Updated with correction
While the use of outsourced chief investment officers by defined contribution plan sponsors is not widespread, the sponsors that use them are satisfied and rely on them for discretion on the selection of investment strategies and hiring and firing of asset managers, according to research out Wednesday from PGIM, the global asset management business of Prudential Financial.
PGIM worked with Greenwich Associates to survey 138 DC plan sponsors and with Curcio Webb to survey 20 OCIO managers representing $16.8 trillion in total assets and $1.2 trillion in OCIO assets of all plan types.
The survey found that 15% of plan sponsors currently use an OCIO manager for their entire 401(k) plan. Use of OCIOs are more common for midsize plans (24%) — with between $250 million and $500 million in assets — than larger plans (8%), the survey said. Plan sponsors not using an OCIO manager indicated their top two reasons for refraining are to retain control of the investment decisions and because they already have this expertise internally. Nearly two-thirds (64%) of plan sponsor respondents said they do not use and have never considered using an OCIO manager.
"The use of OCIOs in the DC market is evolving, and adoption is still in the early days with more interest from midsize DC plan sponsors," said Josh Cohen, head of institutional defined contribution at PGIM, in a news release. "There continues to be opportunity for OCIOs to provide innovative solutions for plan sponsors to ultimately help their participants meet their retirement income goals."
Of the plan sponsors surveyed that are using an OCIO, 100% said they are satisfied with their current manager.
And using an OCIO can have an impact on the investment options offered to participants, the survey found. When comparing plan sponsors that use an OCIO vs. those that do not, sponsors that are using an OCIO were less likely to offer a primarily or entirely passively managed fund lineup; less likely to use 100% passively managed target-date funds; and more likely to offer multimanager structures for at least some of their menu options.
"Our research indicates that OCIOs who take on fiduciary discretion tend to prefer a more institutional approach than we otherwise tend to see in the market," Mr. Cohen said. "It also appears that plan sponsors who have hired an OCIO incorporate more of these best practices."
In its paper detailing the survey findings, PGIM noted that some plan sponsors worry about perceived fiduciary risk of implementing a more institutional approach and the potential addition of alternative assets to their plan lineups.
"Of course, addressing fiduciary concerns by merely offering only low-cost basic options could violate one's fiduciary duty to do what's in the participant's best interest, not what's in the plan sponsor's best interest," PGIM said. "Many also realize that a purely simple investment approach isn't likely to lead to better outcomes over the long term, so there are continued opportunities for OCIOs to fill the gap, to innovate and to provide more solutions."
