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Goldman offers DC plans true alternative with novel fund

Taking a step toward portfolio diversification

Oct 15, 2012 @ 1:46 pm

By Jeff Benjamin

In the latest effort to address some of the asset allocation challenges and missteps seen on most employer-sponsored defined contribution plans, Goldman Sachs Asset Management appears to be headed in the right direction.

While the clunky name might not make it clear, the new Goldman Sachs Retirement Portfolio Completion Fund Ticker:(GRPOX) could go a long way toward moving retirement plans away from lopsided and low-performing allocations in domestic equity.

Launched Oct. 1, the fund is being marketed as an alternative strategy specifically for defined contribution plans, where investors tend to have few non-traditional options.

But even when there are some non-traditional options, investors tend to cling to what is most familiar.

For example, according to Callan Associates, emerging market equities represent just 0.3% of all defined contribution assets, and real estate investment trusts and Treasury-inflation-protected securities combined represent just 0.6% of all DC assets.

“Traditionally, there has not been a lot of alternative options in DC plans because of the challenges of explaining them to retail clients and structuring them in a portfolio,” said Ryan Tagal, vice president of product development at Envestnet.

The Goldman Sachs fund takes a step toward addressing some of those challenges with a strategy that doesn't necessarily trumpet the alternatives component, which can be off-putting to some plan sponsors and investors. The fund, which is quantitatively-managed, employs a simplified risk-parity model that is designed to spread risk evenly across seven assets classes.

The weightings, which will be rebalanced every six months, will include 20% weightings in TIPS, emerging market credit, and absolute return hedge fund replication. Beyond that there is 18% in high-yield credit, 10% in commodities, and 6% each in global REITs and emerging market equity.

All underlying allocations are to index-based investments, making it a passive strategy, which should help ease the nerves of retirement plan sponsors. The use of indexes also helps keep the fees at 58 basis points for most retirement plan participants.

If the fund is purchased directly, outside of a retirement account, the fees on the retail-class shares are 98 basis points. “We put it all in one portfolio to reduce the volatility of the standalone asset classes,” said Fred Conley, Goldman's head of institutional defined contribution sales.

“Market volatility and low interest rates make it challenging for DC participants to establish a risk-managed investment portfolio,” said Phil Callahan, managing director in GSAM's retirement services group.

Mr. Callahan explained that the fund was designed after considering where most retirement plan assets are currently concentrated, which is domestic equity, other developed-markets equity and fixed income.

“We wanted to offer new sources of growth and we wanted something with low correlation to where a lot of DC plan assets are concentrated,” he said.


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