Head to head: Is there a place for OCIOs in DC pension plans?
An outsourced chief investment officer provides external expertise that can ease the minds of plan sponsors overwhelmed by pension management decisions. While the services have traditionally been used by defined benefit plans, do they translate to defined contribution plan management?
John Jenner, vice-president of finance at Electrozad:
Although today’s world is geographically the same size that it’s always been, it’s becoming much smaller and more closely interactive, which seems to be making markets very volatile. This is even more true of the increasing speed at which new technology, legislation and ways of conducting business are requiring more depth and breadth in all areas of expertise.
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Years ago, Electrozad offered DC plan members a choice of about 80 investment funds. Many employees chose a specific, well-performing fund. However, when the markets tumbled, these members lost upwards of 60 per cent of their accumulated assets. Since then, we’ve relied on advice and guidance from external experts, formally engaging a group in 2015 and outsourcing the investment selection process. We also adopted the governance committee charter formulated by this group.
Markets are becoming increasingly complex and sophisticated. As business owners and executives, we have limited time and resources to properly fulfil our many responsibilities. Our employees and their families rely on us to make the right decisions at the right time in all aspects of our business. As such, our pension committee and I — as plan administrator — felt it was in the best interest of our pension members to seek out external experts to help manage the plan’s investment options.
Since engaging the group of experts, or OCIOs, our employees are far more engaged in their retirement goals. The experts facilitate member education and deliver tools to assist in investment choices, ensuring they’re relevant to employees’ particular circumstances. As well, qualified retirement advisors are available to every plan member.
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This outsourced expertise, which has legal accountability to protect members’ assets and objectively advises the company and employees on the risks associated with the investment options, alleviates one worry of conducting business in today’s world.
Colin Ripsman, president of Elegant Investment Solutions Inc.:
While an OCIO can free up the time DB plan sponsors spend focusing on investment issues, the offering is less compelling for DC plans.
In corporate DB plans, employers bear the investment risk. Employee contributions are generally fixed, so the employer makes up any adverse investment performance through funding obligations. As long as the plan remains solvent, the chances of employees challenging employer investment decisions is remote. However, in DC plans, members bear the risk, so any suboptimal investment decision means they’ll have lower investment balances at retirement.
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The Canadian legal structure isn’t set up for OCIOs in DC plans. Unlike under the U.S. Employee Retirement Income Security Act, Canadian pension plans can’t delegate fiduciary responsibilities. They can delegate investment decisions, but not the legal liability. So given the potential for legal liability, a DC offering would necessitate rigorous, ongoing monitoring of OCIO providers, similar to what would be typical under a traditional DC structure.
OCIOs may also mean higher fees. In DC plans, these typically incorporate record-keeper and investment management fees, with both included in the asset-based fee netted from investment performance. An OCIO structure incorporates another layer of fees, paid to the OCIO provider, which results in a higher overall expense and a potential lower net return for members.
Instead of OCIOs, plan sponsors would benefit from offering a streamlined plan with a strong reliance on target-date funds. These represent low investment fees, implying a bias towards passive funds or lower cost active options, as well as a bias towards well-diversified core or passive fund options, which limit the risk of member challenges, highest when the available funds underperform their benchmarks in correcting markets.
Read: Assets managed by U.S. OCIOs to exceed US$2.7 trillion by 2022: research