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5900 Southwest Parkway | Building 1 | Austin, Texas | 78735 | t: 512.327.5530 | w: www.sageadvisory.com
CASH BALANCE PLAN
INSTITUTIONAL SOLUTIONS
June 2019
OVERVIEW
SECTION ONE
3
ABOUT OUR FIRM
Organized for Institutional Success
Overview• Registered Investment Advisor based in Austin, Texas
• Founded in 1996 by Bob Smith and Mark MacQueen
• 100% employee owned
• 48 employees, 18 Investment Professionals
• $13.4 Billion AUM/AUA as of 3/31/2019
Strategies and Services• Taxable Fixed Income Strategies
• Tax-Exempt Fixed Income Strategies
• Global Tactical ETF Strategies
• Asset/Liability Services
• ESG Strategies
Core Firm Beliefs• Investment solutions must be crafted based on purpose
• Ensure that simplicity, liquidity and transparency permeate everything we do
• Evaluate what can go wrong before we determine what can go right
• Well-informed clients make better investment decisions
TOTAL FIRM ASSETS
BY CLIENT TYPE (3/31/2019)
Public Funds
3%
Corporate
29%
Health Care 6%
Insurance
20%
Taft-Hartley
14%
Sub Advised
1%
High Net Worth
23%
Endowments &
Foundations 4%
4
Cash ManagementShort Term
Moderate TermIntermediate TermInt. Term Corporate
Core AggregateCore Gov/Credit
SpecialtyGovernment Only
Insurance
TAXABLE FIXED INCOME
Total ReturnModerate Term
Intermediate TermCore
Laddered Maturity
Target Yield
SpecialtyState Specific
State Preferred
Core Plus Fixed IncomeAll Cap Equity Plus
Target Risk Conservative
ModerateModerate Growth
Growth
SpecialtyMulti Asset Income
Target Date Strategies
TACTICAL ETF
Liability Driven InvestingCorporate Defined Benefit
Cash Balance PlansPublic Defined Benefit
Taft Hartley Defined BenefitTarget Date Strategies
Fiduciary Services
RETIREMENT PLAN SOLUTIONS
TAX-EXEMPT FIXED INCOME
ABOUT OUR FIRM
Strategies and Services
ESG Short Term Fixed IncomeESG Intermediate Term Fixed Income
ESG Credit Fixed IncomeESG Tax-Sensitive Fixed IncomeESG Core Plus Fixed Income ETF
ESG Asset Allocation Conservative ETFESG Asset Allocation Growth ETF
ESG Global Equity ETF
ESG
5 ■Investment Committee
OUR ORGANIZATION
Robert D. Williams, CFA ■Principal, Managing Director
Komson Silapachai, CFAVice President
Meghan P. Elwell, J.D., AIFA®
Vice President
Doug A. BenningResearch Analyst
Jae Y. SongResearch Analyst
Emma L. Smith Research Analyst
John R. SamaResearch Analyst
Andrew S. PoredaResearch Analyst
Mark C. MacQueen ■Principal, Managing Director
Thomas H. Urano, CFA ■Principal, Managing Director
Jeffery S. Timlin, CFA, CMT ■Principal, Managing Director
Robert C. Peck, Jr. ■Principal
Gregory H. CobbVice President
Dustin G. Qualley, CFA Vice President
Seth B. Henry, CFAVice President
Andrew K. Demand, CFAVice President
Nicholas C. Erickson, CFAVice President
Ryan C. O’Malley, CFAVice President
Matthew L. CleavengerAssociate
Gregory J. Figaro, AIF®
Principal, Managing Director
Michael D. Walton, AIF®
Principal, Managing Director
Sean F. McSheaExecutive Vice President
L. Dustin FinleyVice President
John R. Teramana, CAIAVice President
Robert G. Smith, III, AIF® & CIMC ■
PRESIDENT & CIO, PRINCIPAL
RESEARCH & STRATEGY INSTITUTIONAL TEAM PRIVATE CLIENT TEAMPORTFOLIO MANAGEMENT
Bob W. Moser, CIMA®, CRPC, CFIPSenior Vice President, National Sales Director
Arthur L. CherchesVice President, National Accounts
Zachary T. SooterRegional Director – Midwest
Kim F. Sowers, CIMA®
Regional Director – South
Deborah D. DraegerRegional Director – Southeast
Brian C. Larson Regional Director – Northeast
Lily A. AtilanoRegional Consultant
Ashley R. PottsRegional Consultant
MARKETING SERVICESOPERATIONS
