2023-7_Evolving OCIO Landscape

What You Need to Know About the Evolving OCIO Landscape

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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.

Retirement Income Solutions for Plan Sponsors

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By Mark Olsen, Managing Director at PlanPILOT

By the year 2030, all baby boomers in the U.S. will be over the age of 65. With that threshold looming, along with an ever-changing economic landscape, the retirement planning process is being significantly reshaped. As people retire and expect to live for another 20 to 30 years, the need for sustained income during retirement has become increasingly crucial. As a result, defined contribution (DC) plan sponsors are adapting and seeking innovative solutions, including introducing income options in their plans. Facilitated by the SECURE Act, which eases the perceived fiduciary risks of such options, plan sponsors now have a broader toolkit to better cater to the diverse needs of their participants. 

In this blog, we’ll guide plan sponsors through this shifting landscape, covering key points to consider with this relatively new and increasingly popular plan structure. Our goal is to support you in shaping a retirement plan that is equipped for the complexities of the modern world and tailored to the varying needs of your participants and your company.

Historical Uses of Retirement Plans

Historically, retirement plans like 401(k)s and 403(b)s have been used to accumulate savings throughout a person’s career. These traditional plans have served as vessels for contributions, investment growth, and tax advantages, with the main goal being to build a substantial nest egg by the time of retirement. 

However, these plans didn’t inherently provide a structured way to distribute these savings as a regular income in retirement, instead leaving the retirees to self-manage their funds, often leading to the risk of outliving their savings. Now, with the changing demographics in our country and workforce, the focus is shifting toward incorporating retirement income solutions that also address this decumulation phase.

Understand Plan Participant Needs

Yet with every retirement plan, it’s best to fully understand the needs of your particular participants before undergoing a change to your plan. While a common concern for many retirees is a reliable, lifetime income, other aspects like control over assets, flexibility in case of emergencies, and potential for growth also play significant roles in their decision-making. They may also be looking for features such as death benefits and inflation protection. 

There are also a number of ways to “create” that income from a retirement plan. Some participants might prefer the security of a fixed annuity (which offers a guaranteed income from an insurance company), while others might prefer the potential higher returns of a managed drawdown plan. Therefore, plan sponsors need to have a deep understanding of their participants’ financial circumstances, risk tolerance, and long-term goals to select the most suitable solution.

Criteria for Retirement Income Solutions

When assessing retirement income solutions, there are several crucial factors to consider.  Does the solution offer any type of guaranteed income? While it varies person to person, many retirees prefer this component as it provides the certainty of an ongoing income stream during retirement, offering peace of mind. 

However, some will want the ability to capture potential market upside so they can potentially enhance their income by benefitting from positive market trends. 

Another key factor is liquidity, which provides participants the flexibility to access their funds in times of emergencies or unexpected financial needs. If a retiree doesn’t have an adequate emergency fund outside of their retirement plan, then access to some of their retirement funds becomes even more pivotal.

Longevity protection is also a key consideration, ensuring participants won’t outlive their assets in an era where the average life expectancy is 79 years of age.

These are just a few of the many criteria plan sponsors and participants should consider. A comprehensive understanding of these factors, along with additional ones tailored to the unique needs of the participant base, provides the selection of an optimal retirement income solution.

Participant Education and Support Is Key

As plan sponsors navigate the complex terrain of retirement income strategies, it’s critical to remember that participant education and support form the cornerstone of successful implementation. These solutions, often intricate and nuanced, demand a certain level of understanding to fully maximize their benefits. Robust educational initiatives can aid participants in grasping the mechanics of their selected income solution, including the inherent risks, benefits, and costs, and how it fits into their broader retirement strategy. 

Further, well-rounded participant education can help increase confidence in the plan, and might lower the risk of litigation. In essence, fostering an informed participant base is as critical as selecting an appropriate income solution. After all, an empowered participant is more likely to make prudent decisions that align with their retirement goals, ultimately promoting financial stability in their post-career years.

Should You Implement a Retirement Income Plan?

If you’re a plan sponsor considering the introduction of a retirement income solution, now is the time to take action. The ever-evolving landscape of retirement planning, coupled with the enhanced longevity of the modern workforce, makes it essential to at least consider income solutions that address these realities. 

