Thursday, August 22, 2013

A Fine Example of a 401(K) Program: North Carolina

A Fine Example of a 401(K) Program: North Carolina

When we think about reforming government programs, we often look to the private sector for models.  Today I want to highlight a government program that should be adopted by the private sector.   The Treasurer of North Carolina and a board of trustees oversee the State’s Supplemental Retirement Program (401(K), and 457 Plans [Deferred Compensation]).   Several years ago I was a member of the board, so I have an ongoing interest in seeing how the program is doing.  I decided to pretend that I was still on the board and review the latest set of reports and minutes.  I figured that I’d find some aspect of the program that I could critique.  Instead, I came away impressed.

Bank Referrals(1997)

Treasurer Cowell, her staff, and the Investment Subcommittee have done a great job of providing comprehensive disclosure and thorough analysis.  For example, the details for the August 15th meeting of the Investment Subcommittee are available for all to see.[1]   During my brief tenure, I struggled to get the necessary details about the Stable Value component (essentially how cash is managed) of the Supplemental Plans.  When Treasurer Cowell was first elected, the information was scattered and incomplete.  Today there’s a comprehensive report that provides a thorough and uniform analysis of each of the stable value managers.  Stable value is the cash option, which you might think is the least risky option requiring minimal oversight.  Since beneficiaries aren’t supposed to be taking investment risk when they select stable value, board members have to be extra vigilant because relatively small risks can undermine the ability of investors to get their entire principal balance back.

The report on performance for each of the investment options is equally thorough and drills down to the attributes and exposure of the components and subcomponents of each option.  There’s also a detailed narrative about each manager.  The expenses incurred for retaining each money manager are shown both in basis points and dollars.  Moreover, the overall budget for the Supplemental Retirement Plans is laid out in detail.  The program’s costs are low given its size and scope.

I don’t envy the trustees, because the investment materials come to more than 350 pages.  However, the plans encompass $7.5 billion, covering 12 options and 22 portfolios, as well as a series of 12 comprehensive options based on investment risk and horizon (known as Goalmaker).  It’s no wonder that the quarterly binder is bulging with material.

I’ve been involved in many corporate 401(K) programs over the years and spent many years preparing the investment materials for retirement boards.  I’ve not seen anything that comes close to North Carolina’s efforts.   The corporate sector would be well served studying North Carolina’s program.  Money managers, on the other hand, might not appreciate the additional level of scrutiny.


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