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Exclusive Interview: Dale Neibert Explains 21st Century 401k Plan Design

Exclusive Interview: Dale Neibert Explains 21st Century 401k Plan Design
July 18
00:03 2017

For many years, Dale M. Neibert was part of a 2-man team managing a $2.8 billion corporate 401k for the H-E-B Brand Savings & Retirement plan. He invested on behalf of their 25k participants that chose to allocate 90% of their assets (over the other Fund choices) to the set of custom target risk funds that he co-managed which allocated directly to traditional & alternative asset class investment strategies. In addition to co-managing the portfolio, Dale conducted manager research, provided idea generation and monitored all of the portfolio positions including equities, fixed income, hedge funds, private equity, venture capital, MLP’s, priv. real estate and oil & gas. During his tenure at H-E-B, the plan generated top percentile performance rankings consistently and achieved first percentile rankings for long-term risk adjusted net performance according to Callan & Associates database of retirement plans (10 yr. ann. net performance ranged from 8.5% to +9.25% depending on the glidepath). 

Today, Dale serves Vice President & Portfolio Manager: Financial Solutions, Inc. where he brings more than +26 years of institutional investment management experience within traditional & alternative investment advisory firms. He graduated from the University of Oregon and attended the London School of Economics.  Dale resides in Austin, Texas with his family and enjoys traveling, snow skiing, scuba diving and volunteering his time with charities.

FN: Dale, our readers always enjoy hearing “how they got here from there.” Tell us a little bit about your background, including how you ended up at HEB Grocery and what you’re doing now?
Neibert: My background extends over 26 years within institutional investment management in research & portfolio management career over 26 years with experience serving in different roles in research & portfolio management within traditional & alternative investment advisory firms. I was introduced to the acting CFO of H-E-B who expressed a need for my background & asked that I meet with Tom Witt, the current Managing Director & CIO of what was then the $2.3 Billion H-E-B Brand Savings & Retirement Plan. Initially, I thought the interview process would be short. As an investment professional, I didn’t have much interest in administrating a 401k plan as I had no idea of the composition as not much information was available. Boy was I wrong, resembling the cliché when one makes an assumption. I learned that the HEB BSRP was a special and very unique Defined Contribution plan. The retirement plan was set up to employ/invest in “illiquid” assets utilizing the philosophy of a Defined Benefit Plan and/or Yale Endowment model with daily pricing.

Immediately, I instantly felt an intellectual kinship with Tom, challenging my thought process as he had a similar portfolio management background. He expressed that he needed my well-rounded research skills and industry knowledge which included alternative investments. Tom Witt wasn’t only respected by professional peers for his intellect or his accomplishments academically (Harvard MBA & Chartered Financial Analyst designation) but he had ran the pension plan for multiple Fortune 500 Corporations as well as a stint directly managing a Fortune 100 family’s assets. Tom Witt would go on to not only eventually become a colleague, but more importantly a lifelong personal friend and influential mentor professionally.

I became familiar with my current firm Financial Solutions, Inc. aka FSI (SEC-Registered Investment Adviser $1.5 Bil. AUM) & CIO Gary Gould while conducting research to find an options overlay vehicle allowing us to hedge out our equity exposure/risk on a zero-cost basis that could be funded notionally (i.e. we didn’t have to liquidate our position). Known as ‘TRC’, FSI’s Tactical Risk Control strategy offered an actively-managed option overlay to H-E-B’s existing portfolio of equity securities to protect against a sudden and dramatic drop in the stock market. I was particularly impressed by the TRC’s ability to provide alpha over a market cycle by capturing 80% on underlying securities in up markets and avoiding 30% of losses in negative periods utilizing artificial intelligence as a crystal ball to help remove biases & emotions that influence human beings when they pick the direction of the market. The FSI TRC has an industry high accuracy percentage rate well into the 90’s and was a big reason we hired FSI to manage what became one of the largest trades in the portfolio. While discussing the composition of the H-E-B portfolio, Gary realized that H-E-B was a 401k DC plan, and not a DB pension plan like it appeared at first glance based on the diversity of the assets we invested in that is much more synonymous with a pension plan then a 401k. Gary excitedly shared with us how he had begun the process of developing a Target Date Fund strategy series designed specifically for the 401k market that employed the same philosophy of an expanded allocation portfolio. Tom Witt and I had been throwing the same idea around for a couple of years of to develop a similar strategy based on the same principals, but we had pulled the trigger like FSI. I knew that Defined Contribution plans were becoming significant asset pools and were quickly taking over as the dominant retirement vehicle for the majority of workers in the United States. I also knew that 401k and similar DC plans lacked diversity and were overloaded with equity fund investment options in addition to being limited to stocks, bonds and cash. What’s more daunting was that the most popular investment option – Target Date Funds – were allocating on average more than 80% of their portfolio to equities with many of the top Target Date providers Funds’ reflecting R-Squared figures averaging over 0.93% meaning that their returns correlated more than 90% to the returns of a stock market index like the S&P 500.

