Investing February 2, 2015

Institutional Investors Increasingly Seek SRI

A majority of institutional asset managers surveyed by Cerulli Associates have received client requests for socially and environmentally responsible investing mandates.
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Socially responsible investing (SRI) mandates are gaining popularity among institutional investors, according to Cerulli Associates research.  

More than 50% of institutional asset managers have recently received client requests for socially responsible investing (SRI) or environmental, social, governance (ESG) mandates, Cerulli finds in a new analysis. The research reveals that among investment groups, 68% have ESG capabilities, and 27% have plans to develop these capabilities in the next 24 months. Just 5% of asset managers do not have SRI/ESG capabilities today and are not planning any related product development in the next 24 months.

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“Institutional sales teams report that clients and prospects are inquiring about this area as they seek to better understand the different aspects of sustainable investing,” says Susana Schroeder, senior analyst at Cerulli. “Even professionals working in the trenches have witnessed this shift, including request for proposal [RFP] teams, which have reported a rise in the number of RFPs with embedded ESG-related questions.”

The research from the global financial analytics firm reveals that the institutional investing market as a whole benefited from strong equity performance in 2013. The defined benefit (DB) channel still contains the most assets, with a combined public and private DB figure of slightly more than $6 trillion. However, asset growth in this segment is slowing, and Cerulli expects defined contribution (DC) assets to grow at nearly three times the rate of DB assets in the years ahead.

The majority of public DC (96.4%) and public DB (91.8%) plans (asset-weighted) are using advisers and consultants, Cerulli finds. It is expected that public DB plans will increase the use of consultants as more aim to institute de-risking strategies. Additionally, while endowments and foundations see lower consultant employment compared to public DB and DC plans, consultants polled see these nonprofit channels as the ones with the greatest potential for asset under advisement growth.

Cerulli acknowledges the investment consulting industry is hugely important to the asset growth of institutional asset managers, stating 65% of institutional asset manager flows were consultant-intermediated in 2013. In light of the time-consuming challenge that asset managers face when building client relationships, Cerulli finds an increased use of consultants and third-party databases to improve institutional client prospecting.

Cerulli concludes that institutional asset managers are becoming more solutions-oriented for clients and prospects, and firm leaders are looking for institutional sales team members that have specialized knowledge of different institutional channels.

The “Institutional Markets 2014: Opportunities in a Crowded Market” report includes surveys of investment consultants, asset managers, and others involved in the institutional asset management space. Information on how to obtain the report is available here.

Compliance February 2, 2015

Internal Controls Can Help Prevent Retirement Plan Fraud

The IRS has suggested a list of helpful internal controls for retirement plan sponsors.
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The Internal Revenue Service (IRS) said its Employee Plans Compliance Unit (EPCU) Fraud project revealed a significant percent of plans experienced fraud losses due to weak internal controls and risky investments.

The agency says good internal controls can help plan sponsors protect assets from accidental loss or loss from fraud, ensure the reliability and integrity of financial information, ensure compliance with various laws and regulations, promote efficient and effective operations, and accomplish the plan’s goals and objectives.

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Helpful internal control steps the IRS suggested retirement plan sponsors should take include:

  • Ensure the plan’s books and records are checked regularly by an outside third party;
  • Trace deposits and payments to original documents;
  • Have someone else review work when only one employee is in charge of plan operations;
  • Ensure the plan sponsor’s fidelity bond is current and in a sufficient amount;
  • Keep blank checks locked up;
  • Have outside professionals verify transactions;
  • Ensure any loans to third parties are in writing with all forms properly completed, adequately secured, and all interest payments made on time;
  • Reconcile bank, investment and account statements regularly;
  • Require two original signatures on checks or forms that involve plan assets;
  • Keep copies of plan documents including Form 5500 series returns and determination letters;
  • Ensure that payments are sent to correct vendors;
  • Request product and service providers promptly remove employees or trustees with signature authority after they retire or leave employment; and
  • Verify participants who are supposed to receive loans or other distributions actually received them in the correct amounts.

The agency also suggested some steps plan sponsors can take to avoid getting involved in a risky investment:

  • Be prudent in investments;
  • Question investments in hard-to-value assets including hedge funds and foreign assets;
  • Ensure that investment advisers act according to plan sponsor instructions and monitor their work regularly; and
  • Consult with a benefits professional to ensure that administrative procedures are in place to prevent fraud or dishonesty in the retirement plan.

More information about preventing retirement plan fraud is here.

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