ADMINISTRATION
Sean C. KrasanPrincipal, Managing Director
Allison C. HartmanPerformance Analyst
Erica G. MassAssistant Vice President, Portfolio Administration
Mark J. WelpAssociate
Jessica A. McHughDirector of Marketing Communications
Kari K. EdgarAssociate
Jessica N. Hernandez Associate
Clemence KelmanAssociate
Jacqueline M. OlveraSalesforce Administrator
Cameron R. LaddChief Technology Officer
Corey B. CarterAssociate
INFORMATION TECHNOLOGY John R. SlaisPrincipal, CFO & CCO
Wade T. Uloth, IACCPVice President, Compliance
Annette S. KennedyOffice Administration
6
A REPRESENTATIVE CLIENT LIST*Taft-Hartley FundsMachinists Retiree Investment Trust, CAResilient Floor Covering, CAPlumbers & Pipefitters Union Local 74, DEMiami Ironworkers Local 272, FLPeace Officers’ Annuity & Benefit Fund, GAI.B.E.W. Local 697, INUnited Steelworkers of America, KYI.U.O.E. Pipeline Employers H&W Fund, MD Flint Area Sheet Metal Workers Local 7-4, MIUAW GM Center Human Resources, MIUAW Retirees of Mack Trucks Health Benefit Fund, MIGulfport Steamship Companies ILA, MSElevator Constructors Local No. 1, NJI.B.E.W. Local 400, NJLocal 18 International Union of Police & Protection, NJPlumbers Local 14, NJMetro – ILA, NJNo. NJ Teamsters Local 723, NJTeamsters Industrial Employees, NJTeamsters Local 73, NJTrucking Employees of New Jersey, NJWWEC Teamsters Local 863, NJATU Local 1342, NYI.B.E.W. Local #86, NYI.U.O.E. Local 15, NYOhio Carpenters’ Health Plan, OHUAW Northwest Ohio Area Industries, OHUAW Retirees of Daimler Trucks North America, ORSteamfitters Local Union No. 420, PATexas Iron Workers, TX
Foundations & EndowmentsNational Association for Biomedical Research, DCNFL Players Association Endowment, DCFlorida United Methodist Foundation, Inc., FLH. Lee Moffitt Cancer Center & Research Institute Fdn., FLDetectives Endowment Association Administrative Fund, NYAllied Services Foundation, PAWestern Pennsylvania School for the Deaf Endowment, PAThe Catholic Foundation for the Diocese of Greensburg, PALutheran Foundation of Texas, TX
Insurance InstitutionsAmerican Longshore Mutual Association, ALState of Alabama DORM, AL Development Insurance Group, Inc., AZNorthwestern Arizona Regional Insurance Co., AZValley Schools Insurance Group, AZLivingstone Reinsurance, Ltd., BarbadosCapstone Insurance Company, Ltd., BermudaSeaview Insurance Company, CACPA Mutual Insurance Company, FLMCNA Insurance Company, FLPrepared Insurance Company, FLGeorgia Auto Dealers Association, GAGeorgia Hospital Association Workers' Compensation, GA3MP Insurance Company, Ltd., Grand CaymanPioneer Reinsurance Group Ltd., Grand CaymanOxford Insurance Company TN, LLC, MDMississippi Windstorm Underwriting Association, MSCrossFit Risk Retention Group, MTSynergy Insurance Company, NC Affinity Health Plan, Inc., NYElderServe Health, Inc., NYEmblemHealth, Inc., NYEmpire Bonding & Insurance Company, NY American Fidelity Corporation, OKAegis Security Insurance Company, PAAmerican Sentinel Insurance Company, PALackawanna Insurance Group, PAMultinational Insurance Company, Puerto RicoTitan Insurance Company, SCCronus Insurance Company, TXEthos Group Incorporated, TX Service Group Insurance & Financial Services, TXTexas Lawyers’ Insurance Exchange, TX
Public FundsTuscaloosa Police and Firefighters, ALCity of Danbury, CTCity of Deerfield Beach, FLCity of Marietta, GAGeorgia Firefighters’ Pension Fund, GASt. Charles Fire Fighters Pension Fund, ILCity of Jackson Act 345 Policemen's Firemen's RP, MIMetropolitan Library Systems, OK Texas State University, TX