FN: Some might not be familiar with H-E-B Grocery. Give us the 4-1-1 on it and the particulars of its 401k plan (size, number of employees, etc…). What was your role within the 401k plan?
Neibert: H-E-B aka H-E-B Grocery Stores or HE Butt Grocery is a privately owned supermarket chain based in San Antonio, Texas that was first opened 111 years ago in 1905 and was one of the first grocers to bring customers into the store (versus delivering to them).  H-E-B is owned by the Butt family and run by CEO and Billionaire Charles Butt. It is the largest privately owned corporation in Texas and the 13th largest in the United States according to Forbes in 2016 with over $81 billion in estimated revenues and over ~ 90,000 employees. H-E-B is distinguished by its ties to the community and state as one of Texas most philanthropic organizations based on their charitable activities donating 5% of all pre-tax earnings. The HE Butt Family Foundation operates a 1900 acre ranch offering families and children of Faith based and non-profit groups a retreat to camp in the Texas Hill Country. They have over +400 stores throughout Texas and N.E. Mexico. H-E-B also owns & operates Central Market, an upscale organic and fine foods retailer (competes with Whole Foods) specializing in hard to find gourmet foods etc. as well as a host of other subsidiary brands including Mi Tienda (Hispanic) and Joe V’s Smart Shop (modeled after discount German grocer Aldi that owns Trader Joes). H-E-B is one of the largest retail petroleum vendors in Texas distinguished by superior customer service with competitive pricing and some of the highest quality private-label brands available often choosing to manufacture and produce their own brand products. In business, H-E-B was known for being a shrewd investor in real estate with a specific model of multiple buildable plots for each planned store so that if competition decided to build close by they could easily move to another location. It also repeated a consistent model not unlike a modern-day guild where each store was built with a mall like set up so that retail space could be leased out to vendors consistently such as liquor stores, pool supply stores, dry cleaners etc. Further, after the announcement of a store being built each plot became more valuable as other investors desired to have their retail outlets close by to where people were shopping at H-E-B. When combined with H-E-B’s grocery, pharmacy and petroleum businesses customers consistently knew they could go have one stop to shop and take care of basic needs. The convenience factor helped their retailers to thrive and consumers had one place to go to budget the majority of their paycheck making a retail grocery store into a real estate magnate as 90% of their store properties are owned not leased.

The internal team that I was a part of provided ongoing due diligence research and investment efforts by allocating primarily to “best in class” strategies of investment management firms. This includes a mix of investments in U.S. and international stocks, bonds, alternative investments and cash. At H-E-B, we defined alternative investments as Hedge Funds, Private Equity, Private Real Estate, Oil & Gas wells, Commodity Trading Advisor Funds, multiple MLP strategies, and other singular alternative strategies such as Private Debt (Bank Loans, High Yield and Direct Lending), Container shipping and closed-end funds in Trade Finance. The LifeStage Funds required that we keep minimum allocations to equities (i.e., we could not liquidate or further reduce to minimize risk) so we chose to employ an options overlay to serve as an insurance policy to protect the portfolio in the event of a sudden and dramatic drawdown in the stock market reducing the impact of losses due to equity exposure by 40% to 60%. At one time, the retirement plan held deeded real estate positions that their grocery stores were built on that were hold overs from an earlier version of their retirement plan which were eventually liquidated

FN: One of the things that’s impressive about the H-E-B Grocery 401k plan is the way it incorporates leading edge behavioral finance research into its plan design. Before we get into those precise techniques, let’s review the history of the plan’s evolution, starting with the more traditional features. When did it start? Initially, what did it look like (e.g., did it have only three managed options to satisfy 404(c) requirements)? When did it begin to incorporate mutual funds as opposed to traditional managed options? Did it ever adopt a “style box” approach to menu options (and, if so, when did it do this?)
Neibert: A little more than 20 years ago in 1997, Tom Witt began the process of revamping the plan adding the 3 LifeStage Funds to lineup. He had managed the pension funds of LTV Corp and Vought Aircraft Co., both multi-billion dollar plans with superb risk adjusted performance. H-E-B had asked Tom to establish an improved infrastructure of the plan as the plan was becoming large enough where they felt the hiring of a Chief Investment Officer talent would make the changes necessary to oversee complex developments to carry the plan into the 21st century. Initially, the Funds did not allocate to alternative assets as most participants would not qualify under the accredited investor rule. To be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of their home and have income at least $200,000 each year for the last two years ($300,000 if married) with the expectation to continue making that amount. Working with ERISA Counsel Alan Robin of Vinson Elkins, a No-Action letter was drafted, submitted and subsequently approved by the SEC on behalf of H-E-B Grocery and the H-E-B Brand Savings & Retirement Plan. The letter advised that a participant-directed defined contribution plan may be a qualified purchaser as long as the plan has more than $25 million in assets, that the participants are only allowed to invest in generic investment options and that a plan fiduciary has discretionary authority over all investment related decisions and that no more than 50% of plan assets be invested in funds normally associated with alternative asset class strategies (section 3(c)(7) of the Investment Company Act). Now we had the legal authority to invest on behalf of participants in alternative asset classes. Imagine a portfolio similar to what one would find in a DB pension plan, Yale endowment, or a fund of funds with mandates primarily given to separately managed account structures or limited partnerships and in some cases institutional class ’40 act funds. Structured as a balanced portfolio that represents a version of Modern Portfolio Theory (“MPT”) in a defined contribution plan at work. Developed by Harry Markowitz and published under the title “Portfolio Selection” in the 1952 Journal of Finance, MPT suggests that it is not enough for an investor to look at the expected risk and return of one particular investment. By investing in more than one asset class, an investor can reap the benefits of diversification – chief among them, a reduction in the riskiness of the portfolio. This methodology quantifies the benefits of diversification and could be seen as a sophisticated approach to not putting all of your eggs in one basket.

H-E-B Grocery offers their employees a retirement plan with a generous match contributing $1.60 for every dollar of a participant’s deferral, up to 2.5% of compensation. H-E-B as an organization cares greatly for its employees and is very maternal by allowing employees to remain in the retirement plan for life whether employed at HEB or not – they are not required to roll out of the plan. Furthermore, HEB employs their own call center for both Health & Retirement related inquiries (most companies contract this out).

Known as the H-E-B Brand Savings & Retirement Plan or H-E-B Savings & Retirement Plan, the Plan operates as a safe harbor 401k plan. As of 2016, the Plan had over $2.2 billion in assets with over sixty thousand participants. Participants have 7 investment options with an after-tax Roth option. There are 4 core index investment options offered (U.S Stock: S&P 500, U.S. Bond: Barclay Aggregate, Global Stock: 50/50 S&P 500/EAFE and a Money Market: 90 Day Treasury with an after-tax Roth option), but the plan is distinguished by their 3 custom Target-Risk Funds aka “H-E-B LifeStage Funds.”  Much like target date funds, target risk funds offer a single, balanced solution for you to diversify their investments and tailor them specifically to your desired risk level. Unlike a target date fund, if you invest in a target risk fund, you only have to select the right risk level and not worry about the additional complexities of glide paths or the significant variations between funds with the same target dates. Held in a Collective Investment Trust, the H-E-B LifeStage Funds were designed to complement various life situations and have consistently held over 80% of plan assets for many years with the H-E-B General Fund or Moderate Risk being the most popular among participants.

