DC plan sponsors increasingly turning to OCIO

Greater scrutiny on plan design and performance is driving more defined contribution plan sponsors to consider outsourced CIO arrangements.

Indeed, a Vanguard Group survey of companies that sponsor pension plans released at the start of this year showed that plan sponsors have found the past few years challenging and are looking for external support to manage their plans. According to the findings, 49% say they employ an OCIO compared with 33% in the same survey conducted four years ago. The use of OCIOs increased across all types of plan designs including defined contribution plans. The findings anticipate that demand for OCIO services will continue to grow.

This tracks with what Jeremy France, Boston-based head of Graystone and institutional consulting at Morgan Stanley, is seeing in terms of outreach from potential clients. "There's a growing desire to adopt OCIO through the defined contribution side of the house and put more governance around the DC plan," he said. "We are seeing that from all types of clients. I think as organizations have come out of the pandemic and are dealing with more than they ever have, they are realizing that with an OCIO they can have someone in a full-time, day-to-day investment management role and that they need that."

Morgan Stanley reported $71.2 billion in total OCIO assets under management as of March 31, up 13.4% from the previous year, according to P&I's latest OCIO survey.

P&I's survey also found that the number of defined contribution OCIO clients is growing. The number of U.S. DC clients reported by OCIO firms jumped to more than 22,000 as of March 31, up 58.7% from the previous year's survey. Also as of March 31, OCIO firms reported a total of $267.1 billion managed for U.S. DC clients with full or partial discretion, up 4.3% from the prior year and up 134.8% over the five-year period.

Mr. France said that working with an OCIO at the defined-contribution level can help with plan customization. OCIOs are often tasked with identifying managers and funds that make it into the final lineup. "We have seen bigger plans doing more with their target-date fund offerings," he said. "Plans of all sizes are also using OCIOs as a fresh set of eyes on the investment menu and plan design. Not every defined contribution plan sponsor has an investment staff, so it can be helpful to bring someone in with that level of expertise."

Beyond investment tasks, OCIOs might work with plan sponsors on risk management or financial wellness, said Tim Braude, New York-based co-head of multiasset solutions at Goldman Sachs Asset Management.

Mr. Braude added that he's seeing more DC plan sponsors re-evaluate their approach, which could also include a shift to outsourcing. Goldman Sachs reported $246.8 billion in OCIO AUM for all types of institutions as of March 31, up 2.9% from the previous year.

"We're at the point where we are at the end of a cycle and there is a lot of evaluation going on," Mr. Braude said. "I think that's going to continue as plan sponsors look to offload more of the investment and operational burden to their providers."

That operational burden could be significant — at least initially.

Michael Cagnina, senior vice president and managing director of the institutional group at SEI in Malvern, Pa., noted that plan sponsors that make the shift could need a new record keeper. If that happens, plan sponsors also need to go through notification and blackout periods. "Having to make those changes puts people off — at least initially — but you only have to make the change once and then any further updates or refinements will happen automatically through the OCIO," he said.

SEI reported a total of $87.1 billion in OCIO AUM as of March 31, down 13.5% from the previous year, according to P&I's survey.

Mr. Cagnina added that now could be a worthwhile time to think through plan changes. There are a number of required compliance changes for defined contribution plans as a result of SECURE Act and SECURE 2.0, and plan sponsors may already be looking at whether their providers can meet their needs going forward.

"I think some of these rule changes are adding to the broader appetite for evaluation and considering a different type of approach," he said. "We're seeing more dialogue around it and it could make for a longer-term trend over the next five years."

"The discussion around defined contribution has started to pick up," agreed Amanda Nelson, New York-based principal at Casey Quirk, Deloitte's asset management strategy consulting business.

"We are hearing of OCIOs getting more pressure from consultants and gatekeepers to offer defined contribution outsourcing as well," she further noted.