For defined benefit (DB) plans that do not have in-house investment capabilities, the outsourced chief investment officer (OCIO) model is a means of filling the gap between the resources required to run efficient investment strategies and the typically constrained governance budget of a pension plan, Willis Towers Watson contends.
In a report, the firm aims to challenge five myths about using OCIOs. For example, the report says a concern among some sponsors and investment committees is if you delegate some of your decision making to a specialist, you are no longer in control of your plan and potential investment outcomes. However, Willis Towers Watson notes that investment committees still control the objectives and the constraints within which the plan operates. “If circumstances or needs change, investment committees and plan sponsors still have the power to change the objectives and the constraints within which the delegate is working,” the report says.
The firm also challenges the argument that OCIOs are conflicted because they profit from their position as both adviser and investment implementer. “A good service will always command a fee. In the OCIO model, plans may pay a service fee, and it should be transparent and separate from any management fees. OCIOs will only retain these mandates if they perform their duties and are held accountable. In the case of the OCIO model, we feel the provider should acknowledge they are a fiduciary under [the Employee Retirement Income Security Act (ERISA) within the service agreement and, therefore, are subject to the standards of prudence under ERISA,” the firm says.NEXT: Is OCIO untested, expensive or only for plans of certain size?
Another myth challenged in the report is that an OCIO is a new and untested concept. To this Willis Towers Watson says, “While the terms ‘OCIO’ and ‘fiduciary management’ are relatively new, the ideas that underlie them are not. A multi-asset approach to managing pension fund portfolios is nothing new.” But, the firm says it believes the multi-asset approach is often implemented through a range of costly or inefficient allocations, which requires a high level of governance on the part of the plan. With the OCIO model, governance is considerably strengthened and portfolio decisions can be made in real time to take advantage of changing market opportunities, the firm contends. “Based on our experience, outcomes have been generally positive and have the potential to improve funded status, particularly in volatile market conditions,” the report says.
To the argument that an OCIO is only for plans of a certain size, the firm responds that, “We feel the model is less about size and more about how feasible it is to build a dedicated in-house resource to manage the considerable demands of institutional portfolio management.” Willis Towers Watson says many organizations have discovered that finance professionals are strained to assess risks within a real-time investment environment, and allocating individuals to the pension plan can leave financial functions short of resources. “Of course, the very large plans do have the option of developing an in-house team, and some have exercised this option. But for most other plans, we believe the OCIO may potentially improve their investment governance and outcomes,” the firm says.
To the argument that using an OCIO is expensive, Willis Towers Watson concedes that plans are asked to spend more money on a service that was previously a relatively small part of the annual budget. But in aggregate, across the plan, employing an OCIO does not necessarily mean costs rise because the plan sponsor may anticipate an overall potential savings for the plan from lower investment fees due to the OCIO’s buying power as well as intangible time savings for staff and committee members.