While outsourced chief investment officers (OCIO) have historically been tapped by defined benefit plan sponsors and endowments, there is a growing trend of DC plan sponsors turning to OCIO managers.
New research from PGIM research found that plan sponsors’ top reasons for using an OCIO manager were:
- The desire for expertise in implementing institutional-quality structures,
- The perceived mitigation of fiduciary risk,
- Insufficient investment sophistication.
“The move by some plan sponsors to utilize OCIOs seems to be driven, in part, by the desire to implement more best practices,” Josh Cohen, head of institutional defined contribution at PGIM, said in a statement. “While some sponsors are concerned with the perceived fiduciary risk of implementing a more institutional approach, others want to do so but need help getting there. This includes adding diversified asset classes and having a thoughtful mix of active and passive investment options.”
OCIO impact on the investment menu
Of the plan sponsors surveyed who are using an OCIO, 100% said they are satisfied with their current manager.
Plan sponsors are primarily using their OCIO to take discretion on the hiring and firing of investment products of asset managers—including the selection of single-manager funds and off-the-shelf target-date funds (TDFs).
The survey also found that the use of an OCIO can have an impact on the investment options offered to participants. For instance, when comparing plan sponsors who use an OCIO versus those who do not, plan sponsors who are using an OCIO were:
- Less likely to offer a primarily or entirely passively managed fund lineup.
- Less likely to use 100% passively managed TDFs.
- More likely to offer multi-manager structures for at least some of their menu options.
- More likely to say they offer alternative investments in the fund lineup.
OCIO adoption still in early innings
The adoption of OCIO managers in the DC space is still in its early innings.
Only 15% of plan sponsors surveyed are using an OCIO manager for their entire 401k plan. Use of OCIOs are more common for mid-sized plans (24%) than larger plans (8%).
Plan sponsors not currently using an OCIO manager indicated their top two reasons for refraining are to retain control of the investment decisions and because they already have this expertise internally.
“The use of OCIOs in the DC market is evolving and adoption is still in the early days with more interest from mid-sized DC plan sponsors,” Cohen concluded. “There continues to be opportunity for OCIOs to provide innovative solutions for plan sponsors to ultimately help their participants meet their retirement income goals.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