H-E-B’s LifeStage funds are for all purposes Enhanced Balanced Portfolios that are similar to Target Risk Funds (TRF) in that they offer a single, balanced solution for one to diversify their retirement account investments and tailor it specifically to their desired risk level. The LifeStage Funds simplified the investment process more than a Target Date Fund (TDF) structure as the participant could make a decision if they understood what their stomach for risk was without worrying about the additional complexities of glide paths or the significant variations that can exist between funds with the same target dates etc. Most TRF’s are passively managed and do not offer allocations to alternative asset classes whereas H-E-B’s LifeStage Funds were actively managed with a mix of both traditional (stocks, bonds, cash) and alternative (Hedge Funds, Private Equity, Private Real Estate, Oil & Gas etc.) asset classes. Like a TRF the H-E-B LifeStage Funds nomenclature told a participant that the Aggressive Balanced Fund’s investments had higher allocations to stocks and other alpha generating vehicles with the remaining in bonds etc. whereas the Conservative Balanced would have the opposite allocations with majority holdings in fixed income and other similar income producing, preservation oriented vehicles with limited exposure to equities. H-E-B’s LifeStage Funds also assume that most participants will probably have more than one investment account as part of their portfolio unlike Target Date Funds and as such, offer flexibility based on each participant’s individual scenario allowing a mix of active/passive and different exposures. For example, an older employee will have the majority of their assets in fixed income within the U.S. Bond Fund and could add a small portion to the Aggressive Balanced Fund unlike a TDF that has a glide path that becomes more conservative as they approach their literal ‘target date’ of retirement. Another factor behind the design of the LifeStage Funds was that a participant’s risk tolerance can change as their retirement becomes closer. If they don’t understand the philosophy behind a TDF’s approach where one Target Date may have a higher percentage allocated to stocks etc. than another with the same Target of 2030 making it a more aggressive so it adds to the complexity that they would need to understand in order make sure that they are on the right track for their individual situation. Simplification of this process increases the likelihood that participants will move forward as taking all of those questions into account can be overwhelming for those that want to save but are paralyzed by the amount of details and finding a TDF that embraces all of those factors would be challenging. We didn’t want participants bogged down with having to understand those variabilities and complexities. I think Target Date Funds are a good solution for some, but it should be noted that they do require participants to be more hands on than one would think initially which could mean that a participant could end up investing more aggressively or conservatively for their specific risk tolerance.

Each participant considering the LifeStage Funds is asked to consider an investment mix that is based on their age, risk tolerance and overall retirement goals specific to their personal investment profile. Participants were educated to consider a number of factors, but first they needed to decide whether they desired to self-manage their retirement account via multiple index funds in the core options offered or if they desired to have a professional in the driver’s seat via the turn-key LifeStage Funds. If they chose the latter they needed to begin with the following: 1) What is your stomach for risk?  2) What is your readiness to make investment decisions?  3) What amount of time & effort are you willing to spend managing your retirement account?

I’d never assign a “style box” to our portfolio or LifeStage Funds as we didn’t want to be limited by any categories or labels. We kept things very simple at HEB from the perspective of a style box but if one could say that it was less relevant considering that a style box is more appropriately geared toward a traditional 60/40 balanced portfolio of Stocks and Bonds. If we were to assign a Morningstar style box I would place the LifeStage portfolio only in a category of Mid Value on the upper end of Mid Cap as the domestic equity exposure could be broken out into a 60/10/30 ratio of Large/Mid/Small capitalization with a bias toward value strategies but we still employed core and growth as conditions warranted. In general, one could say that we looked at the world through a pair of contrarian eyes. On the fixed side, an example of this would be our domestic fixed income exposure with Hoisington Investment Management that utilizes US Treasuries with durations of 20 years or longer (primarily 30-year treasuries) which were adjusted based on economic conditions. We considered Van Hoisington and his Chief Economist Dr. Lacy Hunt to be the best one-two punch in the country with regard to economic analysis and are considered by many in the investment and academic community to be superb economists. Hoisington’s portfolio provided our portfolio with long term uncorrelated equity like performance that outperformed the stock market long term with 10-year annualized net performance that has continued to deliver in excess of 8.5% by the end of 2016 (versus sub 7% with the S&P 500 for the same timeframe).

In the plan description, this can show one the range of the asset allocation guideline for all seven investment fund choices:

Source: 2015 DOL Form 5500

All 3 LifeStage Funds were managed internally and held in Collective Investment Trust striking a daily NAV based on their specific asset allocation breakdown based on the above guideline limits. Any changes, trades, and pricing were communicated daily between our team and a small group we worked closely with at our custodial bank to approximate a daily price of the illiquid holdings in order to fairly value any transactions. The bank verified & executed any portfolio transactions and then communicated the resulting pricing with the recordkeeper daily who would then break it down at a participant transactional level. As a general rule of thumb, the portfolio invested at any given time between 20-30% of the portfolio in illiquid assets which we strived to keep under 30% so that we could utilize liquid assets to manage any increases in flows should a “run on the bank” scenario occur. Daily pricing was adjusted based on the last known monthly or quarterly valuation for participant cash flows. The daily valuation was utilized as a basis for participant loans or withdrawals of participants that had redeemed their positions at quarter end. However, a conservative, maternal view was taken that participants were more likely to attempt to time the market or make inappropriate decisions about their retirement account based on emotional responses etc. which meant that even though daily pricing was utilized participants were limited to quarterly trades which were based on the “as of” pricing of when a trade was entered. The plan has not been moved to a daily trading environment for that and other reasons which include “gaming” the LifeStage Funds even though that would be specifically challenging considering the diversity of positions.

