OCIO at a Tipping Point? (Part 1 of 2)


Q&A with Liana Magner, CFA, Partner, U.S. Defined Contribution Leader, Mercer

One of the most significant developments in the retirement industry has been the growth in plan sponsors’ delegating investment decision-making to third-party providers. This is often referred to as an Outsourced Chief Investment Officer (OCIO) or a delegated investment arrangement. In delegated mandates, professional firms take on fiduciary responsibility, under ERISA Section 3(38), to manage the Plan’s investment options. It’s a notable trend with Pensions & Investments reporting OCIO assets increasing by 23% in the year ending March 2018.1

It’s also a hot space within the defined contribution (DC) industry. Neil Lloyd, Head of DC and Financial Wellness Research for Mercer, recently spoke with Liana Magner, Mercer’s US DC and Financial Wellness Leader, to better understand what’s on the minds of plan sponsors around the notions of OCIO innovation. The following two-part interview has been edited for length.

Neil Lloyd: Liana, you’ve been involved in the DC delegated market for a very long time. What have you found that’s been driving the expansion in this market?

Liana Magner: There are two key drivers behind the move toward delegated or OCIO solutions. The most common is plan sponsors trying to do more with fewer resources. People who are responsible for 401(k) plans typically have full-time jobs. Resources are stretched and they don’t have the time to focus on day-to-day plan management. A delegated solution allows sponsors to focus their time and energy where they feel they can have the most positive impact, such as strategy, plan design, and employee engagement. The delegated provider then handles the management, monitoring, and changing of investment managers.

Secondly, we’ve seen a lot of focus on fees. The majority of 401(k) lawsuits have largely focused on the use of company stock. After that, litigation has zeroed in on fees, questioning whether they are reasonable for recordkeeping and the investment services provided. We’ve seen the advent of available lower-cost investment vehicles, but staying on top of these lower- or lowest-cost share classes and managers takes time. That’s where delegation can be helpful.

Much of the growth in delegated solutions stems from plan sponsors wanting to improve their governance structure, mitigate risk, manage costs, and deliver better participant outcomes.

Neil Lloyd: Can you share any broad scenarios that illustrate the journey that clients took before engaging with Mercer’s Delegated offering?

Liana Magner: Most clients want to have varying levels of involvement throughout the investment decisionmaking process. Obviously, as OCIO, we need to maintain control over certain fiduciary responsibilities and decision-making items, but that doesn’t mean a client can’t be involved — in fact, some want to remain very involved.

For example, some larger plans have their own investment staffs with whom we collaborate closely. We not only share our investment viewpoints, but also seek to understand any particular philosophical beliefs or investment managers they want to retain. If we feel it makes sense to do so, and if the clients’ preferred managers are highly rated by our manager research group, we’ll follow a process to take the decision to the full investment committee.

Then, there are a growing number of clients who want to be more handsoff. They largely want us to make decisions and report back to them.

Neil Lloyd: How does outsourcing appeal to sponsors of smaller plans? Can you comment on plans at various sizes that have embraced delegated solutions?

Liana Magner: We’ve seen keen interest and engagement in OCIO solutions across the spectrum, from small plans through mega-plans. When we first launched our OCIO solution in 2006 for DC plans, it really was geared toward customizing solutions for mega-plan sponsors and their participants.

It’s common today for sponsors of any plan with over $1 billion in assets to think about moving away from mutual funds and toward more institutional vehicles, such as separately managed accounts, and custom multi-manager options. When you’re moving to a more customized, white-label solution there’s more set up work, coordinating between the recordkeeper, custodian, and various investment managers. The use of an OCIO solution can greatly simplify this process. While the use of institutional vehicles, such as separately managed accounts and commingled funds, typically reduces cost, there is more paperwork involved, and hence legal review required, versus investing in a mutual fund. Again, an OCIO solution can make this easier.

The investment we made in both operations and technology, including our own multi-manager fund vehicles that we launched in 2017, allows us to serve clients with an OCIO solution at the smaller and mid-sized plan market. In fact, in the past two years, we’ve seen the most growth in the number of small and mid-sized clients looking to outsource.

Neil Lloyd: Thanks, Liana.

Learn more by reading Part 2 of “OCIO at a Tipping Point?”

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1 “OCIO managed assets leap 23%: DB and DC plan contribute to surge in assets managed with full, partial discretion,” Pensions & Investments, June 25, 2018. https://www.pionline.com/article/20180625/ONLINE/180629956/ocio-managed-assets-leap-23