Retirement PlansHolland & Hart LLP, COPLI Holdings, Inc., FLDLA Piper LLP, ILHitachi High Technologies America, Inc., ILScholle Corporation, ILTrueValue Corporation, ILEdw. C. Levy Co., MIRobins Kaplan LLP, MNConcord Electric Corporation, NYPaul, Weiss, Rifkind, Wharton & Garrison, NYTurley, Redmond, Rosasco & Rosasco, LLP, NYBaker Botts, LLP, TXBrazos Electric Power Cooperative, TXGuadalupe Valley Telephone Cooperative, TXMary Kay, Inc., TXOverland Partners, Inc., TXThe Fordyce Company, TXUrgent Surgery Associates, TXFoss Maritime Company, WANintendo of America, Inc, WASEH America, Inc., WAAlliance Laundry Systems LLC, WI
Healthcare InstitutionsKingman Hospital, Inc., AZAllHealth Network, COBaptist Health Systems of South Florida, FLTift Regional Health System, Inc. , GAKing’s Daughters’ Hospital, INBryan Health, NEDeborah Heart and Lung Center, NJAsante Healthy System, ORLancaster General Hospital, PA The Princeton Community Hospital Assoc., WV
*This is a partial representative client list that shows some of Sage Advisory’s clients without regard to either performance-based criteria or type of investment strategy utilized.Inclusion on this list is not intended as an endorsement by any such client of Sage Advisory or the advisory services provided to such client. June 2019
CASH BALANCE SOLUTIONS
SECTION TWO
8
Access to Institutional Expertise• Sage CB plan experts partner with consultants to construct the appropriate solution for their client
• Interact directly with Sage investment professionals who perform the analysis and invest the assets
• Planning, portfolio construction, and ongoing management is collaborative and customized
Comprehensive Approach to Risk Management• Identify and quantify plan-related risks through asset/liability study
• Measure ability to meet benefit obligations and the impact of market changes to plan health and contributions
• Develop custom liability focused investment solution based on client’s unique goals and risk tolerance
Communication and Client Service• A unique client service, communication, and portfolio review program is developed for each client
• Reports are tailored to client needs and reflective of a custom, open-architecture approach
• All analysis and investment commentary is delivered in straight-forward language the client willunderstand
CASH BALANCE SOLUTIONS
Overview
9
CASH BALANCE SOLUTIONS
Overview
Asset/Liability Analysis
CustomStrategy
Ongoing Monitoring
- Work collaboratively with all key parties including plan actuary
- Produce comprehensive asset/liability diagnostic
- Develop customized scenario testing and analysis
- Unique portfolio design balancing accounting and economic concerns
- Determine appropriate assetallocation and de-risking glide path
- Construct tailored portfolio using individual bonds & equity ETFs
- Provide comprehensive quarterly reporting
- Monitor progress relative to custom liability benchmark
- Interact with Sage to resolve complex plan-related issues
Cash Balance Investing Approach• Evaluate key aspects of plan design including interest crediting rate (ICR), contribution policy, and investment
approach
• Conduct asset/liability study and scenario analysis to understand cash flows and key risks facing the plan
• Build custom investment strategy that incorporates asset allocation assumptions and time horizon
• Provide ongoing monitoring and reporting, including customized quarterly asset/liability reports
10
ICR TYPE ALLOWABLE ICRS ASSET MANAGEMENT CONSIDERATIONS
Fixed Rate
Fixed Rate Up To 6% ICR dictates the asset allocation
If ICR is not met, contributions beyond pay credits are required
ICR does not reflect the current market environment
