401(k) Specialist Issue 1 - 2016 - 38

INVESTMENTS
First, some context. SMAs are typically
based on one or more investment models
that vary in their risk and return characteristics.
This allows plan participants to
choose a single option that aligns with their
unique investor profile, instead of having
to make individual selections and manage
their own portfolios. Because most 401(k)
participants lack the knowledge to create a
properly diversified portfolio, offering SMAs
that consist of a series of risk or age-based
investment models simplifies the process.
Until recently, technology for offering
separately managed accounts in 401(k)
plans, especially smaller-size, was inefficient
(to say the least). Money managers either
had to work directly with record keepers
to implement individualized trading and
recordkeeping processes or construct other
investment vehicles that trade in a similar
manner to mutual funds. While they may
have been cost-effective for very large
401(k) plans, these approaches were often
expensive, impractical or simply not scalable
for smaller plans.
One popular approach, constructing
investment models on the record keeper's
platform using the mutual fund options
available in the plan's core lineup, has
problems. For instance, any changes to the
models are more visible to participants,
which creates confusion and requires
increased communication to participants,
which drive up costs and complexity.
When a fund no longer meets the objectives
of the plan's investment policy
statement, it needs to be replaced. The plan
is therefore required to provide investment
change notices, which is a significant administration
burden for the advisor, record
keeper and plan sponsor.
Another challenge relates to compliance
and fee disclosure rules. A model portfolio
that includes funds not offered to participants
as an individual investment in the core
lineup is considered a " designated investment
alternative " (DIA) under fee disclosure
rules. The advisor and record keepers are
required to provide certain DIA disclosures,
including historical returns, expense information,
benchmarks, and a special website
38 ISSUE 1 2016 | 401kSpecialistmag.com
where participants can access detailed information
about the investment.
Most recordkeeping platforms and advisors
are unable to keep pace. Further, when
DIA models are built on a recordkeeping
platform using a core lineup, an advisor
often feels constrained in their abilities to
create suitable portfolios. They want access
to a range of mutual funds and exchange
traded fund options, rather than those limited
to the core offering.
For retirement plan advisors experiencing
these issues, take heart. Today, several 401(k)
custodians have developed technology to
seamlessly allow advisors, asset managers,
and record keepers to offer SMA-like portfolios
to their clients in a scalable, cost-effective
manner. While seemingly new, these
advances are actually iterations of systems
that have been used for many years. In other
words, they're time-tested and trustworthy.
Managers can utilize the custodian's
proprietary technology to rebalance assets,
replace or add investments, apply and collect
management fees, manage fee disclosure
requirements and interface with the plan's record
keeper. Each model portfolio is assigned
an individual " ticker " by the custodian, allowing
the record keeper to trade the portfolio
in the same manner as a mutual fund. All
changes the manager makes to a portfolio are
applied across all 401(k) plans, but includes
an " override " option at each plan, one that
can be applied with minimal effort. These
new systems also allow advisors and record
keepers to comply with the aforementioned
fee disclosure rules for DIAs.
In 2010, Mid Atlantic Trust Company
released ModelxChange. It allows advisors
two options-manage the plan themselves
or outsource to third-party money managers.
Both options include a seamless
interface to the plan's record keeper. Plan
participants can access the investment
model as they would a mutual fund in the
plan's core lineup. Advisors are now using
ModelxChange to create model portfolios
for both their 401(k) clients and individual
investors, providing greater efficiencies.
" Approximately 18 percent to 20 percent
of all new fee-based plans being on-boarded
with Mid Atlantic Trust are taking advantage
of ModelxChange, " explains Tim Friday,
CEO of Mid Atlantic Trust Company. " We
attribute this increase to several factors,
including advisors seeking lower-cost
investment solutions for their 401(k) clients,
the need for increased transparency over traditional
options, and the ability to improve
operational scale and efficiency. "
In 2014, Matrix Trust Company released
the Matrix ModelTool(k)it in partnership
with Envestnet. Like ModelxChange, it
allows advisors to construct and manage
separately managed accounts for their
retirement plans with access to over 17,000
mutual funds and ETFs. Advisors also have
access to Envestnet's staff of CFAs and PhDs
to vet models, managers, and provide fiduciary
support.
In 2015, Pershing launched the Pershing
Retirement Plan Network (RPN), which
provides 401(k) custodial solutions to
their broker-dealer and RIA clients. With
the launch of RPN, Pershing included a
model management tool as part of their
core services via their Retirement Model
Manager technology. Like ModelxChange
and ModelTool(k)it, Pershing's Retirement
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