Plans easing burdens by taking the OCIO route

Limited plan committee time and resources as well as litigation concerns are driving increased interest in outsourced chief investment officer services from a variety of DC plan sponsors.

Historically a defined benefit, endowment and foundation phenomenon, outsourced investment programs on the defined contribution side have "really picked up steam" within the past two or three years, said Phil Edwards, Pennington, N.J.-based principal at Curcio Webb LLC, a consulting firm that helps primarily large plan sponsors find OCIO managers.

In Pensions & Investments' latest survey, OCIO managers reported nearly 2,000 U.S. DC clients as of March 31, a 22.4% increase from 2017. Total assets for the group reached $113.8 billion as of March 31; comparable numbers for 2017 were not available. Survey respondents were asked not to include assets managed in target-date and lifecycle funds.

Too little time and resources among plan sponsors, Mr. Edwards said, are major reasons DC executives are turning to OCIO managers to handle tasks ranging from investment manager selection and replacement to developing multimanager portfolios and custom glidepaths.

While defined contribution plans are "a bit more straightforward" than DB plans "in the sense that you don't really have an asset allocation and you have fewer investment options and the investment options are (primarily) traditional long-only equity and fixed income," there are still decisions to be made, Mr. Edwards said.

Plan executives are saying, "investments are not my day-to-day activity and not something I'm able to participate in on a regular basis," and would rather delegate some of those day-to-day decisions to a third party, he said.

Implementation varies by plan sponsor, with some looking to outsource their entire plan, and others, just a sleeve.

Another catalyst for DC OCIO adoption, Mr. Edwards said, is that OCIO managers are "able to provide what can be at times significant cost savings to defined contribution plans because of the scale of their businesses now."

"Cost has been a flashpoint of litigation" for DC plans, and the potential to achieve cost savings with an OCIO manager makes that relationship attractive, he said.

There is a "continued groundswell" within the defined contribution market for plan sponsors to outsource investment decisions and dedicate more of their time to, say, measuring the effectiveness of their plans for employees, said James Robison, Indianapolis-based managing principal at White Oak Advisors, which also helps large DC plan sponsors with OCIO manager searches.

Mr. Robison said six clients hired their first OCIO managers within the last 12 months, with several more inquiries and discussions. He declined to identify the clients.

The appetite for OCIO services extends to smaller plans as well, experts said.

White Oak — which provides OCIO services to midsize plans with $200 million in assets or below — received eight to 10 inquiries from midsize DC plans within the past six months, Mr. Robison said.

Responding to increasing 401(k) and 403(b) plan sponsor interest and competition among providers, OCIO managers have been ramping up their DC capabilities.

In a recent Pacific Investment Management Co. survey of 77 consultants, responding firms predicted that an average of 23% of their clients will use their firm's discretionary (OCIO) services by 2020, up from an average of 11% now.

Callan LLC — which historically has built custom multimanager portfolios for its discretionary DC clients — decided about six months ago to offer plan sponsors access to its proprietary multimanager core asset class funds, which are currently only available to Callan employees as part of the company's retirement plan, said Greg Allen, San Francisco-based CEO.

One of the reasons Callan decided to offer something more turnkey, Mr. Allen said, was that firm executives were increasingly hearing from prospective clients that they wanted OCIO managers to make the decisions about investment offerings.

"If you walk (into a search interview) and you say, 'We'll customize (your plan) to your needs and your design specifications,' and (the plan sponsor is) thinking about going discretionary, a lot of times they don't want to have any input. They just want the answer," Mr. Allen said.

Callan's proprietary multimanager core asset class funds are expected to be available to investors in about a month and go live with its first plan sponsor client in the fourth quarter. Mr. Allen declined to identify the client.

Mr. Allen anticipates the firm's funds will be picked up by plan sponsors in the $75 million to $2 billion asset range. Plans in the $2 billion to $5 billion range typically want to do things on a more customized basis, he said.

The firm will continue to build custom multimanager portfolios for clients, Mr. Allen said. Callan's discretionary DC clients have historically ranged from $500 million to $11 billion. As of March 31, Callan had $7.5 billion in U.S. DC outsourced assets under management, according to P&I's survey.

Other OCIO managers that have boosted their DC capabilities recently include:

• Russell Investments, which added three senior business developers to the firm's OCIO sales team in the past 18 months in response to growing demand for OCIO services generally, and from DC plan sponsors specifically, said Holly Verdeyen, Chicago-based senior director of defined contribution investments, in an email. Russell had $9.2 billion in U.S. outsourced DC AUM as of March 31, up from $7.5 billion last year.


• SEI, which recently filled a new senior position dedicated to the firm's DC outsourcing business. Spokesman Frank Wilkinson declined to identify the individual. A formal announcement is expected in the coming weeks, he said. SEI had $5.4 billion in U.S. DC OCIO assets as of March 31.


• Mercer LLC, which expanded into the midmarket DC OCIO space in 2016 after historically serving large plan sponsors with $1 billion or more in assets, said Rich Joseph, Boston-based U.S. head of delegated solutions. Mercer is the largest DC OCIO manager in P&I's database, with $36.9 billion in U.S. AUM as of March 31.

While DC plan sponsors are showing increased interest in OCIO services, implementation is still in the "very early stages," said Dan Kutliroff, Chicago-based manager of investment management for OCIO at Northern Trust Asset Management, which had $5 billion in U.S. outsourced DC AUM as of March 31, up from $3.6 billion last year. Northern Trust has also been adding OCIO team members with DC backgrounds, Mr. Kutliroff said. OCIO managers reported enhancements to their back-office administrative functions as well, including strengthened communications with record keepers and custodians.

A predominant concern among plan sponsors is whether OCIO managers have conflicts of interest, White Oak's Mr. Robison said.

Forty-three percent of consultants responding to the PIMCO survey identified potential perceived conflicts of interest as a hurdle in offering DC OCIO services.

To mitigate perceived conflicts of interest, NEPC LLC officials said that they do not offer any proprietary collective investment trusts to their discretionary DC clients. The Boston-based firm reported $2.5 billion in U.S. outsourced DC assets as of March 31.

Outside of offering proprietary funds, conflict-of-interest concerns might also be raised when consultants that assist with OCIO searches provide OCIO services as well, experts said.