Bond-Based andIRS Segment Rates
30-Year Constant Maturity Treasury
Shorter Treasuries or CPI + Applicable Spreads
Pension Protection Act funding segment rates (with or without adjustment for HATFA)
Optional annual floor of 4%
ICR dictates the asset allocation
If ICR is not met, contributions beyond pay credits are required
Challenging to invest: achieve a yield of a 30-year instrument with a 1-year time horizon
Investment-Based
Actual Return On Plan Assets
Return of Diversified Mutual Fund
Optional cumulative floor of 3%
Client risk tolerance dictates asset allocation and ICR
Low funded status and contribution volatility
Contributions beyond pay credits required only if asset returns are consistently negative (only for preservation of capital rule)
Interest Crediting Rate (ICR) Options: Fixed Rate, Bond-Based, or Investment-Based • 30-year Constant Maturity Treasury and safe harbor; other bond yields plus applicable spread
• Actual return on plan assets and fixed rates; regulations proposed in 2010 and finalized in 2014
• All ICRs include a “preservation of capital” rule, essentially, a cumulative 0% floor on all pay-based contributions
CASH BALANCE SOLUTIONS
Regulatory Landscape
This is not an exhaustive list of permitted crediting rates. Ceiling applies to all crediting rates. Various blends and “greater of” rates may be permitted.
11
CASH BALANCE SOLUTIONS
Key Considerations
Pure Cash Balance or Legacy DB
Interest Crediting Rate
Cash Flow Needs
Plan Design
Potential Investment Solutions
Accounting-BasedSimilar to LDI
Interest CreditingRate Matching
Total ReturnTraditional Approach
Regulations
Market Conditions
Economic Conditions
Additional Considerations
Client Type
Risk Tolerance
Contribution Policy
Plan Sponsor Objectives
12
CASH BALANCE SOLUTIONS
Analysis Process and Investment Solution
Client Type and Focus Drives Investment Solution• The funding liability (PPA funding target), the accounting liability (projected benefit obligation (PBO), and the
sum of participants’ hypothetical account balances are all different
• Different types of clients have different approaches to their cash balance plans
Accounting-Based ICR Matching Total Return
CORPORATE PLAN SPONSORSPARTNERSHIPS AND
CLOSELY HELD COMPANIES
TRADITIONAL APPROACH
UNDERFUNDED PLANS
PROJECTED BENEFIT OBLIGATION (PBO)1
Maintain (or increase) PBO fundedstatus, reduce balance sheet volatilityand pension expense
SUM OF HYPOTHETICAL ACCOUNT BALANCES
Ensure that market value of assets isequal to (or greater than) the sum ofhypothetical account balances
Account for all ICR floors, including thepreservation of capital
HIGH RISK-ADJUST RETURN
Achieve high risk-adjusted return,regardless of ICR
Shortfalls are made up throughcontributions by the plan sponsor
1 The PBO liability is determined by the plan’s Actuary by projecting account balances forward to retirement with future service credits and an assumedfixed ICR, pro-rating based on service to valuation date, and discounting back to present value using a high quality corporate bond curve
13
CONDUCT INITIAL PLAN EVALUATION
Identify plan structure, interest crediting rate, cash flows, and plan sponsor objectives
DETERMINE AND IMPLEMENT STRATEGY
Based on analysis, select an investment strategy and implement
PERFORM SCENARIO ANALYSIS
Analyze asset allocations, interest crediting rates, and liability changes in various market scenarios
CASH BALANCE INVESTMENT PROCESS
CASH BALANCE SOLUTIONS
Analysis Process and Investment Solution
ANNUALLY
Select asset allocation based on ICR, risk tolerance, capital market assumptions, etc.
