In its report on the study, Greenwich Associates says that 45% of sponsors surveyed said they choose a transition manager without any formal search or outside advice. Said Greenwich Associates consultant William Wechsler in the report, “This largely informal process stands in stark contrast to the rigorous procedures typically used by plan sponsors in the selection of investment managers and for other critical decisions in plan management.”
According to the report titled, Transition Management: Too Important to Leave to Chance, trade execution cost minimization and a candidate’s responsiveness to the sponsor’s request both rank at the top of the list in terms of importance in the selection process for a transition manager. According to Wechsler, “The fact that plan sponsors place so much weight on transition manager service highlights their general uncertainty about the process and the time-sensitivity of their need for information.”
Sponsors consider a transition manager’s depth of experience, project management capabilities, and perceived absence of conflicts of interest after the cost and service consideration.
The report notes that the main reason for sponsors’ informal selections is their uncertainty about how to measure a transition manager’s effectiveness. Thirty four percent of sponsors say they use Volume Weighted Average Price (VWAP) to measure trading execution. In the report Wechsler notes that, “The goal in measuring transition performance should be to compare actual results with a hypothetical portfolio in which 100% of assets have been transitioned instantly and without costs.”
This type of performance measurement is called implementation shortfall. According to the study, 32% of sponsors use this measure, and 45% of those say they use the “T Standard”, a measure promoted by transition management firms as an objective, standardized calculation.
The Greenwich Associates report also mentions the issue of plan sponsors engaging a transition manager as a fiduciary. Almost half of sponsors say they engage their transition manager as a fiduciary and another 20% say they sometimes do. Sponsors say they do this to ensure the transition manager acts on behalf of the plan and its participants, while many believe they have to do so under ERISA.
For the study, Greenwich Associates conducted phone interviews in May and June with 194 US plan sponsors that used an external transition manager for over $47 billion in recent transactions.
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