We had a unique way that we looked at the world as we didn’t always separate what some would consider “alternatives” into their own asset class category from other asset classes, especially if they did not utilize any leverage and were not considered risky investments. What should be noted is that our use of alternatives in most cases was not simply to add alpha, but to utilize their diversification and ability to lower the portfolio’s correlation to the stock market. Many do not realize that many alternative investments are actually less risky than the most popular assets offered to 401k participants by way of equities. For example, hedge funds are considered a much riskier asset class then say, an investment in the S&P 500. However, the statistics do not match this common belief as of recent simply because stocks have outperformed hedge funds on average during the last 8 years of the second longest record setting bull market the U.S. has experienced since the Great Depression. If one studies the annualized performance & standard deviation (measurement of how much an investment’s returns can vary from its average return representing a measure of volatility and in turn, risk) of HFR Indices (HFRX) over multiple economic cycles a different picture emerges. By examining HFR indices and popular traditional indexes (S&P 500, Barclays Aggregate etc.) on a Risk vs. Return matrix chart over a 10-year period the annualized performance results will have many people reevaluating their original assumptions. Hedge Funds show that they not only provide bond like risk in line with the Barclay’s Aggregate, but they match or outperform stocks (S&P 500) consistently over a long period that represents both periods of expansion (growth) and contraction (in this case as of 12/31/16, 10 years).

Another characteristic unique to a 401k plan was the fact that we employed an offshore vehicle for mainly private equity investments (some hedge funds) that could only be accessed through an offshore entity. Offshore investing refers to a wide range of investment opportunities that exist outside of the United States. It is commonly thought that such strategies strengthen one’s portfolio due to regulatory and tax reduction. For a retirement plan such as H-E-B’s 401k, the motivation behind working with investments being held offshore are in order to avoid ERISA’s “plan assets” requirement that deem the managers as plan fiduciaries (section 4975) meaning that employee benefit plans governed by ERISA cannot exceed 25% of any class of equity interests in their strategy’s limited partnerships assets. Establishing an offshore entity allowed the HEB 401(k) to invest in certain alternative strategies that normally would be closed to any new ERISA plan investments due to other plans that invested earlier. It also provided benefits with U.S. Tax withholdings that many do not realize exist. Since offshore funds operate on the assumption that the assets they accept are not subject to taxes as pension funds, endowments, foundations, and other pools of capital whose assets are managed by a group of fiduciaries are the primary investors. Under U.S. tax law, a tax-exempt organization like H-E-B’s 401(k) (i.e. an ERISA-type retirement plan) that adopts an investment strategy where money is borrowed (which commonly occurs in many alternative investments) is liable for taxes on “unrelated business taxable income” commonly known as UBTI. This creates taxable issues for the plan as well as political issues, because why would a tax-exempt fund have to pay any income tax? Pass-through entities such as limited partnerships (L.P’s) and limited liability companies (LLC’s) comprise the vast majority of U.S. Private Equity and Hedge Funds so the UBTI activity passes through the entity to the tax-exempt investor which triggers a tax issue that can be avoided based on this acceptable structure. Taxable investors know that they have to pay taxes already and are not bothered by this anyway. On the other hand, it is a cause for unease for tax-exempt investors so by having the tax-exempt entity (i.e. H-E-B’s 401(k)) invest in a non-U.S. (offshore) corporate entity (which is non-pass through), the UBTI tax can be avoided all together because the UBTI is effectively confined or trapped inside the corporation and no longer causes trouble for the U.S. tax-exempt investor. As a result, a tax-exempt investor like the H-E-B Brand Savings & Retirement Plan Trust was willing to invest offshore as it allowed the freedom to invest in these asset classes without creating multiple unforeseen issues down the road.

Employee benefit plans have historically been one of the largest sources of capital for private equity funds and more recently hedge funds that focus on alternative fixed income securities/vehicles. As one can imagine some of the more successful hedge funds have many employee benefit plans that desire to invest with them and only a limited amount of space due to the 25% restriction as well as imposing limitations on the limited partnerships with the type of incentives fees and other performance-based compensation that may be paid to them if they are categorized as plan fiduciaries. The problem is that the statutory framework imposed by ERISA is not only quite strict, but for all practical purposes is incompatible with the business model of most private equity and hedge funds. In particular, ERISA imposes a duty on plan fiduciaries to discharge their responsibilities solely in the interests of the plan participants and “to act with the care, skill, prudence and diligence that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character.” Although fund sponsors already have fiduciary duties to their limited partners generally, the duty imposed on plan fiduciaries under ERISA is much more strict, making it particularly difficult to comply with insofar as these limited partnerships can frequently pursue what they would deem as high-risk investment strategies that are making decisions on the basis of a variety of objective and subjective factors. Other factors in how the assets are valued for tax reasons are incentives. Both the employee benefit plan and the Funds can avoid regulatory limitations by requiring assets to be invested from an offshore entity.

To keep ourselves informed as fiduciaries, we would measure and benchmark our net of fee risk adjusted results in an organized, credible universe of other retirement plan peers provided by Callan & Associates. On a long-term basis (i.e. 10 years annualized) our risk-adjusted net of fee returns were consistently in the 90th percentile or higher regularly exceeding 8% or higher. Keep in mind, while the plan was conscientious of fees the overall expense ratios of our Funds were demonstrably higher then what is typically found in most 401k plans that are focused on low expense ratios. According to the DCIIA (Defined Contribution Institutional Investment Assoc.), the all-in fees for alternatives is generally higher than standard public equity or fixed income investments; however, superior net-of-fee performance or lower volatility may offset the higher fees. H-E-B’s LifeStage Funds have substantially higher expense ratios then any traditional balanced, Target Risk or Target Date Funds. Studies show portfolios investing in with a defined benefit pension plan style employing an expanded allocation like the LifeStage Funds are in line with the expenses of define benefit plans and Australian SuperFunds of similar sizes which have been investing with the use of alternatives for over 4 decades. The net fees performance of H-E-B’s LifeStage Funds, particularly when adjusted for risk, justified the higher expenses particularly when compared to that of other defined contribution retirement plans and other balanced and Target Funds. Penbridge Advisors conducted a survey in 2015 of 22 Plan Sponsors representing $52 billion in assets that on average invested 30% of their assets in alternatives found that the largest plan expenses were attributed to investment management. The higher investment expenses driving up their expense ratios were largely due to the higher allocation to alternatives and their higher use of active management.

