The NYC Deferred Compensation Plan – Where is the Money?

asset allocation pie chart

This paper is an informational piece that takes a look inside the NYC Deferred Compensation Plan to see where participants are investing.  No investment recommendations are given and this is not investment advice.  The City of New York Deferred Compensation Plan has grown to be an enormous plan.  As of December 31, 2014 (last annual report) the City of New York Deferred Compensation plan had over $15 billion in assets.  There were 168,731 participants in the plan and the annual deferral for 2014 was $773,269.  Average deferral per participant in the 457 and 401k was approximately $7,000 and $8,000, respectively.    In the past 10 years the number of total participants has grown about 35.7% (3.1% annually).

The 457 plan is by far the largest of the 4 plans with over $13 billion in assets.  Given that, we will focus on how the assets in the 457 are invested.  Approximately 83% of total assets have been allocated into the core funds by participants.  The remaining 17% is spread among the Target Date Funds (Pre Arranged Portfolios).  Here is a snapshot as reported:

Core Options: 2014
Stable Income Fund 30.6%
Bond Fund 2.0%
Equity Index 26.5%
GSRF 2.5%
Mid Cap 3.8%
International Fund 3.8%
Small Cap 13.9%
SDB 0.2%
Core Funds Sub Total 83.3%
Target Date Funds 16.7%
100%

2014 Asset Allocation Small


 

Note that:

  • The allocations to the Stable Income Fund and the Equity Index Fund are by far the largest
  • The allocations to the Target Date Portfolios are relatively small at 17% of total assets
  • The allocation to the SDB (Self-Directed Brokerage) is very small at less than 1%

The 17% of funds that are allocated to the Target Date Funds are allocated as follows:


2014 Target Date Funds


Note that:

  • Two Funds, 2015 and 2025, account for 48% of the total allocation to Target Date Funds
  • If we include the 2020 Fund with the 2015 and 2025 Funds, all three account for 59% of the total allocation to Target Date Funds

 

Our last pie chart “looks through” the Target Date Funds, i.e., we look at what the 17% invested in Target Date Funds is actually invested in (the core funds and TIPS) and then add it to the 83% Core Fund allocation in the first pie chart:


Look Through Allocation


Note that:

  • The Equity Index Fund and Stable Income Fund account for 65% of the plans total assets
  • There is more money invested in the Equity Index than the other 4 Equity options combined
  • There is over 5 times more money invested in the Stable Income Fund than in the other two fixed income options (Bond Fund, TIPS)

The plans asset allocation is as follows:

Total Equities:                          62%

  • Equity Index 32%
  • Mid Cap Index 5%
  • Small Cap Fund 15%
  • International Fund  7%
  • GSRF   3%

Total Fixed Income:                  38%

  • Stable Income Fund 33%
  • Bond Fund 4%
  • TIPS 1%

 

Key Takeaways:

  1. The Self-Directed Brokerage (SDB) option is under-utilized at less than 1% of total assets. The SDB has the potential to be a powerful diversifier to the core options of the plan.  There are major asset classes available through the SDB window that an investor could use to improve the risk/return profile of their portfolio.
  2. The allocation to Target Date Funds is growing very slowly at approximately 0.57% per year since the end of 2008. Plan participants may be dissatisfied with the Target Date Funds or not fully understand what they are.  The participants that do use the Target Date Funds are invested primarily in three funds, 2015/2020/2025.  It’s possible that these participants are planning on retiring/withdrawing in the 10 year period from 2015-2025.
  3. Retired participants don’t appear to be using Target Date Funds. Approximately 2.17% of plan assets are in portfolios that have been constructed for those already retired (Static, 2000, 2005, 2010)
  4. Participants have very little appetite for the Bond Fund but have an extreme allocation to the Stable Fund. Over the past 10 years the Bond Fund has a higher compound return than the stable fund.  It also has higher returns than the International Equity Fund and the Globally Responsible Fund with much less volatility.  However, the Bond Fund let investors down in 2008 when they needed diversification the most.  The Bond Fund returned a -3.4% while the Benchmark had a positive return of 5.2%, equating to underperformance of 8.6%.  A simple investment in a 7-10 year or 20 year government bond ETF would have returned over 18%, and over 33%, respectively.

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