Investing October 28, 2020

Plan Sponsors Turning to OCIOs to Broaden Investment Lineups

Experts agree that outsourced chief investment officers take on more duties than 3(38) investment managers.

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PGIM, the global asset management business of Prudential Financial, has found that more defined contribution (DC) plan sponsors are hiring outsourced chief investment officers (OCIOs). Plan sponsors say they are looking to create an institutional-quality investment lineup because they lack the internal expertise to do so and to reduce their fiduciary risk.

Josh Cohen, head of institutional defined contribution at PGIM, tells PLANSPONSOR that by an institutional quality lineup, sponsors mean they want diversified asset classes, including alternatives and illiquid investments, custom target-date funds (TDFs), lifetime income solutions, a mix of active and passive investments and multi-manager and white-label structures for at least some of their menu options.

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PGIM notes that only 15% of DC sponsors are using an OCIO manager, but that this jumps to 24% for mid-sized plans.

“The use of OCIOs in the DC market is evolving, and adoption is still in the early days,” Cohen says. He says that as DC plans continue to become more complex, such as by adding in retirement income solutions and annuities, more DC sponsors are likely to turn to OCIOs. “There is also a heightened fiduciary environment out there,” Cohen adds.

Cohen notes that the responsibilities of an OCIO are broader than those of a 3(38) fiduciary. “Besides taking discretionary responsibility for the hiring and firing of investment managers, like a 3(38), an OCIO handles other services, such as plan design and participant communication.”

Clint Cary, head of U.S. delegated investment solutions at Willis Towers Watson, agrees that an OCIO’s role is broader than that of a 3(38) fiduciary, saying, “As an OCIO, you are responsible for the total management of the investment program.”

Michele Brennan, U.S. DC solutions leader at Willis Towers Watson, says OCIOs commonly suggest custom TDFs for plans’ qualified default investment alternatives (QDIAs).

Brennan says she believes that one of the reasons why more DC sponsors are likely to turn to OCIOs is because “401(k)s have become so much more important to participants than they were 10 to 20 years ago. They use the assets not just for retirement but for other lifetime events, so it is really important that the investments in the plan work harder than they have in the past. OCIOs are focused on broader sets of asset classes than 3(38) fiduciaries.”

Cary also notes that if a plan sponsor turns to an OCIO specialist such as Willis Towers Watson, that OCIO can leverage all the assets they oversee to negotiate the best fees possible. “As DC plans have moved from $300 million in assets to $1 billion, they naturally move from off-the-shelf offerings to institutional platforms,” he says. “The benefit to participants is lower costs and a broader opportunity set on the investment side, including post-retirement income solutions.”

Investing October 28, 2020

Pre-Retirees and Retirees Can Take Steps to Address Inflation in Retirement

Few are discussing the impact of inflation with a financial professional or looking for a financial product that can increase their income to help address inflation.

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Fifty-seven percent of Americans are worried that inflation will make basic retirement expenses unaffordable, Allianz found in a survey that formed the basis of its “2020 Retirement Risk Readiness Study.” Furthermore, 48% of retirees and 62% of non-retirees have no idea how much they currently spend or will spend on health care in retirement.

Despite these concerns, only 24% of Americans are discussing the impact of inflation with a financial professional, and a mere 21% say they will look for a financial product that can increase their income to help address inflation.

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Kelly LaVigne, vice president of consumer insights at Allianz Life, tells PLANSPONSOR that inflation should be a concern for every retiree. “Even if it averages 3% over the course of retirement, within 24 years, a retiree’s cost of living is going to double. Everyone knows that inflation makes things more expensive over time, but few seem to appreciate that rising costs can also bring more complexity, which is particularly concerning as we age and our cognitive ability declines,” LaVigne says. “It is already challenging to establish and maintain reliable sources of retirement income. The additional pressure of managing increased expenses can pose a risk to financial security if people don’t have a strategy for increasing income built into their retirement plan.”

LaVigne says there are steps people can take to mitigate inflation risk. “The first is working with a financial adviser, who can have a better handle on their needs,” he says. Allianz learned in its survey that people are afraid to talk about their concerns, so it is critical that if someone goes to the trouble of hiring an adviser that they are straight with them, LaVigne says.

The next thing people should do is wait as long as they can to take their Social Security benefit, LaVigne says. “If you think about it, Social Security is one of the few guaranteed sources of income that is supposed to last your lifetime,” he says. “It also has a cost-of-living adjustment [COLA] built in.”

Social Security benefits can increase in value by 25% to 30% with a delayed start date, he notes.

The third thing people can do is to invest in products that keep up with inflation, such as an immediate annuity with a COLA rider, or guaranteed income that promises to keep up with inflation, LaVigne says.

Steve Vernon, president of Rest-of-Life Communications, says he wholeheartedly agrees that delaying taking one’s Social Security benefit is key. People can live off of what they have saved for retirement in the interim, Vernon says.

For those who are wary of purchasing an annuity, there are platforms that can bid an inquiry out to multiple insurers to find the most attractive contract and price, Vernon says. Two examples of this are immediateannuities.com and spia.direct, he says.

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