The methodology employed in the LifeStage Funds served as an excellent diversifier for participants at a level unlike any other 401k plans in the U.S. that continue to be dominated by their lack of diversity and dependence on exposure to equities. This was particularly apparent in the excellent relative performance during the financial crisis of 2008 where the stock market was down close to 38% and Target Date Funds averaged losses that exceeded this with some loosing well over 40% because of the double whammy of the trailing losses in international and fixed income positions. Our primary focus of the portfolio was on risk-adjusted performance and the reduction of overall volatility to the portfolio that comprised the LifeStage Funds. Simply put, a risk-adjusted return is of how much return your investment has made relative to the amount of risk the investment has taken over a given period of time. If two or more investments have the same return over a given time period, the one that has the lowest risk will have the better risk-adjusted return. In laymen’s terms, “bang for your buck.” We often used Sharpe ratio (measure of an investment’s excess return, above the risk-free rate, per unit of standard deviation) as a proxy.

FN: Now let’s turn to the behavioral finance twist that HEB Grocery eventually implemented into its 401k. When was the earliest you recall there being interest in these new developments and what initially triggered that interest?
Neibert: For most participants (or human beings), their decisions about how and when to invest is rarely if ever exclusive to rational thought. Every day the average U.S. worker is inundated with financial models and economic outlooks etc. that do not consider that humans will make decisions in a wholly competent and unemotional manner. The fact is as humans we are emotional beings that can act illogically and impulsively and often times do not gather facts that lead to an informed decision. It was a determining factor weighing into the decision to keep our participant trades limited to quarterly even after years of having upgraded the plan to daily pricing of the Funds. While not popular with those that thought they knew better or felt entitled because it was “their money,” we knew that we were acting in the best interest of plan participants by protecting those participants from themselves. As fiduciaries with discretionary oversight we had the ability to make adjustments to the portfolio as needed on a daily let alone hourly basis. In addition to our team employing protective risk controls to the portfolio and protecting the interests of the participants, other qualified investment professionals had monitoring access over the overall portfolio that had a fiduciary interest to maintain oversight and were encouraged to share feedback to ensure that proper fiduciary responsibility was being correctly executed by us. Participants appeared to agree reflected by their choice to allocate the majority of their 401k savings to the LifeStage Funds we actively managed. Besides, many of our employees knew about the studies showing that individual investors were more likely to buy when prices are high in the market and sell when prices are low. We reiterated this message in newsletters, videos, 401k education intranet blogs, employee personal finance days and 401k participant education meetings. I can say with emphasis that H-E-B as an organization truly cares about the best interest of their employees and their company retirement plan’s reputation mirrored this. Participants were rewarded by the fact that the LifeStage Funds provided them with exceptional long-term annualized risk adjusted net of fees performance consistently year over year for more than 2 decades. This was confirmed by the top percentile rankings assigned to our LifeStage Funds in an universe of other U.S. retirement plan peers regularly submitted and monitored by the plan’s investment consultant on a quarterly basis.

Like most Plan Sponsors, the question of how to improve on the “opt-in” model (i.e., “How much money do you want to contribute and how do you want to invest/allocate it?”) was a part of the plan evolution during Tom Witt’s oversight as managing director. Improving employee participation rates was tantamount and he knew early on that giving participants the “keys to kingdom” with too many investment options would lead to poor decision making of taking too/too little risk over their working life or becoming paralyzed by too many choices and remaining in a cash fund. Characteristics like auto enrollment were considered and developed, but ultimately were never executed. Careful analysis revealed soaring administrative costs based on the high turnover rates among entry level employees who would likely redeem and cash out of the plan soon after meeting the threshold of auto-enrollment. In addition to our own analysis showing retirement plan administrative costs soaring, Aon-Hewitt had done a study on one hundred forty 401k plans showing over time that the average savings rate in plans with auto enrollment was lower than in plans where employees signed up and put the money in themselves. We also knew that the employees who signed up themselves to participate were more likely to save more because they had to pick their own savings rate upon enrollment versus the auto-enrolled participants that put money in at the widely accepted default rate of 3 percent and left it there. While participation may have increased in an auto-enrolled world the overall saving rate would have decreased.

FN: Explain the impact of the 2006 Pension Protection Act on the evolution of your 401k plan design?
Neibert: In my opinion, the 2006 Pension Protection Act has impacted the evolution of my 401k plan design in a number of ways beginning with how the act has allowed larger sized organizations (i.e. employees with more than 500 employees) with both DB & DC plans the ability to become more efficient & potentially streamline costs by using a single plan document and trust fund. I think one of the best characteristics resulting from this act was the Safe Harbor 401k (which we embraced and implemented) which was a victory for U.S. workers particularly because the employer must make contributions to each employee’s plan with the same percentage of salary for everyone. In my opinion, a retirement plan’s nightmare begins with one employee’s feeling of uncertainty after his employer’s plan has failed a nondiscrimination test. It only takes one employee to vocalize their hesitancy about the retirement plan to spread like wildfire potentially discouraging or stymieing the savings of other employees. Statics show higher overall participation rates years later if participants are incentivized by the education, notification and fairness that are Safe Harbor characteristics.

