The selection of funds usually focuses on returns rather than risk/return measures. Investments should be chosen for their effectiveness on a portfolio basis.

“The essence of investment management is the management of risk, not the management of returns,” Benjamin Graham, the American “father of value investing,” famously said. The Capital Accumulation Plan(CAP) Guidelines focus attention on the responsibilities and the risks that sponsors need to consider in providing CAPs. The guidelines offer guidance on the selection of service providers, investment funds, decision- making tools and information disclosure, including objectives, types of investment and the relative levels of expected risk and returns of each fund.

Sponsors ususally provide a spectrum of investment styles to satisfy the demographics and varied diversification needs of plan members. Style and return performance, however, are usually the key selection factors in choosing funds. The selection, performance and tracking processes focus on returns and peer group ranking rather than risk/return measures. The effectiveness of the combinations of investments available to the members in their asset mix decisions, however, is usually not addressed.

The underlying premise of portfolio management theory is that both risk and return—and understanding the correlation between investments—are important. Most CAP members are intuitively risk averse and want to reduce volatility; they need to invest in a range of securities that don’t move up and down together. Understanding the relationship between risk and returns, however, requires a higher level of education and understanding. How does a sponsor deal with this added communications requirement, given that many members often struggle with simple investment decisions?


The CAP environment in our company was complex—there were twenty different CAPs, multiple service providers and a large number of investment options. Governance, administration, communication and education were awkward and costly. As in many other plans, the emphasis in selecting investments was also on style, peer group ranking and returns, with risk being an afterthought.

To address these issues, three changes were made: several plans were moved to one service platform; a standardized suite of fifteen investment options was created; and three asset allocation funds were added. The asset allocation funds were unitized and based on the asset class mix recommended by the service provider. The funds used in the asset classes were also the “standard” investment options available to the members.

Each investment option was equally represented in its asset class in each of the asset allocation funds.

The asset allocation funds are now automatically rebalanced by the service provider quarterly; there are no costs for being in an asset allocation other than the fund manager’s fees the members would normally pay by holding one of the investments. The changes facing the members as a result of the introduction of the asset allocation funds have therefore been limited: the members are familiar with the recommended asset mixes, with standard investment options and there has been no change in manager fees.

One of the key advantages in introducing asset allocation funds is the opportunity it presents to manage and select CAP investment options in a meaningful way with respect to both risk and return. It also opens the door for developing risk budgets and performance parameters for each manager and asset allocation fund. Our defined contribution and defined benefit plans will be managed using a similar process.

The advantages of the approach are significant from a governance perspective. The number of service providers, managers and investment options has been reduced and manager and service provider fees are negotiated on an aggregated basis. The communication and education processes have also been simplified. The ability to monitor and evaluate the investment options has improved; it’s simpler, more manageable and addresses both risk and return.

From the members’ perspective, a combination of high-quality investment options that make sense from a risk and return perspective are available, while the asset allocation funds simplify the process and minimize the angst of many members regarding investment decisions. Reward indeed.

Gerry Wahl is the assistant treasurer for Teck Cominco Ltd. in Vancouver.

For a PDF version of this article, click here.

© Copyright 2005 Rogers Publishing Ltd. This article first appeared in the April 2005 edition of BENEFITS CANADA magazine.


Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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