The Outsourced Chief Investment Officer (OCIO) or delegated investment solution, whereby professional firms take on fiduciary responsibility under ERISA Section 3(38) to manage plan assets, is seeing robust growth within the retirement industry.
In Part 2 of his interview with Liana Magner, Mercer’s US DC and Financial Wellness Leader, Neil Lloyd, Mercer’s Head of DC and Financial Wellness Research, probes the state of the impact to OCIO from litigation, innovation, open MEPs, and retirement income.
This post has been edited lightly for length.
Neil Lloyd: There has been some press coverage lately around increased interest in and adoption of OCIO solutions due to the amount of DC plan litigation and the extensive nature of plan sponsors’ fiduciary roles and responsibilities. How has litigation risk come up in client discussions?
Liana Magner: Fee litigation has everyone on edge, prompting sponsors to ask, “Am I managing my DC plan the right way? How can we improve upon that governance process? How can we improve upon outcomes for our participants?”
So, the litigation risk has made an OCIO solution considerably more appealing to plan sponsors. A delegated solution helps mitigate fiduciary risk by promoting a robust governance framework and ensuring that fees are reasonable. In the event of a lawsuit, a plan sponsor would not be the only named party.
There’s also been some discussion around DC programs lacking innovation as a result of fee litigation. Participants are more aware of fees. I wouldn’t necessarily say that this is directly the result of their reading “plain English” fee disclosures, but the disclosure rules have led to improved fee transparency by disaggregating investment fees and administrative fees, and those are good things. It’s wrung out a lot of systemic inefficiency.
On the other hand, litigation likely has caused some plan sponsors to be less receptive to some of the newer design features or investment solutions, because they don’t want to deviate too far from standard practice or raise any concerns that could trigger a possible lawsuit. One example is the use of custom target date funds (TDFs). A part of sponsors’ hesitancy to adopt custom TDFs may have been sparked by a lawsuit around a large plan sponsor’s custom TDF series that included a healthy allocation to alternatives. That decision resulted in a lawsuit focused on fees related to its high exposure to alternatives.
Neil Lloyd: How is Mercer looking ahead of the curve to innovate and improve its OCIO solutions?
Liana Magner: We try to achieve three objectives for our clients from our OCIO solution. The first is focused around securing their foundation, helping plan sponsors determine the right governance model to use in managing their program.
The second objective is optimizing the participant experience, which speaks directly to the innovation question. Our solution is actively focused on helping participants achieve greater prosperity, to help them get where they need to be in retirement by helping them accumulate a retirement balance that allows them to live comfortably.
You can do that with investment design, which can seek to improve performance and reduce fees. We’re also working hard to determine the optimal number and types of investment options to make available to participants, and helping “guide me” participants make more informed decisions about their asset-class and investment options. Multi-manager customized portfolios can be beneficial, because they are well diversified and automatically rebalanced rather than portfolios whose initial allocations are rarely updated in response to market changes. Particularly when we’re in a period ripe for mean reversion in value versus growth stocks, in active versus passive management, incorporating the thinking of a DB portfolio into a DC plan can move the needle more predictably.
Our third objective is to inspire confidence. This really works in two ways: We want to inspire confidence in plan sponsors that Mercer is the right firm to partner with in managing their DC plan because we’re leaders in the industry, have depth of resources and we’re innovative in research (e.g., retirement income strategies). But we also want employers, employees, and plan participants to be inspired and to be confident about their financial wellness beyond simply the investment piece — that there’s a strong 401(k) program in place to help them achieve peace of mind.
Neil Lloyd: Much of the Setting Every Community Up for Retirement Enhancement Act of 2019 passed by the House of Representatives in May 2019 is focused around the idea of open multiple employer plans (open MEPs). This new category of plan would allow unaffiliated employers that meet certain affinity tests to offer a single plan to their employees. How do you think open MEPs could impact overall OCIO plans, and how will Mercer support the new category of plan?
Liana Magner: Depending on what the open MEP legislation, and accompanying regulations, ultimately set out, there may be varying degrees of fiduciary relief made available to plan sponsors through an open MEP. Therefore, we may see many employers outsource those fiduciary duties to a pooled-plan provider who would offer an open MEP solution. Not all employers will adopt an open MEP at first. But once they see others offloading fiduciary responsibility, especially smaller companies that may lack the ability to manage the investment and administrative duties of offering a 401(k) plan today, that could be a tipping point. Open MEPs take us one step beyond delegated as an outsourced solution, in my view, because open MEPs allow the employer to offload both the investment and administrative pieces. We’ll just have to see what happens in the current regulatory environment.
Neil Lloyd: As you look to the future, where do you see the DC/OCIO market over the next five years?
Liana Magner: Cerulli expects overall OCIO AUM under full or partial discretion to have a compounded annual growth rate (CAGR) of 8.1% during the five-year period ending in 2023, when they project AUM to reach $1.7 trillion. And they also expect that the DC/OCIO market will be one of the fastest-growing segments of that OCIO growth. I know we have seen that within our own business. Our DC/OCIO solutions have grown at over 30% to 40% year over year for the last four years. It’s growing in popularity.
I think growth will continue because the OCIO solution for DC plans is not new anymore. It’s a viable and transparent solution that can help improve participant outcomes while at the same time reducing fiduciary risk, often without increasing fees across the board. The DC and financial wellness markets are beginning to converge to more of a holistic approach to plan management.
Neil Lloyd: Any closing comments on why a plan sponsor would choose Mercer for Delegated?
Liana Magner: Mercer is a leader in the retirement industry. We’ve offered OCIO solutions to DC clients since 2006, and we’re the one of the leading providers of DC/OCIO solutions in the U.S. We have a strong team of resources and a business supporting our delegated solution from an investment, operations, and administrative perspective.
We also have a global approach at Mercer, so that we’re able to learn from solutions or other consulting experiences that we have around the globe. In our case, one of the first areas in which we offered OCIO was in Australia, which is primarily a DC market. There are some differences between various countries, but we’re very much able to leverage our learning from other countries to improve upon what we can offer within our own home country.
Neil Lloyd: Thank you, Liana.
Learn more by reading Part 1 of “OCIO at a Tipping Point?”
Hear our perspectives on the latest retirement news and trends. Receive articles directly in your inbox as soon as they are posted.
Please see Important Notices for further information.
1 The Cerulli Report, U.S. Outsourced CIO Function 2018: Increasing Competition and Service Customization (2018).
Mercer does not provide tax or legal advice. You should contact your tax advisor, accountant, and/or attorney before making any decisions with tax or legal implications. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.