Originally, the portion of the act requiring plan Form 5500 annual reports were beneficial in their intent, but lacked the required teeth to have a significant impact as the DOL only now is updating the act to require “Small Plans” (i.e. under 100 participants) to file. The current problem is that 5500 filers are not required to report plan investments at all, while Large Plan filers report investments on paper attachments that are difficult to data mine which can be utilized by fiduciaries of plans for analysis and peer comparison. I believe the results are more harmful then beneficial to both 401k fiduciaries and their retirement plan participants. When 401k market data is not readily accessible for analysis, it’s likely going to be more difficult for 401k fiduciaries to evaluate the practicality of plan fees, creating disproportionate and unnecessary fees which in turn increases the likelihood of fiduciary liability. To make matters worse, the Form 5500’s current fee disclosures do not align with other fee disclosure regulations, requiring 401k providers to keep an additional set of fee records – which can increase their fees.  How does this help?  Any additional fees that are necessary to maintain a second set of 401k fee records do not offer value to 401k participants, they just lower their net returns and any good Fiduciary can see that. Fortunately for us, those responsible for the 5500’s have figured out finally that there are shortcomings and are revising them substantially in 2019 with many changes.

FN: There are two primary cornerstones to attaining retirement readiness that we learned from academic studies in people’s behavior. The first is to reframe 401k savings decisions from opt-in to opt-out. This is achieved through automatic enrollment and automatic escalation. Elaborate on why H-E-B Grocery’s plan did not adopt these provisions and what may prompt the move towards this design element?
Neibert: For a number of reasons H-E-B’s 401k plan has not graduated to auto enrollment nor auto escalation at this time, but I am confident that if it is good for their employees they will eventually gravitate to and implement them in the plan. I think it is likely that this will change going forward sooner than later as the conversation of implementation combined with auto escalation was already being discussed with more frequency by executives before my departure.

It should be noted though that unlike many other plans that utilize those features H-E-B does not require employees to roll out of the plan upon termination or retirement. Once an employee becomes eligible to participate, they may remain in the plan as long as they like but cannot contribute any additional monies. This is a significant advantage to participants that realize the unique value of Modern Portfolio Theory & risk adjusted performance of the LifeStage Funds compared to most 401k plans that lack asset class diversity and are limited to stocks, bonds, and cash and dominated by equity investment options. While keeping more assets in the plan is definitely one way to maintain a lower cost base thereby benefiting both participants and the plan sponsor it certainly is not enough of a benefit to warrant the higher levels of risk that H-E-B is risking of potential frivolous litigation that is occurring with frequency today. Therefore, I applaud H-E-B as an employer and plan sponsor as they clearly put the interests of their employees & retirement plan participants before the welfare of the company in both a metaphorical and literal sense.

FN: Another important element we’ve learned from researchers is the stultifying impact of decision paralysis. This is symptomatic of the classic “style box” menu decisions, where the number of choices proliferates from a handful to dozens of options. Research shows a better alternative is to offer options first in terms of categories, then in individual funds. This reduces decision-making to a more basic level. (See “Adding Categories: A Sample of a New and Improved 401k Investment Option Menu,”, June 6, 2013) When did the HEB 401k shift to a category-based menu option, what initiated this move, and how did you determine the best way to implement this shift?
Neibert: Tom Witt was a firm believer in keeping thing simple for participants with regard to the design of the 401k plan. He knew the hardest part about managing a 401k retirement plan is in fact getting employees to initiate a conversation with themselves about participating. The parallel wasn’t much different from the basic principles found in a retail grocery store when offering products. By offering customers multiple categories of product types (household name brands, inexpensive options and quality store brands that were priced leaders), customers were likely to feel satisfaction, build loyalty, spend more, and, most importantly, return. Similarly, if you give participants options they will find one that works for them especially if they are designed to represent their innermost beliefs of doing it on their own or having a professional do it for them.

When creating the investment options Tom knew that offering a large selection of options would only intimidate and confuse the majority of participants even when educated. Ultimately, he had seen other plans with a large selection and those plans didn’t necessarily improve their participation rates. In a sense, they would only prove to make people feel good for bragging rights about their favorite fund, but as far as being effective in improving participation rates and getting participants to retirement that was another story.

This is why the investment options in our plan and initial education going into the plan were created with purpose and a laser like focus. Essentially, a participant could ask themselves an initial question: “Do I want to invest myself or do I want a professional to do it for me?” If they wanted to invest on their own and create an asset allocation plan with straight forward core options or if they wanted to invest in a turn-key expanded allocation fund that had a professional that would invest on their behalf and maintain a specific allocation and risk level based on the participants stomach for risk. This investment professional would be responsible for overseeing all of their asset allocation and management of investments.

It was clear to Tom that H-E-B’s participants needed to be engaged with straightforward simple questions, but not overwhelmed with complexity or choice. It was decided to offer a set of custom white label funds with straight forward unemotional nomenclature that also provided categorization. One could say that the 4 core options bordered on the purposefully ordinary so that anyone from any background could easily understand and feel comfortable knowing what they were choosing. Rather than naming the core options after the indices they were designed to model the names described exactly what they were investing in like U.S. Stocks, U.S. Bonds, Money Markets or Global Stocks. The same consideration naming was given if the participant chose another to invest for them. H-E-B’s LifeStage Balanced Funds allowed an employee to essentially “set it and forget it.”  The only decision they needed to make was to gauge what level of risk is appropriate for them as it relates to their age, stomach for risk, and horizon until their retirement. With the LifeStage Funds or the core options, participants didn’t spend much time answering these questions but still allowed them to personalize their experience by focusing their retirement goals on the road to retirement through a broad “lifestyle” objective or a more “traditional” path to retirement goal.

