Consultants Predict Strong OCIO Growth

Financial professionals working as outsourced chief investment officers (OCIOs) expect growing demand from non-pension clients in the coming years.

There are many reasons more institutional investors and corporations implement an OCIO mandate, says a study from  Cerulli Associates. Institutions frequently cite a lack of internal resources or a greater interest in sharing fiduciary responsibilities. Another reason is the need for faster decision-making and implementation of investment decisions in increasingly complex and fast-moving capital markets.

Cerulli explores demand for OCIO services. In the most recent issue of The Cerulli Edge research report, the analytics firm predicts much of the long-term growth in the OCIO market will come from non-pension clients with less than $500 million in assets.

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“A broader array of institutions with significant pools of assets will increasingly call upon asset managers to take on greater responsibilities, implement more complex strategies, and better align their interests with that of the institution in a more objectives-based approach,” explains Alexi Maravel, associate director at Cerulli. “Asset managers need to consider their level of preparedness to address asset owners besides defined benefit plans.”

Cerulli asserts that managers of all sizes need to evaluate their resources and determine their niche to be well positioned for growth in the OCIO market. The firm expects more interest from clients looking to find risk management, asset management, investment selection and trust services from one provider: an OCIO.

The report finds OCIO assets are hovering around $1 trillion worldwide. While OCIO use is growing, the business is still relatively small compared with institutional consultant hiring activity across other types of mandates. There were 22 OCIO mandates awarded during the first 11 months of 2013, totaling $39.9 billion, compared with 13 mandates totaling $10.3 billion during the same period in 2012. Consultants and dedicated OCIO providers received the majority of those assets, the report shows.

Other key findings in the report include the following:

  • Cerulli contends that customized OCIO service offerings benefit asset managers that have mandates as part of an outsourced relationship. The odds of retaining assets remains higher under a customized arrangement should the institution terminate its OCIO agreement.
  • Consultants polled expect the most significant growth for total portfolio support from nonprofit (71%), health care (43%), Taft-Hartley (46%), and corporate defined benefit (43%) clients. More business is also expected from private defined benefit plans (21%), defined contribution plans (15%), and insurance general accounts (14%).
  • The challenge for investment consultants offering discretionary OCIO services will be moving beyond providing investment advice and making recommendations to actually executing decisions with a proven track record of success.

The report also predicts that during the coming years, the institutional outsourcing trend will continue to evolve and steadily expand. This situation presents opportunities for OCIO providers to gain market share, especially those advisers that can differentiate themselves by establishing a niche to support a particular client need.

More on how to obtain Cerulli’s most recent report, along with its table of contents, is available here.

IRS Preps for Cash Balance Plan Program

The Internal Revenue Service (IRS) intends to expand its pre-approved defined benefit plan program to permit plans with certain cash balance features to be submitted by sponsors and practitioners.

In Announcement 2014-4, the IRS extended to February 2, 2015, the deadline to submit on-cycle applications for opinion and advisory letters for pre-approved defined benefit plans for the plans’ second six-year remedial amendment cycle. The submission deadline has been extended to allow time for the agency to develop the necessary language and tools to implement its expansion of the pre-approved program. However, new deadline applies to all on-cycle pre-approved defined benefit plan submissions, even those that will not be modified to contain cash balance features.

In general, plans will continue to be reviewed for qualification items based on the 2012 Cumulative List (see “IRS Issues 2012 Cumulative List”), which is the Cumulative List applicable to sponsors of defined benefit pre-approved plans submitting during the second six-year remedial amendment cycle. Future guidance will address permissible cash balance features under the pre-approved program.

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The IRS said it will announce in future guidance when applications for opinion and advisory letters for pre-approved defined benefit plans with cash balance features may be submitted. Until that time, such plans should not be submitted under the pre-approved program.

In order to preserve (or, in the case of a new plan, obtain) reliance on the terms of their plans, sponsors of individually designed plans who intend to adopt a pre-approved defined benefit plan document in the future may, before the end of their applicable individually designed on-cycle deadline, complete Form 8905, Certification of Intent to Adopt a Pre-approved Plan, in lieu of submitting an application for an individually designed determination letter. The deadline for submitting the form is March 31, 2014.

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