Data and Research October 19, 2020

OCIOs Help DC Plan Sponsors With Investment Lineup Best Practices

Plan sponsors using an outsourced chief investment officer have more diversified asset classes and a mix of active and passive investment options in their fund lineups, PGIM research found.

Reported by

Outsourced chief investment officers (OCIOs) have historically been used by defined benefit (DB) plan sponsors and endowments, but there is a growing trend of defined contribution (DC) plan sponsors turning to OCIO managers, according to PGIM, the global asset management business of Prudential Financial.

PGIM worked with Greenwich Associates to survey 138 DC plan sponsors and with Curcio Webb to survey 20 OCIO managers and found 15% of plan sponsors are using an OCIO manager for their all their 401(k) plan investments. OCIOs are more common among mid-sized plans (24%) than larger plans (8%).

Get more!  Sign up for PLANSPONSOR newsletters.

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 and insufficient investment sophistication. However, OCIOs indicated that the top reasons for being hired by their clients were the perceived mitigation of fiduciary risk and the plan sponsors’ lack of resources, not so much their expertise in implementing institutional-quality structures.

“The move by some plan sponsors to utilize OCIOs seems to be driven, in part, by the desire to implement more best practices,” says Josh Cohen, head of institutional defined contribution at PGIM. “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.”

Plan sponsors that are using an OCIO are less likely than those that are not using one to offer a primarily or entirely passively managed fund lineup and are less likely to use 100% passively managed target-date funds (TDFs), according to the research. Plan sponsors using an OCIO are more likely to offer multi-manager structures for at least some of their menu options and are more likely to say they offer alternative investments in the fund lineup.

“At PGIM, we believe providing DC plan participants access to a more institutional investment approach enhances the ability to meet retirement readiness objectives. Our research indicates that OCIOs who take on fiduciary discretion tend to prefer a more institutional approach than we otherwise tend to see in the market. It also appears that plan sponsors who have hired an OCIO incorporate more of these best practices,” Cohen says. “There continues to be opportunities for OCIOs to provide innovative solutions for plan sponsors to ultimately help their participants meet their retirement income goals.”

The full research report is available at https://www.pgim.com/dc-ocio.

Compliance October 19, 2020

Another Lawsuit Challenges Fund Manager Strategy During COVID-19 Market Crash

Allianz Global Investors is again accused of not following the promised investment strategy for its Structured Alpha Funds.

Reported by

Allianz Global Investors (AllianzGI) and related entities, including its parent company, are facing a third lawsuit alleging the stated investment strategies of the AllianzGI Structured Alpha Funds were abandoned, resulting in significant losses to a pension fund.

The Employees’ Retirement System of the City of Milwaukee (CMERS) was a passive investor in the Alpha Funds, having ceded all discretion to its fiduciary, AllianzGI, according to the complaint. Similarly to the plaintiffs in the other lawsuits filed recently, CMERS alleged that, before the market crash caused by concerns over the COVID-19 pandemic, AllianzGI abandoned the hedging and risk-management strategies that it marketed as “generating returns in times of rising or falling equity markets and both low and high market volatility.”

Get more!  Sign up for PLANSPONSOR newsletters.

In addition, the lawsuit says the asset manager, in an attempt to generate returns and earn income for itself, sold the hedges that could have protected the funds during market volatility.

The CMERS lawsuit says AllianzGI explained in its response to a due diligence questionnaire that it was supposed to use “proprietary quantitative tools to stress test positions at both the individual and portfolio level” in an “iterative” process that could identify “any potential areas of unintended risk for a given scenario.” AllianzGI said it had “developed deep analytical capabilities” that it believed were “crucial to manage an option strategy with due mathematical rigor and care.”

These risk control measures were supposedly overseen and enforced by the Allianz Global Investors defendants, and AllianzGI’s parent, Allianz SE. “Had AllianzGI actually run and adhered to the stress-test protocols that it was required to follow, the funds’ exposure to the market conditions in February and March 2020 would have been readily apparent, and their losses averted,” the lawsuit claims.

In a March 26 analysis of AllianzGI’s management of the Alpha Funds, CMERS’ investment consultant, Callan, recommended that CMERS terminate its investment in them “due to the outsized magnitude of realized losses incurred year-to-date 2020, heightened risk related to the ongoing viability of the Structured Alpha platform business due to losses and incentive fee model, and the lack of formal communication from AllianzGI during the recent periods of uncertainty, which exacerbates uncertainty regarding the portfolios going forward,” the complaint states. CMERS says between January 1 and March 27, it lost at least $286 million on its investments in the Alpha Funds.

In a statement to PLANSPONSOR, Allianz Global Investors said: “As we set out at the time, the Structured Alpha portfolio sustained losses during the severe market rout in late February and March. While the losses were disappointing, the allegations made by the Employees’ Retirement System of the City of Milwaukee (CMERS) are legally and factually flawed, and we will defend ourselves vigorously against them.

“CMERS is a professional investor and was advised by a sophisticated investment consultant to evaluate the Structured Alpha strategy. CMERS bought these hedge funds in the knowledge that they sought to deliver substantial returns, net of fees, of as much as 10% above the fund’s benchmark index return. As was fully disclosed, the Structured Alpha funds involved risks commensurate with those higher returns. CMERS, and its investment consultant, determined that the Structured Alpha Portfolio fit with its overall investment goals and risk tolerances.”

«