Considering the fact that many of our participants did not have investment backgrounds or were not previously educated in finance, we knew many didn’t want to have to think about anything beyond how much of their pay was being deducted each month. We knew that by offering a simple set of 3 Target Risk Funds (Conservative Risk, General Risk and Aggressive Risk), employees would easily gravitate towards them. The thought was to provide participants with an option that would allow them to focus on the act of saving as they tended to have success with achieving retirement under those conditions. Like all organizations you had some that wanted more options and pushed to have access to a personal trading account but we felt like we were being prudent fiduciaries by keeping choices and how to get to those options limited to a few questions so they can focus on saving for retirement. It is likely that the combination of simplicity and the ability of the LifeStage Funds to deliver consistent top tier risk adjusted net returns that ultimately made them overwhelmingly popular with the majority of participant allocations.

FN: “Retirement Readiness” has become the term de jour in the industry. What have you seen done successfully in this area and what do you expect to see coming in the future to help better prepare people for retirement?
Neibert: The unfortunate truth is that nearly half of all Americans are underprepared for their retirement. Our ongoing and ultimate goal at H-E-B was to ensure that employees had options to control their own destiny to achieve readiness for retirement. We knew that could only happen if they were taking the right steps along the way. Through the use of education, applying behavioral finance and by employing features that enabled more employees to retire on their own terms. When employees stay past their normal retirement date simply because they can’t afford to retire, it’s not good for them or their company.

We accomplished this by improving the overall plan’s design (Safe Harbor, Roth Investment Options, Competitive matching and profit sharing) but also by streamlining the investments and allowing the participants to engage at a level most felt comfortable with making choices within. Sure, the LifeStage portfolio was as complex as they come by comparison to other plans but that complexity was never a determining factor as to why participants chose one investment option over another.

It was our consistency of engaging participants by utilizing active and personalized communications. Many participants that were surveyed by the call center sited that engagement being a strong reason why they remained focused on saving. Education was fun for employees as benefits engaged them through personal finance days that gave them tools to concentrate on financial well-being and was the perfect opportunity to incorporate health savings education within a retirement savings context. Custom videos that employed both visual and oral messages were created and distributed to all employees with company email accounts and made available on the front page of the intranet discussing improvements to the plan and reiterated the benefits of our investment options and how compounded interest could be their biggest ally. On our intranet blog page, generalized educational videos to understand asset class types, savings and investment subjects was available in addition to links to applications, games and modelers to help improve their knowledge. If videos & applications weren’t your thing we made educational materials available discussing both generalized subjects on saving and investing, but also specific pieces to help with understanding the H-E-B Plan’s investment options so they could understand if they were appropriate for them.

Engaging participants also meant holding people accountable to themselves and their retirement goals by keeping them apprised of how they were doing along the way. A campaign communicating with all employees was instituted that was customized based on an employee’s current situation. For employees that were not eligible to participate yet in the retirement plan (eligible at the beginning of a quarter after their 1-year anniversary) they were reminded that their eligibility was soon approaching, the benefits of the plan and an example was given showing the power of compounded interest based on the current rate of pay. For those that had once participated, but dropped off the wagon we engaged them to reenroll and again showed an individual what they could easily be accomplishing. For the current participants, we specifically addressed their balance and where they should be at to achieve retirement specifically if they were lacking and if they were on track we suggested not only increasing their savings rate but how it would provide them with more options. We also used that opportunity to plug the Roth option as another retirement vehicle that would improve their options.

Our monthly blog on the company intranet and quarterly newsletter allowed participants to compare their investment options to a number of benchmarks. We also evaluated economic conditions over the last quarter, what the future would likely entail based on our analysis but also how our team was adjusting the custom target-risk funds to protect and grow their assets. Last, one of my favorite activities was the tradition of our annual retirement plan meeting which was attended by many. We addressed the past year’s investment option performance, how they compared to other peers (including the overall plan) and any changes in the plan. We discussed how different scenarios in the future could and would likely play out based on a composite of our intelligence gathering from a host of experienced professionals we invested with and how economic policies or short-term trends could influence the markets in turn impacting their own retirement account. Most importantly, it allowed employee participants to engage us in a dedicated Q&A session to answer their questions about the plan, retirement or the markets etc.

FN: Some feel we can avoid a “retirement readiness” crisis by encouraging workers to save as much as they can as early as they can. Another way to accomplish this is to offer parents an incentive to set up a Child IRA for their children. [Ed. Note: You can read more about it here:  – just scroll down below the sliding picture and click the links to the relevant articles.] How does The Child IRA better prepare people for retirement? How does The Child IRA address a future retirement crisis like the collapse of Social Security? What do you think is the best way to get the message of The Child IRA to parents and grandparents?
Neibert: When I speak with many people about this subject you really would not believe the quantity of times people have asked me, “Is there really a retirement savings crisis?” Americans have a selective memory when it comes to finances and so many are choosing to live in the here and now forgetting about 2008, but more importantly thinking that the current economic mood will continue with an almost cavalier attitude that they will begin saving at some point, maybe tomorrow and that they will be able to work forever. Experts are predicting that Social Security will be depleted by 2034 and that most Americans will need more income because they are living longer and are retiring relatively earlier. Historically low interest rates, seen by home owners with mortgages and holders of debt as a windfall has a sharper edge as those interest rates also determine how much income we can draw from our nest eggs. Even though pension plans are becoming an endangered species the social security administration is showing that people are saving today more than ever as 61% of all workers, and 80% of married couples, are saving in a retirement plan. Opinions differ but I tend to fall into the camp that most people will fall substantially short in their retirement savings. While some economists believe we do not face a crisis it should be noted that they also assume that retirees plan to gradually spend less as they age. That makes a pretty large assumption that all generations behave similarly and that parents do not spend more on themselves when their children leave the nest. As an empty-nester myself I can attest that they simply save the extra.

