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.

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%).

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.