THROUGHOUT THE YEAR
Adjust asset allocation based on progress toward achieving ICR, market outlook, etc.
14
100% FI
60% FI
100% FI
30% FI
88% FI
30% FI
69% FI
60% FI
18%
21%
24%
27%
30%
33%
35% 40% 45% 50% 55% 60%
Pro
bab
ility
of
Ne
gati
ve R
etu
rn
Probability of Achieving Desired ICR
Cash Balance Efficient Frontier (1-Year Horizon)
Next Year's ICR (3.10%) This Year's ICR (3.80%)
Interest Crediting Rate and Contribution Policy• Understand ICR, including any applicable floors
• Understand contribution policy relative to ICR and the time horizon for achieving ICR
• Ascertain baseline asset allocation and consider hedging options
CASH BALANCE SOLUTIONS
Conduct Initial Plan Evaluation
Sample plan; returns are based on sample near-term capital market assumptions.
15
0
5
10
15
20
25
2014 2019 2024 2029 2034 2039
Estimated Expected Benefit Payments (Current Account Balances)
Age 65 Age 66-69 Age 70+
Cash Flow Needs• Due to portability provisions, near-term cash flow security is of great importance to cash balance plan sponsors
• Understand expected, and potentially unexpected, plan outflows and inflows
• Incorporate sensitivity of liability cash flows to liability-related assumptions, such as participant group
CASH BALANCE SOLUTIONS
Conduct Initial Plan Evaluation
While expected cash flows are relatively moderate,the vested deferred and post-age-65 participantswith account balances represent potentiallysignificant cash flow drawdown risk
Sample plan, assuming accrued benefit only (no future pay- or interest-based credits). All amounts are in millions.
16
Deterministic and Stochastic Modeling: Expected Returns • Understand and quantify plan sponsor objectives and risk tolerances over a one-year and multi-year periods
• Consider several potential investment solutions that may be expected to achieve (or exceed) the ICR
• Develop probabilistic rate and market scenarios including the probability of achieving ICR over a 1-3 year period
CASH BALANCE SOLUTIONS
Perform Scenario Analysis
Sample plan, assuming 3.8% target ICR (30-year CMT as of November, 2013), no interest rate shifts, and sample capital market assumptions.
-10%
-5%
0%
5%
10%
15%
20%
100% 90% 80% 70% 60%
Fixed Income Allocation
1-Year ReturnAssuming No Interest Rate Shifts
-3%
-2%
-1%
0%
1%
2%
3%
No Change Rates Up 0.5% Rates Up 1.0%
1-Year Fixed Income ReturnsVarious Interest Rate Shifts
T-Bill Short Treasuries Short IG Moderate IG Int IG
17
Adjust Investment Strategy As Needed• Continuously measure success in terms of reaching ICR, applicable floors, etc.
