The Markets April 13, 2018

LDI Solutions Support Surge in Custom Institutional Portfolios

A new Cerulli Associates analysis shows institutional custom solutions assets stood at $1.7 trillion at year-end 2016, and assets are projected to grow 10.4% to 1.9 trillion by 2021.

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The latest report published by Cerulli Associates seeks to develop a working definition of “custom institutional investing solutions.”

“True institutional custom solutions are a relatively new phenomenon in the modern history of asset management and there remains a great deal of debate in the industry regarding what constitutes a custom solution,” says Christopher Mason, senior analyst at Cerulli.

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The framework established by Cerulli researchers suggests the “custom institutional solution” label is appropriate for “any strategy managed for an institution characterized by the major functions of liability-driven investing (LDI), multi-asset-class solutions, outsourced chief investment officer, and pension risk transfer or pension settlement transactions.”

“Cerulli suggests that LDI is the ultimate custom solution and that the growth of the discipline is intertwined with the developments in the U.S. corporate defined benefit (DB) plan universe,” Mason explains. “LDI is used by corporate plans in the United Kingdom, Canada, and elsewhere; however, the U.S. corporate market is by far the largest.”

Alexi Maravel, director of Cerulli’s institutional practice, observes that the LDI topic is “probably the most competitive pricing environment among the different types of institutional custom solutions available today.”

“In such an environment with pressure on pricing and rising cost of resources, Cerulli believes more mergers and acquisitions among LDI managers could occur in the near future as organizations look for scale in their delivery of services,” Maravel says.

Cerulli’s report, “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments,” also covers the increased use and adoption of collective investment trusts (CITs), and the ongoing influence of investment consultants.

Details from the Cerulli report

Cerulli’s reporting shows institutional assets rose 5.5% year over year to roughly $20.7 trillion as of year-end 2016, reflecting growth across defined contribution (DC) plans, state/local DB plans, corporate DB plans (including Taft-Hartley), insurance general accounts, and nonprofit institutions. According to Cerulli’s proprietary sizing models, total institutional assets are projected to reach nearly $25 trillion by 2022.

“Relatively low long-term interest rates remain a challenge to the finances of insurance companies and to the internal investment professionals charged with company investments,” Cerulli notes. “However, the actual impact of rates varies by company and the type of business the company writes.”

Cerulli researchers highlight that approximately one-quarter (26%) of surveyed managers’ product development plans will be allocated to multi-asset-class products during the next 12 months.

“The leading priority among managers’ product-related initiatives is building out new vehicle offerings. For managers that don’t currently offer collective investment trusts (CITs), 86% of managers are currently considering offering them, with the remaining 14% indicating they have formal plans to build them during the next 12 months,” Cerulli explains. “Target-date strategies make up approximately 19.4% of total CIT assets held in DC plans.”

 The majority of managers (43%) anticipate adding portfolio specialists/client portfolio managers to their institutional sales teams during the next 12 months. Other findings show surveyed providers indicate that a lack of internal resources and a desire to improve governance processes are the top reasons institutional investors pursue OCIO service offerings.

Information about obtaining Cerulli Associates research is available here.

Compliance April 12, 2018

Home Depot 401(k) Plan Latest Targeted with ERISA Fiduciary Breach Lawsuit

Plaintiffs include in their complaint a substantial amount of backward-looking fund performance data to underpin their failure to monitor claims, comparing the Home Depot offerings to others that could have been purchased.

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The next Employee Retirement Income Security Act (ERISA) fiduciary breach complaint of 2018 has been filed, this one with the U.S. District Court for the Northern District of Georgia.

Plaintiffs bring a broad range of claims against a number of defendants—including Home Depot, Inc.; the administrative committee of the Home Depot Futurebuilder 401(k) Plan; the plan’s investment committee; Financial Engines Advisors; Alight Financial Advisors; and some 30 or more individuals from these firms.

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The sweep of the claims included in the 98-page complaint is very broad, and for that reason alone it will be interesting to see how successfully the plaintiffs will be able to demonstrate standing on such a broad range of issues. Echoing the language of the numerous excessive fee and failure to monitor ERISA litigation cases that have been filed in recent years, plaintiffs here suggest Home Depot has “selected multiple poorly-performing funds for its 401(k) plan, allowed investment advisers to charge its employees unreasonable fees, and turned a blind eye to a kickback scheme between an investment adviser and the plan’s recordkeeper.”

The lead plaintiffs are both participants in Home Depot’s retirement plan, and they are seeking certification on behalf of themselves and approximately 200,000 current and former plan participants. At this very early stage, the class complaint seeks $140 million in damages. One somewhat unique aspect of their challenge is that, unlike some others that have come before, plaintiffs here have named multiple providers touching the plan as defendants—rather than focusing on one provider relationship and mentioning others as being more peripherally involved in wrongdoing. It stands to reason that the case will see a dizzying number of cross motions from the defendants, testing which of them carries a fiduciary responsibly to the plan—and if they do, to what extent and in what contexts.

The text of the complaint includes substantial detail about the inner workings of the Home Depot retirement plan, and its relationships with advice providers Financial Engines and, later, Alight. Plaintiffs include in their complaint a substantial amount of backward-looking fund performance data to underpin their failure to monitor claims, comparing the Home Depot offerings to others that could have been purchased.

In another section, the plaintiffs further allege that Home Depot arranged for the investment adviser Financial Engines to sell investment advisory services to participants. But rather than providing genuine personal investment advice, Financial Engines is accused of delivering “cookie-cutter portfolios based on minimal participant input.” According to the complaint, Home Depot allowed Financial Engines to charge plan participants advisory fees that were in some cases double the competitive rate.

“To add insult to injury, Home Depot condoned an arrangement in which Financial Engines kicked-back a portion of its fee to the plan’s recordkeeper,” plaintiffs allege. “Although Home Depot replaced Financial Engines with Alight Financial Advisors in July 2017, Alight simply re-hired Financial Engines as a sub adviser. Thus, the new arrangement added another layer of inefficiency to the plan’s fee structure.”

As relief, plaintiffs seek “compensation for financial losses to plan participants and beneficiaries resulting from the plan’s underperforming investments and excessive fees; reform to Home Depot’s retirement plan that would remove imprudent investments and ensure only reasonable investment advisory expenses; and the removal of the fiduciaries who have violated their duties to the plan’s participants and beneficiaries under ERISA.”

The full text of the complaint is available here.

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