Adjustments to LifeStage Rebalancing Rules
February 27, 2009—Last November, the General Board temporarily suspended rebalancing the accounts of participants enrolled in the LifeStage Investment Management Service (LifeStage). In a letter to participants, we stated that this action was a prudent response to unprecedented conditions in the U.S. and world financial markets. We also indicated that we would evaluate and test several approaches with the intention of improving the rebalancing feature to allow for more flexibility in responding to changing market conditions in the future.
Financial Market Turmoil
The U.S. and world financial markets have been experiencing an unprecedented level of turmoil since August 2007, with market conditions worsening last September. Virtually all segments of the U.S. and world markets were impacted, including what previously had been considered “safe” fixed income investments.
Dynamic financial markets are characterized by many willing buyers and sellers, each with different investment needs and risk tolerances. A sea change occurred late last year, however, when investors’ collective appetite for risk disappeared. As a result, markets began to fail in facilitating the orderly buying and selling of risk-based assets. Suddenly, investors, wanting to avoid any risk, began shifting their holdings to U.S Treasury securities, which are viewed globally as the safest “risk free” investment.
Declining Markets and LifeStage
The changing market dynamic directly affected the General Board’s management of LifeStage. With the significant decline in U.S. and world stock (equity) markets, our analysis revealed that we would need to sell substantial amounts of fixed income investments in order to rebalance participant LifeStage-managed accounts to achieve target stock allocations. Since a significant portion of the fixed income holdings are bonds, other than U.S. Treasury securities, a forced liquidation would have been extremely difficult and costly to participants. We determined that selling significant holdings in the three fixed income funds (Domestic Bond, Inflation Protection, and Stable Value) would not have been a prudent course of action.
LifeStage Rebalancing Changes
We evaluated and tested a number of alternatives over the past three months to enable a more orderly rebalancing of investments. As a result, we have identified and adopted three changes to the LifeStage rebalancing rules, and resumed rebalancing participants’ LifeStage managed accounts on February 27, 2009.
The three rebalancing rule changes are:
We have increased the minimum difference between a participant’s target stock allocation and actual stock allocation that causes an account rebalance to occur. LifeStage examines each participant’s unique data to determine the best allocation to stocks (also known as the target allocation). The goal of rebalancing is to maintain a participant’s actual stock exposure close to the target stock exposure. The slight increase in the difference needed to trigger a rebalance is expected to lengthen the time between rebalancing transactions.
We have established a limit on the amount of a participant’s account that can be rebalanced at any one time. Previously, if the difference between a participant’s target stock allocation and actual stock allocation was greater than the minimum difference, we would automatically buy or sell shares in the two stock funds (Domestic Stock and International Stock) to return the stock exposure to the target allocation. We will limit the total value of units purchased or sold at any one time to 3% of a participant’s total account balance, effective with the February rebalance.
We have suspended any rebalancing activity that would result in the purchase of units in the two stock funds for any Ministerial Pension Plan (MPP) participant whose actual age is within five years of the intended retirement age, as specified on a participant’s Personal Investment Profile. MPP participants are required to convert at least 65% of their accumulated MPP balance to a monthly benefit payment (annuity). Suspending the purchase of additional units in the two stock funds will further minimize investment risk for MPP participants approaching retirement and is consistent with our strategy for managing MPP balances.
LifeStage is designed to reduce the investment risk for these balances as a participant approaches retirement. LifeStage assumes that a participant will begin receiving monthly annuity payments at age 65 unless a participant changes the age he or she expects to begin receiving benefits. A participant can make such a change by accessing his or her Personal Investment Profile through Benefits Access or by contacting the General Board at 1-800-851-2201.
Impact of Rebalancing
The impact of these three changes will significantly minimize costs associated with rebalancing participant accounts by reducing the quantity of fixed income securities that must be sold to facilitate fund purchase and sale activity. The General Board believes that these actions are prudent and in the best interests of participants, given the unexpected and unique changes that have occurred in the financial markets over the past several months.
The General Board continues to believe that LifeStage is a prudent and appropriate service for managing the retirement assets of participants who choose not to actively manage their own accounts. If you have elected LifeStage to manage your balances in retirement plans (other than the MPP), you may choose to opt out of LifeStage and self-direct your account balance(s) at any time. To do so, access your LifeStage settings through Benefits Access.
Ernst & Young Financial Planning Services
Remember, Ernst & Young Financial Planning Services can assist you in managing your account(s). This valuable resource is available at no cost to:
active participants and surviving spouses with an account balance, and
retired and terminated participants with an account balance of at least $10,000.
To take advantage of this program, call Ernst & Young at 1-800-360-2539 between 9:00 a.m. and 8:00 p.m., Eastern time, Monday through Friday (excluding holidays).