• Review market scenarios for the next 3-6 months and adjust asset allocation or investment strategy as needed
• If ICR is reached, consider significantly reducing market exposure or even going to 100% cash
• Repeat the plan evaluation, scenario analysis, and asset allocation process annually as the ICR is reset
CASH BALANCE SOLUTIONS
Continuously Monitor Strategy
0.0%
1.0%
2.0%
3.0%
4.0%
3/31/2014 6/30/2014 9/30/2014 12/31/2014
Contribution to Return YTD
Fixed Income Equities Total Target Return
3.80%
1.61%
2.15%
0.0% 1.0% 2.0% 3.0% 4.0%
Annual Target
YTD Return(Total
Portfolio)
RequiredReturn
For Rest ofYear
Return Goal Progress YTD
18
CASH BALANCE SOLUTIONS
Research, Reporting, and Ongoing Commentary
19
DISCLOSURES
This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or saleof any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have beenobtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data,figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not representthat the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. The Information generatedby Sage regarding the likelihood of various investment outcomes is hypothetical in nature, does not reflect actual investment results and is not aguarantee of future results. Please note that the results generated by Sage may vary with each use and over time, and may vary depending onindividual client circumstances. Additional investments which may not have been considered in this analysis may have characteristics which aresimilar or superior to those which have been analyzed herein. All results included in this report constitute Sage’s opinions as of the date of this reportand are subject to change without notice due to various factors, such as market conditions. No part of this Material may be reproduced in any form,or referred to in any other publication, without our express written permission.
Any decision to act upon the Information described herein should be made after conducting such investigations as you deem necessary includingconsulting your own legal, actuarial, accounting and investment consultants in order to make an independent determination of the suitability andconsequences of the Information herein.
These materials contain statements and analyses that are “forward-looking statements.” These forward-looking statements are based upon certainassumptions. Actual events are difficult to predict and are beyond the preparer’s control. Actual events may differ materially from thoseassumed. All forward-looking statements included are based on information available on the date hereof and Sage, nor its respective affiliates, doesnot assume any duty to update any forward-looking statements. Accordingly, there can be no assurance that estimated returns, yields or projectionscan be realized, that forward-looking statements will materialize or that actual returns, yields or results will not be materially different than thosepresented. Market conditions will have a significant impact on the valuation of assets and the Actuarial Data. Annual, cumulative, and annualizedreturns are calculated assuming reinvestment of dividends and income plus capital appreciation. Past performance results are not necessarilyindicative of future performance.
The Information herein is confidential. Any reproduction of this Information, in whole or in part, is prohibited and you may not release thesematerials to any other person, except to your advisors and professionals who will be assisting you in evaluating the Information. Please read andunderstand this entire statement before utilizing the Information. The Information is illustrative and is not intended to predict actual results whichmay differ substantially from those reflected in the Information. You should understand the assumptions and evaluate whether they are appropriatefor your purposes. Performance results are based on mathematical models that use inputs to calculate results. As with all models, results may varysignificantly depending upon the value of the inputs given. You should consider whether the behavior of these analyses should be tested withassumptions different from those included in the Information. The Information contains data that is current as of its publication date and afterpublication may no longer be complete or current. The study does not account for taxation. Sage does not offer tax advice and urges you to consult atax adviser for specific advice about the tax implications of an investment portfolio. The study does not consider all investment opportunities availableto investors (other investments not considered may have characteristics similar or superior to those analyzed by the study).
20
Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. Allinvestments contain risk and may lose value. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk,political and economic risk, derivatives risk, income risk, and other investment company risk. As interest rates rise, bond prices fall. Credit risk refersto an issuer’s ability to make interest payments when due. Below investment grade or high yield debt securities are subject to liquidity risk andheightened credit risk. Foreign investments involve additional risks as noted above. Investing involves substantial risk and high volatility, includingpossible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. Our Tactical ETF strategy invests in exchange traded funds(ETFs). Investors should consider funds’ investment objectives, risks, charges, and expenses carefully before investing. The investment return andprincipal value of an investment will fluctuate, so that an investor’s shares, when redeemed, may be worth more or less than their original cost. ETFstrade like stocks and may trade for less than their net asset value. Different types of investments involve varying degrees of risk, and there can be noassurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Past performance is not a guarantee offuture results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and highnet worth individuals. For additional information on Sage and its investment management services, please view our web site atwww.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
DISCLOSURES
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