The bottom line is that all of this is superfluous if Americans are not being held accountable to be responsible for their own retirement and it begins with the income earning generation of now teaching children who will be the future earners of tomorrow through actions not words what Albert Einstein considered to be the eighth wonder of the world and the most powerful force in the universe: Compound interest. “He who understands it, earns it … he who doesn’t … pays it.” Clearly, the most impactful method to get the message about this important subject out is to begin with showing our lawmakers in Washington. Policies should be implemented so that the IRS provides Americans with tax incentives as prescribed by the “Child IRA” doctrine so that parents (as well as any relative or friend including Tom, Dick or Harry) could make tax-deductible contributions totaling as much as $1,000 per child every year up to that child’s 19th birthday.

The Child IRA would be a wonderful gift to our future generations now as we have already stifled them with incomprehensible debt and a culture of entitlement with regard to bureaucracy solving everything including retirement.

FN: We’ve seen reports of the “death of the 401k.” Do you believe the 401k has been a failure? Why not? In what ways do you see we can improve the current model of the 401k? Of these, which idea is most likely to see the light of day in the near future?
Neibert: I don’t think that the concept of 401k plans has been a failure as they have improved savings rates and with the addition of salary deferrals and non-discrimination testing they have clearly compelled companies to offer retirement benefits to more employees in order to remain competitive.

As of late we are seeing more focus on improving participation and savings rates but most have shifted focus to substantially eliminating the plague of unnecessary fees particularly after the DOL began requiring disclosure in 2012. Transparency will continue to improve in this area as the DOL requires smaller plans to file Form 5500 so that employers and employees can understand the true costs of their retirement plan across the board from administrative to investment and importantly advisory fees whether paid directly or indirectly. Like them or not, 401k lawsuits have established a precedent of company liability as well as fiduciary responsibility. In my opinion, the DOL’s enforcement doesn’t go far enough. One of the benefits that has resulted is that many companies are now looking for ways to mitigate fiduciary responsibility risks of litigation by outsourcing fiduciary roles and I agree. It is refreshing though that the EBSA (under the DOL) is publishing a request for information in connection with its examination of the final Fiduciary Rule under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). It is my hope that professionals and industry experts will participate in this so they can get it right this time.

The trend that I believe should change is how we look at 401k’s with regard to excessive fee lawsuits as they relate to fiduciary responsibility. The result of this slashing of fees trend has many plan sponsor fiduciaries failing their retirement plan participants as they choose low expense ratios as their primary determinant over more important factors such as the quality of investment vehicle and whether or not it produces top caliber risk adjusted performance net of fees. Of course, I agree with the idea of providing a better environment with regard to fees, but if lower fees come at the cost of producing a better outcome net of those fees when another vehicle utilizing expanded asset classes with a higher expense ratio produces remarkably higher risk adjusted net performance, then I would argue a fiduciary has a responsibility to seek out and explore the use of those funds as part of their lineup. H-E-B’s expense ratios are much higher and often double that of other traditional target risk & target date funds because of the LifeStage portfolio’s employment of alternative asset classes, yet the H-E-B 401k’s LifeStage Funds consistently outperform their retirement plan peers on a consistent long-term basis net of fees which is even more significant if adjusted for risk. The bottom line is that on a long-term basis the net of fees performance of a strategy with higher expenses which would initially strike many as a non-starter shows us that getting a less expensive ticket to the show does not always mean that there will be a better outcome. Sometimes, you get what you pay for.

FN: Are there any other comments you’d like to share with our readers?
Neibert: I always knew if I left H-E-B it would be for an opportunity that would continue the same defined benefit methodology employing an expanded asset allocation that we applied in the LifeStage Portfolio. Why? Defined benefit plans have outperformed 401k plans over the long-term with reduced volatility net of fees even though they average higher expense ratios. I knew that 401k Plans were generally not managed as institutional assets from a portfolio development standpoint, unlike most defined benefit plans which typically have expanded asset class palettes that include alternative asset classes. Alternative strategies have long been utilized in well-known pension plans to add diversity & protect principal lowering a portfolio’s overall correlation to stocks. Knowing my experience in the H-E-B 401k it seems reasonable to say that all 401k plans should offer an expanded asset allocation option so their participants’ can better protect their nest egg & reduce their downside risk in an overpriced stock market before the next correction occurs.

I found my opportunity to realize my passion to offer the participants of all 401k retirement plans the same expanded asset allocation that institutions had been employing for over 4 decades in defined benefit plans when met Mr. Gary Gould, the CIO of Financial Solutions, Inc. I became aware of FSI through my research. FSI had been hired to hedge out the equity exposure in H-E-B’s LifeStage portfolio by employing a protective risk overlay that acted as an insurance policy against a sudden drawdown. FSI had begun developing an improved version of the same expanded asset allocation we employed at H-E-B in the LifeStage portfolio. After many years of discussions and input I eventually joined FSI, part of their team managing an expanded allocation turn-key solution strategy named the FSI Enhanced Target Date Fund. Finally, I am proud to be a part of providing 401k plans with access to a Target Date strategy that can consistently offer their participants superior risk adjusted net performance while lowering volatility by over 1/3 compared to equity heavy traditional target date strategies allowing 401k participants to enjoy a smoother road to retirement.

FN: Dale, this has simply been one of the most amazing interviews I’ve ever had the pleasure to conduct. The amount of rock solid practical examples you’ve provided need to be read and re-read by every 401k plan sponsors (as well as their service providers). While few 401k plans are as large as H-E-B’s plan, size doesn’t matter when it comes to applying the critical core principles H-E-B initiated years ago. I look forward to seeing how both H-E-B moves forward and how your new activities blossom into the future. Thanks again for sharing such a tremendous wealth of information.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA


  1. Dale Neibert
    Dale Neibert August 03, 19:43

    If you have any questions about the FSI Target Date Fund Strategy I discuss in this article please feel free to contact me directly.
    Dale Neibert
    Phone: 512-840-1826

  2. Dale Neibert
    Dale Neibert August 03, 19:48

    If you are interested to learn more about the FSI Enhanced Target Date Fund Strategy I discuss in this interview please feel free to contact me directly.
    Dale Neibert
    Phone: (512) 840-1826

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