Case 2 (HBS): BP Amoco

FINA 6216: Portfolio Theory and Asset Pricing

Max: 25 points
Due Date: Week 7
Instructions:
Please present your analysis in a short, self-contained, professional report (Word format), being
sure to address each issue or question identified below. Grading will be based on the written
analysis, and each member of the team will receive the same grade. The write-up should not
exceed five double-spaced pages of text (not including figures and exhibits). All figures and
exhibits, including analysis performed using Excel, should be carefully labeled and included in
the Word document. Discussions need to be clearly articulated so that the reader can follow the
analysis without undue burden. Please upload the report on Canvas by 10 a.m. on the due date.
An excel spreadsheet containing the case data is posted on Canvas.
Required reading: Cambridge Report: Revisiting Active US Equity Management 1
BKM text, Section 11.5, Pages 375-380.
Questions:
1. Describe the distinguishing features of defined-contribution (DC) pension plan and definedbenefit (DB) pension plan.
(3 points)
Hint: Please highlight the difference across plans along three dimensions: (a) guaranteed benefits on
retirement, (b) investing (i.e., who makes the decision?), and (c) financing (who funds it?). You are
encouraged to refer to sources outside the case to answer this question.

2. How would you compare the pre-merger offerings of BP America and Amoco defined
contribution pension plans?
(3 points)
Hint: Plans could be compared on size, number of offerings, cost and investment philosophy.

3. Which investment options would you recommend that BP Amoco offer to their employees?
Should BP Amoco only offer mutual funds with the largest alpha? Should index funds be
included in the mix? Finally, should BP Amoco offer company stock in the menu?
(6 points)
Hint: Please focus your attention on the pros and cons of various options available to John Rueys
team and your broad recommendation. Note that company-match contributions are made in the form
of company stock.

Important: It will be a violation of the honor code to share the Cambridge Report with anyone
who is not currently registered in FINA6216 course.

4. What default allocation would you recommend BP Amoco set for plan contributions? If
liabilities risk considerations were not a play, what should the default allocations be? Should
default allocation be the same for all employees regardless of their age? How would you
adjust the plan offerings to accommodate employees who have the financial ability to save
outside the plan?
(8 points)
Hints:
(1) Note that the Money Market Fund in the Amoco Plan and the Income Fund in the BP America
plan (the default option), plus company stock, represent a substantial fraction of total assets in
each plan, suggesting that many plan participants hold on to the default asset allocation in the
plan.
(2) Since 401(k) contributions in 2008 are capped at $15,500, many employees would invest in
financial assets outside their 401 (k) plan. These employees should combine assets in the plan
and outside the plan so as to minimize income tax burden. How would you adjust the plan
offerings to accommodate these employees?

5. Assess SMUs current retirement plan and provide recommendations (if any) to the plan
coordinator.
Explain the rationale of each recommendation. If you have no
recommendations, explain why you believe the plan is well designed.
(5 points)
Plan Documents:
https://www.smu.edu/~/media/Site/BusinessFinance/HR/pdf/Benefits/Understanding%20the
%20SMU%20403b%20Retirement%20Plan.ashx?la=en
Fund and Fee information:
https://fp.trsretire.com/PublicFP/fpClient.jsp?c=TT069444&a=00001&l=TDA