Recent years has seen the emergence of the outsourced CIO (OCIO) model, under which a pension plan sponsor delegates or outsources a larger part of their investment management program than was traditionally the case. Some of the big questions that arise under the OCIO model are addressed in a new research piece by Brian Golob (Russell’s Global General Counsel) and Mike Thomas (CIO for the Americas Institutional business.) Specifically, they look at fiduciary duty (how to ensure that plan participants are protected); the OCIO provider’s role (as defined by ERISA sections 3(21) and 3(38)); and evaluation (what to look for in an OCIO provider.)
Fiduciary duty: expertise, alignment, and accountability
For a number of years, Brian has been drilling the basics of fiduciary duty into anyone who will listen. As he puts it, the first principle is the duty of care and ERISA’s “prudent expert” standard: it is a basic requirement whenever any role is delegated or outsourced that the chosen provider should be suitable for that role. The second principle is the duty of loyalty and ERISA’s “exclusive benefit” rule: expertise should be exercised for the benefit of plan participants; interests should be aligned. And, finally, there needs to be accountability: roles must be clearly defined, measurable against relevant objectives, and properly reported.
OCIO as both investment advisor and investment manager
In this context, Brian and Mike argue that most OCIO assignments include both advisory and investment management responsibilities. As such, both ERISA’s section 3(21) and section 3(38) are applicable. This can seem odd to those who are accustomed to thinking of investment firms as playing just the single role of either advisor or manager. Under an OCIO assignment with elements of both, it becomes necessary to define clearly who does what. To this end, Brian and Mike provide a “roles and responsibilities worksheet,” which sets out a list of functions under the general categories of plan management, asset management and operations/administration. This allows a fiduciary to define exactly which responsibilities are being delegated under the OCIO arrangement, and which are being retained.
Evaluation of providers
Finally, they offer some thoughts on the selection of an OCIO provider. This begins with the roles and responsibilities worksheet mentioned above: not every outsourcing assignment is the same, so different considerations will come to the fore in the selection process in different cases. With that in mind, Brian and Mike highlight the need for “a culture consistent with that of the plan sponsor, experience with the plan’s specific issues, and resources sufficient for the handling of diverse tasks, which can range from strategic asset allocation to administering monthly benefits payments.”
In an ever-more demanding investing environment, OCIO seems set for continued growth in the coming years. As this happens, and as the concept becomes more familiar to investors, we are likely to see further maturing and evolution within the sector in the next few years.