When Bob Hunkeler, CIO of International Paper, joined the investment office in 1997, the defined contribution plan needed a facelift. More than 50% of the primary plan’s defined contribution assets were invested in company stock, and the plan had only six investment options. The recordkeeping was also inflexible and outdated, the plan rules were overly restrictive, and communications were weak, and participation needed encouraging.

Hunkeler, who has also been regularly achieving top-decile returns for the company’s $9 billion defined benefit plan (his most recent pension risk transfer project reduced assets by $1.65 billion), rolled up his sleeves and led his team on a multi-year journey of transforming the DC plan. His guiding principle was simple: “To be the best, we had to have great funds, great service, and great fees, in that order,” he told CIO. But it wasn’t without its challenges, as things moved slowly at first. Hunkeler had to dredge entrenched ideas and build a convincing platform. “But once we built up momentum, changes started to occur at a much faster clip,” Hunkeler said.

He built a team of “highly skilled craftsmen” that sometimes makes him feel like “Santa in his workshop,” he said. “They work well together, with or without me around, and bring a good sense of humor and energy to work every day.” The functional work environment gave him a competitive advantage that became one of the keys to his success. “I don’t take that for granted, ever,” he said. One International Paper employee noted, “He has built a solid team that works for him; a team that is ready to be the next generation of leaders of the IP retirement plans.”

Despite the rising tide of indexation, Hunkeler is a firm believer in active management in both the pension and savings plan, which he claims has added hundreds of millions of dollars of value to the plans over the years.  “In this day and age when there’s a lot of pressure on plan sponsors to move to passive management, I think it’s important not to lose sight of what you really believe in and how valuable that belief can be to your participants,” he said.

Now the plan offers a nearly limitless choice of investments with a three-tiered investment lineup of balanced funds, asset class funds, and a brokerage window, a state-of-the art recordkeeping platform at about one-fifth of the cost in 1997, a number of participant-friendly plan design features, and a customized communications program. The plan’s participation rate has increased from 75% to 95%, participants’ allocation to company stock has fallen below 10%, and virtually every plan rule or restriction that inhibited investment flexibility or that was deemed “user unfriendly” has been eliminated. 

The next goal for Hunkeler is to encourage more employees to stay in the plan after retirement. He is focusing on creating an advanced 401(k) with a host of attractive end-of-career plan design features – like unlimited distribution options, retirement spend-down programs, and an annuity platform.

With a drive to be one step ahead of the competition “but not two,” notes Hunkeler, International Paper’s DC plan became one of the first in the country to be fully unbundled, with independently awarded investment management, recordkeeping, and custody assignments. The decision allowed IP to choose the best service providers without being constrained by the limited choice of options any one might have offered. And because Hunkeler was heading the DB plan, the DC plan was also one of the first to utilize white label funds (unitized fund-of-funds). “The white label funds enabled us to tap into our pension plan’s best ideas and make them available to our savings plan participants,” explained Hunkeler.

International Paper was also an early adopter of brokerage windows (which gave employees the opportunity to buy and sell securities through a brokerage platform), web-based investment advice (i.e., robo-advice), auto-enrollment, and auto-escalation.

Oftentimes, plans don’t provide many options for after an employee retires from a company. Hunkeler’s goal is to keep the retirees under the protection of a fiduciary, by making the International Paper plan attractive and diverse enough so that members of the plan don’t need to head elsewhere. The International Paper plan has features to help participants manage their investments during the spend-down phase of their lives. Oftentimes in other companies, when people retire or part ways from a company, employees are required to immediately repay any outstanding loans they’ve taken from their plan, which can cause a sudden and unnecessary hit to their retirement accounts.  IP’s plan offers post-retirement loans to employees, which can ease the transition to retirement. (Once they retire, they don’t need to repay loans all at once.)  It also offers Roth 401(k) accounts, and retirement spend-down programs. 

His latest innovation includes a long bond fund to improve the payout potential of IP’s spend-down program, which its managed-account provider, Financial Engines, estimates could boost payouts by as much as 10%. He also launched Hueler’s Income Solutions annuity platform to help IP retirees find lower-cost annuities that can produce a paycheck for life and reduce longevity risk.

As Hunkeler was fine-tuning the DC plan, he also helped cut the company’s pension risk by over 60% through a series of term-vested, lump-sum payouts, liability risk transfer projects, company contributions, and investment policy changes. In 2016, he began the pension fund risk mitigation process, which has reduced the plan’s liability by over $4 billion and the participant population by over 90,000 (down from 180,000). The pension plan was also the beneficiary of $2.75 billion in company contributions over the past few years. This, in combination with prudent asset allocation decisions, active management (not indexed), top-decile performance, and an increased hedge ratio (to 75% from less than 10% in 2015) has improved the plan’s funded status from 77% in 2016 to roughly 90% today.

By Christine Giordano