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MIS 4500 (31)

Chapter 20.docx

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Management Info. Systems
MIS 4500
Pourang Irani

Chapter 20: Managing Institutional Investor Portfolios DC Plans:  sponsor directed: IPS is simpler subset of DB plan IPS  participant-directed: i. diversification: Section 404(c) of ERISA safe harbor for DC plan sponsors against claims of insufficient or imprudent investment choice if plan has 1. at least 3 investment choices diversified versus each other and 2. provision for participant to move freely among options. ii. Company stock: should be limited to allow for diversification  plan participants set on risk and return objectives  IPS becomes overall set of governing principles rather than IPS for a specific plan participant Hybrid and other plans: combination of DB (benefit guarantees, years of service rewards, ability to link retirement pay to % of salary) and DC (portability, administrative ease and understandability) plans  cash balance plans, pension equity plans, target benefit plans and floor plans  Cash Balance Plan: DB plan w/ benefits displayed in individual recordkeeping accounts; facilitates portability to a new plan. i. contribution credit: % of pay based on age ii. earnings credit: % increase in acct balance typically tied to long-term interest rates iii. no actual account balance b/c no separate account iv. some allow for some investment choices  ESOP: DC plans that invest all or a majority of assets in company stock; contributions based on employee pay; vesting schedules; (not diversified) Foundations and Endowments:  Foundation: grant-making institutions funded by gifts and investment assets i. typically have single donor ii. have minimum levels of annual spending iii. typically do not receive new contributions iv. typically four types: 1. independent, 2. company sponsored, 3. operating and 4. community Type of Foundations in U.S. Foundation Description Source of Decision- Annual Spending Type Funds Making Requirement Authority Independent Independent grant- Generally an Donor, At least 5% of 12- foundation making organization individual, members of month average asset (private or established to aid family, or donor’s family, value, plus expenses family) social, educational, group of or independent associated w/ charitable, or individuals trustees generating investment religious activities return Company- A legally independent Endowment Board of Same as independent sponsored grant-making org w/ and/or annual trustees, foundation foundation close ties to corp contributions usually providing funds from a profit- controlled by making corp sponsoring corp’s executives Operating Org that uses its Largely the Independent Must use 85% of foundation resources to conduct same as board of interest and dividend research or provide a independent directors income for active direct service (e.g., foundation conduct of operate a museum) institution’s own programs. Some are also subject to annual spending requirement equal to 3.33% of assets. Community A publicly supported Multiple Board of No spending foundation org that makes grants donors; the directors requirement. for social, public educational, charitable, or religious purposes. A type of public charity.  Foundation IPS: i. risk objectives: desire to keep spending whole in real terms or to grow institutions, but can be more fluid or creative and aggressive than pensions; still ability and willingness ii. return objectives: total return; long-term return objective for foundations w/ indefinitely long horizons: preserve real (inflation-adjusted) value of investment assets while allowing spending at appropriate (statutory or decided-upon) rate; intergenerational equity/neutrality: equitable balance b/w interests of current and future beneficiaries of foundation’s support;  spending (say 5%) times investment management expenses (say 0.3%) times inflation (say 2%) iii. liquidity requirements: anticipated (spending rate) or unanticipated needs for cash in excess of contributions; investment management expenses don’t count toward payout req, though overhead associated w/ grant making does.  may use smoothing rule that averages asset values over period of time to dampen spending rate’s response to asset value flu
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