PGIM, the global asset management business of Prudential Financial, has found that more defined contribution (DC) plan sponsors are hiring outsourced chief investment officers (OCIOs). Plan sponsors say they are looking to create an institutional-quality investment lineup because they lack the internal expertise to do so and to reduce their fiduciary risk.
Josh Cohen, head of institutional defined contribution at PGIM, tells PLANADVISER that by an institutional quality lineup, sponsors mean they want diversified asset classes, including alternatives and illiquid investments, custom target-date funds (TDFs), lifetime income solutions, a mix of active and passive investments and multi-manager and white-label structures for at least some of their menu options.
PGIM notes that only 15% of DC sponsors are using an OCIO manager, but that this jumps to 24% for mid-sized plans.
“The use of OCIOs in the DC market is evolving, and adoption is still in the early days,” Cohen says. He says that as DC plans continue to become more complex, such as by adding in retirement income solutions and annuities, more DC sponsors are likely to turn to OCIOs. “There is also a heightened fiduciary environment out there,” Cohen adds.
Cohen notes that the responsibilities of an OCIO are broader than those of a 3(38) fiduciary. “Besides taking discretionary responsibility for the hiring and firing of investment managers, like a 3(38), an OCIO handles other services, such as plan design and participant communication.”
Clint Cary, head of U.S. delegated investment solutions at Willis Towers Watson, agrees that an OCIO’s role is broader than that of a 3(38) fiduciary, saying, “As an OCIO, you are responsible for the total management of the investment program.”
Michele Brennan, U.S. DC solutions leader at Willis Towers Watson, says OCIOs commonly suggest custom TDFs for plans’ qualified default investment alternatives (QDIAs).
Brennan says she believes that one of the reasons why more DC sponsors are likely to turn to OCIOs is because “401(k)s have become so much more important to participants than they were 10 to 20 years ago. They use the assets not just for retirement but for other lifetime events, so it is really important that the investments in the plan work harder than they have in the past. OCIOs are focused on broader sets of asset classes than 3(38) fiduciaries.”
Cary also notes that if a plan sponsor turns to an OCIO specialist such as Willis Towers Watson, that OCIO can leverage all the assets they oversee to negotiate the best fees possible. “As DC plans have moved from $300 million in assets to $1 billion, they naturally move from off-the-shelf offerings to institutional platforms,” he says. “The benefit to participants is lower costs and a broader opportunity set on the investment side, including post-retirement income solutions.”