITs which are gaining popularity because they are cheaper, more flexible and more transparent than mutual funds but accomplish the same goals with little downside. The American Airlines new investment menu is a good model for many plans to follow.
