Outsourcing continues to gain popularity among institutional investors

It has long been the norm among institutional investors to delegate certain functions to others. But the extent to which this is being done and the scope of responsibilities that are being outsourced are growing.

Delegation—or outsourcing—is drawing more attention

This topic was one of the three chosen by the ERISA Advisory Council to focus on in 2014. They reported late last year, and their recommendations included:

• education and the issuance of guidance (so that plan sponsors are better informed about their options and better equipped to select and monitor providers);
• legal clarification (so that the fiduciary implications of outsourcing are clear); and
• the facilitation of multiple employer plans.

The Council took the view that outsourcing can be a significant help to fiduciaries in running their plans effectively. That, in itself, is not news: institutional investment programs have long chosen to rely on outside expertise for certain tasks, just like most large, complex organizations. Fiduciary responsibility – whether for a large pension plan, a nonprofit or anyone else—is about making sure something is done well, not necessarily about actually doing it yourself.

A change in attitudes and in the extent of outsourcing

There has been a shift in recent years, however, in attitudes to outsourcing, and in how much is outsourced. The Council’s report highlights growth in “the outsourcing of functions that would usually be performed by a plan sponsor’s chief investment officer—known in the industry as an ‘outsourced chief investment officer’ or ‘OCIO.’”

There are a number of reasons for this trend. Every aspect of running a plan has become more complex over the years. Dealing with investment, administrative and professional tasks requires more specialist expertise. Fiduciaries are more sensitive to their legal risk. Resources are constrained, and pensions are today seen as less of a core corporate function than in the past at many plan sponsors. And the trend provides some of its own fuel, because the outsourcing decision is easier to make when it is an established practice.

Multiple employer plans (MEPs) would take outsourcing even further: here, the employer would not be the sole sponsor of the plan, but rather would participate in a separately-run trust that also covers other employers. There have been efforts to clarify the extent of fiduciary responsibility that would remain with the employer in an MEP; the lack of clarity has been a sticking point. This is likely to be an area that gets more attention in the coming years.

Outsourcing makes more sense for some investors than for others

To be clear, outsourcing is an option, but not a requirement. More plan sponsors may be outsourcing more functions, but by no means all are doing so. The decision will depend on resources and attitudes as well as scale. As a result, the providers of outsourcing services generally offer a range of choices from full-scale OCIO to more selective approaches that are customized to the situation and preferences of the sponsor.

The good folks here in Russell’s marketing department have even come up with a tool that tells you “what type of institutional investor are you?”—based on half a dozen hypothetical questions, it’ll tell you whether you are a “rock steady” or a “pathfinder” or some other type of investor. That, in turn, gives a clue about what types of task you are likely to choose to outsource, and which you’ll likely prefer to retain in-house. (It tells me I am a “GM” type of investor – as in General Manager of a sports team, rather than the car manufacturer.) And a more traditional introduction to outsourcing services is also available here.