Month: August 2023

By Mark Olsen, Managing Director at PlanPILOT

Plan sponsors play a pivotal role in helping participants understand and pursue their ideal retirements. One crucial way they do that is through well-rounded and accessible education, especially in areas where the general public lacks awareness or understanding. However, there is a crucial aspect of participant education that has often been given less attention: risk literacy. 

Although many plan sponsors excel in providing foundational knowledge about retirement plans, the critical role of comprehending the risks inherent in financial decision-making is often undervalued and overlooked. This doesn’t represent a setback but, rather, a significant opportunity. By integrating risk literacy into participant education, plan sponsors can arm their participants with the tools to make wiser, more comprehensive financial choices. 

The Current State of Plan Sponsor Education Is Incomplete

For years, plan sponsors have conscientiously been imparting essential knowledge on retirement plans. This includes understanding the basics of retirement savings, the mechanics of contribution matching, the importance of consistent saving, and the variety of plan options available. They help keep participants well-versed on tax advantages, withdrawal rules, and the potential benefits of diversifying their investments.

However, these educational efforts, while undeniably important, fall short of providing a comprehensive understanding of retirement savings. The element that is frequently missing (and arguably as important as the rest) is risk literacy. This absence creates a blind spot for plan participants. They may be knowledgeable in how to save but lack the critical understanding of how to make informed decisions that take into account the inherent risks associated with financial investments. These risks run the gamut from volatility risk to inflation risk to interest rate risks—and all impact the unpredictable terrain of financial markets. 

How Risk Literacy Aids Good Financial Decisions

Understanding risk literacy is not just an optional skill; it’s an essential part of making sound financial decisions. It helps participants distinguish between different types of investment risks, and equips them with the knowledge to assess the potential impact these risks might have on their retirement savings. 

Yet according to TIAA in a personal finance study, comprehending risk is one of the lowest rated financial subjects, with only 35% of questions surrounding risk answered correctly. The benefits can be significant, according to Annamaria Lusardi, a George Washington University professor, who says, “Having higher risk knowledge is correlated with being less likely to be financially fragile.”

Furthermore, risk literacy encourages a deeper understanding of concepts like probability and uncertainty—critical components in financial decision-making. When participants can analyze the likelihood of different outcomes, they’re better prepared to handle fluctuations in the market. They can appropriately calibrate their investments, striking a balance between risk and return that matches their individual tolerance for risk and their long-term financial goals. 

Risk literacy also fosters resilience in the face of financial upheaval. A risk-literate participant may not be easily swayed by market volatility, but can have the confidence to stay the course, understanding that short-term fluctuations are a normal part of the investment landscape. By promoting risk literacy, we empower plan participants with the tools to manage their retirement savings effectively, making them more financially stable in the long run.

How to Incorporate Risk Literacy Into Participant Education

Incorporating risk literacy into participant education may seem like a daunting task, but with a well-structured approach, it can be achieved. The first step involves expanding your educational material to include a module on the basic concepts of financial risk and uncertainty. This includes market risk, credit risk, interest rate risk, and the risk-return tradeoff. To effectively teach these concepts, consider leveraging interactive tools, like risk simulators or scenario-based activities. Real-life examples and case studies also serve as powerful tools, offering participants the much-needed context to relate abstract concepts to their own financial decisions. 

The next phase involves the evaluation and refinement of your approach. Regular assessments or quizzes can help gauge participants’ understanding and application of risk literacy, identifying areas that might need more attention. It’s crucial to cultivate an environment of open dialogue around financial risks, where participants feel comfortable asking questions, expressing concerns, and seeking additional help. Not only can this enhance understanding, but it can also empower participants to take control of their financial futures with greater confidence. With these strategies in place, your education program won’t just impart knowledge on retirement plans, but can also equip participants with the skills to navigate the financial landscape effectively.

Empower Plan Participants Through Risk Literacy

Introducing risk literacy into your curriculum is more than just adding another module—it’s about empowering your participants to make informed decisions for their financial future. By understanding risk and uncertainty, they’ll not only have the knowledge to make more prudent financial decisions, but also the confidence to navigate the complexities of the financial world.

