Investing March 9, 2021

OCIOs Can Improve Pension Plan Funding

Plan sponsors that are considering hiring an outsourced chief investment officer should examine its track record and operational qualifications.

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More defined benefit (DB) plans are using outsourced chief investment officers (OCIOs) to improve their performance and funding, sources say.

In fact, PLANSPONSOR’s sister publication Chief Investment Officer found in its 2020 OCIO Survey that the main reason why institutional investors hire OCIOs is a quest for absolute return, cited by 66% of respondents. Fifty-nine percent of OCIO clients farm out all of their portfolios, whereas 21% outsourced less than 25% of their holdings, the survey found.

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Nearly two-thirds of survey respondents ceded total control of investment management, hiring their OCIOs as 3(38) fiduciaries.

It is generally larger firms that turn to OCIOs, says Jim Scheinberg, founder and chief investment officer (CIO) at North Pier Search Consulting, which has been helping DB plans and other institutional investors select and monitor OCIOs for the past nine years.

“OCIOs are similar to other consulting relationships pension plans enter into,” Scheinberg says. “In the case of OCIOs, they are responsible for investment selection and asset allocation but, if they are a 3(38) fiduciary, which most are, they layer in discretionary authority for hiring and firing managers. Depending on the pension plan’s investment policy statement [IPS], they have narrow to wide authority to maneuver the portfolio to affect the asset allocation of funds. Many OCIOs will take administrative authority, as well, to execute manager contracts.”

OCIOs now oversee more than $2 trillion in institutional assets in the U.S., up from $600 million in 2014, Scheinberg says. “They are very prevalent and growing meaningfully.”

DB plan sponsors can derive multiple benefits from working with an OCIO, most of them “predominantly being time-related,” he says. “The ability for an OCIO to execute on a prudent decision is sped up to the point that they can do it immediately upon determining it is in the client’s best interest, whereas a committee can take three to nine months to reach a decision, and that is if its members are in full agreement initially. Be it asset classes or style mandates, committees frequently will mull the decision over several quarters, which mutes their efficacy and, potentially, results in costly decisions for the pension plan.

“OCIOs, on the other hand,” he continues, “can maneuver portfolios tactically when they see market displacement or areas of increasing risk that should be underweighted or avoided altogether. If a committee is slowly evaluating such matters, the windows close very quickly.”

OCIOs are also very effective at rebalancing portfolios, as proven last March when “they were aggressively rebalancing out of high-quality fixed income back into equities and credit,” Scheinberg says. “If you missed this by a month or a quarter or two, you would have missed the 25% uptick in the market.”

And unlike DB plan committees, OCIOs know when to invest in fund managers, even if their performance currently appears to be ordinary, Scheinberg says. “Even when they look to be mediocre, that might be the precise time to hire them,” he says. “It has become a fascinating market for OCIOs these days.”

Considerations When Hiring an OCIO

Scheinberg says the first thing a sponsor should consider when assessing whether or not to hire an OCIO is its operational qualifications or readiness.

“An organization should be well built and be established from a technical and personnel standpoint,” he says. “Its decisionmaking process should be established, including a fair amount of due diligence, especially with new entrants. Of course, we think performance is important. It must have a track record showing that it is good at running money. After all, you are giving them the discretion to run your entire portfolio. This can be challenging in today’s marketplace because there are no standards for the publishing or disclosure of track records.”

North Pier is one of the few consultants that specializes in assessing OCIOs, conducting quantitative analytics based on 40 to 50 research calls with the OCIO community every quarter. “There are now more than 30 organizations or individual practitioners that in one form or another help sponsors search for an OCIO,” Scheinberg says. “Sponsors have also become much more professional about hiring OCIOs, conducting rigorous RFPs [requests for proposals].”

Russell Investments released a white paper, titled “OCIO: Thinking Like a Fiduciary,” with sample questions plan sponsors might ask in an RFP. The firm suggests asking OCIOs to “describe the functions your firm typically assumes in an OCIO relationship and the resources you assign to manage each function.”

Another sample prompt might be, “Describe your firm’s overall philosophy as it pertains to plan management, including strategic asset allocation and governance,” or “Provide an example of how this philosophy has been put into practice across your client base, including a historical track record.”

In conclusion, Russell Investments says, “Outsourcing should only be considered when a better outcome—i.e., better holistic investment outcomes, risk mitigation, lower fees and/or reduced demands on internal resources—is more likely achievable under the OCIO model than under an internally managed approach.”

Benefits March 9, 2021

Plan Sponsor Roundtable: The New Focus on Financial Wellness

Plan sponsors discussed benefits they consider part of their financial wellness offerings that might not typically be viewed as such.

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Plan sponsors recently discussed how they have greatly expanded their financial wellness offerings to include such benefits as employee stock ownership plans (ESOPs), health savings accounts (HSAs) and rewards programs to encourage people to take such preventative measures as having an annual physical checkup or delving deeper into their finances through one-on-one sessions with financial planners.

Nancy Simutis, human resources (HR) director at Bohannan Huston Inc., told attendees of PLANSPONSOR’s virtual conference “What’s on the Minds of Plan Sponsors” that one of the things she is most proud of about the benefits her company offers to employees is its 10% match in the 401(k) plan. “Our company has a long history of trying to provide the best benefit package,” Simutis said.

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Kelly Mutuc, vice president, talent management at Novaspect Inc., said her company views its ESOP as a critical component of its financial wellness offering, particularly with respect to how the ESOP shores up employees’ long-term financial stability.

“The majority of our employees are engineers who think more broadly and longer term about their financial prospect,Mutuc said. The ESOP, launched in 2016, helps with that, she added. Novaspect thought the ESOP would fit well with its “culture of ownership and accountability,” Mutuc said. “It is also great for job retention, especially for degreed engineers. It is a great benefit that makes us stand apart. It also inspires our employees to dedicate their time and energy to be part of our organization.”

In addition to this, Novaspect now has unlimited personal leave during which employees receive 100% of their salary, she said. Only a few employees a year take advantage of this benefit, so it is not that costly to offer—but the returns are tremendous, as it builds unparalleled loyalty among employees, she said. When deciding to implement this benefit, Mutuc said, the company realized that “life happens, and we don’t want one event out of a person’s control to derail their financial future. We think it is equitable for us to offer this to all employees, including remote employees and new hires.”

Novaspect also decided to pair its high-deductible health plan (HDHP) with better transparency into the various costs available for in-network services, provided through its benefits broker and health care plan administrator, Mutuc said. If an employee selects the lowest cost option, they are rewarded with a gift card, she said. “Overall, we have been able to keep our plan costs low, taking this approach, plus this ties into our theme of employee ownership,” she said.

Simutis said that up until five years ago, her company viewed all its benefits through the lens of its providers. With employees at all different career stages and having a myriad of needs, Simutis realized that it would be more beneficial for the company to view the benefits from the employees’ perspectives, which resulted in a much broader financial wellness program.

Any company can benefit from “helping people come to work at their best every day,” she said. This has resulted in the company offering an HSA and educating workers on the benefits of investing their money in these accounts, she added.

This new approach also led Bohannan Huston to develop four pillars to support decisions for its financial wellness program: financial, physical, emotional and social wellness. The company now awards points for positive behavior people take to improve these four areas and rewards them with gift cards valued at up to $500 a year, Simutis said.

Dawn Food has a similar points program, but it hands out gift cards valued at up to $900 a year, said Brian Coleman, vice president of total rewards at Dawn Food. This past year, the company also rewarded people for educating themselves about protecting against COVID-19, he noted.

In addition to all the other programs Simutis listed, she said one of the most impactful is the opportunity for employees to have one-on-one meetings with a financial planner from the company’s adviser, SageView. The company has also made it a point to encourage retirees to remain in the plan, she added. “SageView has been instrumental in helping our retirees develop a drawdown strategy,” Simutis said.

Likewise, Dawn Food views its financial adviser, UBS, as a great benefit for workers, Coleman said.

While many companies use the term financial wellness, Dawn Food calls its offering a “financial well-being” program  because it feels the former term is overused and, therefore, not well understood, Coleman said. For Dawn Food, this means buildings its workers’ resilience, financial well-being and physical well-being, he said.

Six years ago, before financial wellness became the hot topic it is today, Dawn Food began educating its employees about restructuring student loan debt and helping them create emergency savings accounts, Coleman said. Of course, these are popular topics today, especially now that the COVID-19 pandemic has exposed the fact that so few Americans have an emergency savings account, he said.

Recently, the company began offering hospital indemnity insurance, critical illness insurance and telemedicine, Coleman said.

Dawn Food will continue listening to its employees. As a result of employees expressing their needs in the past, this year the company will begin helping employees improve their credit ratings, Coleman noted.

These are just a few of the ways employers can improve the financial wellness of their employees and, as a result, improve their workers’ loyalty and productivity, the speakers said.

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