At PlanPILOT, we help plan sponsors develop a well-rounded, customized educational program that helps meet your fiduciary duty and equips plan participants to make thoughtful financial decisions. If you’d like to risk literacy into your educational program for participants, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

In an increasingly complex financial landscape, managing endowments and foundations has never been more challenging. Markets are constantly evolving, compliance and due diligence requirements are intensifying, and regulatory landscapes are shifting. Amid this complexity, a comprehensive and focused approach to investing is not just desirable—it’s essential. 

At PlanPILOT, we aim to minimize fiduciary risk for institutional governance teams, and be diligent stewards of the investments they manage. This commitment aligns well with the role of an Outsourced Chief Investment Officer (OCIO), a rapidly growing investment model that is projected to manage a total of $3 trillion in assets by 2025. 

In this article, we’ll explain what an OCIO is, how it can benefit endowments and foundations, and the various types of OCIO services you can use. 

What Is an OCIO?

An Outsourced Chief Investment Officer (OCIO) is a specialized service in which an institution delegates a significant portion, if not all, of its investment management activities to an external expert. This model of investment management offers a holistic approach, overseeing all aspects of an organization’s investment portfolio. The OCIO is responsible for setting strategic asset allocation, making tactical investment decisions, handling manager selection and due diligence, and ensuring adherence to regulatory standards. 

Importantly, an OCIO is also accountable for investment performance. They operate under a fiduciary duty, which means they are legally obliged to act in the best interest of their client. This approach allows institutions to leverage the OCIO’s skill set, resources, and infrastructure, enabling them to focus on their core mission while having confidence that their investments are being professionally managed.

How an OCIO Can Benefit Endowments and Foundations

The decision to engage an OCIO is not taken lightly, and it’s driven by a multitude of key benefits this model offers. One of the primary advantages is the considerable back-end support provided by the OCIO. By overseeing the daily operations and administration of investment activities, the OCIO allows institutions to free up their time and resources, focusing instead on broader strategic goals. 

Moreover, an OCIO brings a wealth of investment experience to the table. With their deep knowledge of the financial markets, they offer strategic asset allocation advice, guide on manager selection, and provide risk management tactics—activities that demand considerable time, experience, and resources. This level of skill is particularly valuable for smaller organizations, which may lack the resources to maintain a fully staffed, in-house investment team. 

Compliance adherence is another area where an OCIO can make a significant difference. Given the increasingly complex regulatory environment surrounding managing investments, an OCIO can help keep your plan in compliance with all relevant laws and regulations, minimizing potential legal and financial risks.

Differentiation Among OCIO Providers

As the OCIO market continues to grow and evolve, differentiation among providers becomes increasingly pronounced. Some OCIOs offer a comprehensive, full-service solution, managing every aspect of your investment strategy, allowing institutions to work on other aspects of their organization. Others provide à la carte services tailored to your specific needs. Before requesting proposals from OCIOs, it would be wise to make a list of all areas you’d like help with so you know the key traits you are looking for in a provider. 

Additionally, some OCIO firms may have more niche investment strategies. Some of them offer ESG (environmental, social, and governance) investments, while others incorporate private equity into their investment strategy. Each of these strategies are polarizing topics in the investment world, so it’s important for you to know whether or not it’s right for your firm. 

After understanding the service offerings as well as any unique investment strategy, other key considerations should be their investment philosophy, performance record, risk management approach, and the depth and quality of their investment team. You also want to verify you understand their fee structures, and that the OCIO is a cultural fit with your organization. In a diverse and growing landscape, understanding these variations is crucial to find the most compatible OCIO partner.

Is an OCIO Right for Your Plan?

Are you grappling with the complexities of governing an endowment or foundation and implementing best governance practices? Now is the time to consider whether an OCIO might be right for you. An OCIO can provide a level of skill and support that enhances your strategy, confirms compliance, and ultimately helps your plan participants to experience better outcomes. With a tailored approach to your unique needs, an OCIO can be an invaluable partner for your endowment or foundation. 

At PlanPILOT, our goal is to help you find the best of class investment manager that meets the goals of your organization and all shareholders and decision-makers. If you’d like to start your search to find the best OCIO for you, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.