At PlanPILOT, we take great pride in creating a customized, streamlined retirement plan for sponsors. If you’d like to see if your company and participants could benefit from a retirement income solution, we would love to hear from you. Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to get started today.

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.

Secure 2.0

Navigating Changes in SECURE 2.0

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By Mark Olsen, Managing Director at PlanPILOT

Just when retirement plan sponsors were getting used to the SECURE Act that went into effect in 2020, new legislation was passed in 2022 designating new rules in the SECURE Act 2.0. Some of those changes went into effect immediately and other changes are set to start as far out as January 2024. This means it’s crucial for employers and plan sponsors to familiarize themselves with these upcoming modifications and prepare for their implementation. By staying informed and proactive, plan sponsors can assist in a smooth transition to the new rules, maximizing benefits for employees and maintaining compliance with regulatory requirements. Here’s how to plan ahead for all the upcoming changes. 

Understand Recordkeeping Readiness

As the new provisions come into effect, it’s essential to assess your organization’s current recordkeeping provider. Start by requesting insight from your recordkeeper on their capability plans to handle the new provisions, including:

  1. Allowing employees to designate employer contributions as Roth contributions, which will impact employee taxes and require considerations for vesting. (optional provision)
  2. Permitting qualified student loan payments to receive employer matching contributions, which will have budget implications for plan sponsors. (optional provision)
  3. Establishing an emergency savings plan for non-highly compensated employees linked to the defined contribution plan, potentially with a 3% auto-enrollment feature, subject to specific account balance and investment limitations. (optional provision)
  4. Ensuring catch-up contributions for employees with compensation over $145,000 (indexed for future years) are contributed on a Roth basis, and allowing all participants to make catch-up contributions on a Roth basis. (mandatory provision)
  5. Increasing the catch-up contribution limit for individuals aged 60-63 to the greater of $10,000 or 150% of the regular catch-up contribution amount ($11,250 for 2023), indexed for cost-of-living increases. (optional provision)

The next step is to determine which of these optional provisions are aligned with your outlook on the employee benefit plan. An additional consideration is “packaging” a number of these changes versus rolling them out on an individual basis.

And that’s just some of the changes to come! Needless to say, there will have to be a lot of modifications to your recordkeeping process. Which of these changes will be easier to make, and which might present a challenge? Establish an open line of communication with your recordkeeper to make a smooth transition and minimize potential disruptions to your internal staff that are supporting these changes.

Lastly, you can keep tabs on all the changes in our SECURE 2.0 Plan Sponsor Checklist.

Plan for Multi-Stage Employee Communication

In making this transition to the new SECURE 2.0 provisions, it’s a good idea to plan your employee communication carefully. Since a number of changes are coming up, a multi-stage communication strategy can help create awareness and understanding among employees. 

Begin by announcing the upcoming changes and providing a brief overview of how they affect your employees. This initial communication should be clear, concise, and informative, giving employees a basic understanding of what to expect. 

Next, dive deeper into the specific provisions that are most discussed and asked about, especially on topics that impact employees’ retirement planning. Offer detailed explanations and resources to help employees understand the changes and how they can benefit from them. This stage is critical to keeping employees well informed and feeling confident in their retirement planning decisions. 

Finally, host Q&A sessions and provide additional resources to address any lingering questions or concerns. These sessions can be conducted as webinars or in-person meetings, allowing employees to ask questions and clarify any confusion. Provide written materials and online resources for employees to reference as needed. The good news is your plan recordkeeper will likely be in a position to assist you with some or all of these additional communication resources.

Review Impacts to the Employer’s Budget

Implementing the SECURE 2.0 Act provisions will likely have financial implications for your organization. Begin by assessing the costs associated with implementing the new provisions, such as technology upgrades or additional administrative tasks. At the same time, estimate potential savings from voluntary provisions like the tax credit for small businesses that adopt automatic enrollment. 

Adjust your organization’s budget to accommodate these changes. Allocate resources for necessary updates and adjustments, and balance the budget to maintain financial stability. Be prepared to reallocate funds as needed to help implement a smooth implementation of the SECURE 2.0 Act provisions. 

Is Your Plan Ready for SECURE 2.0?

The list of rules and regulations businesses need to follow in both the SECURE Act as well as the SECURE Act 2.0 can be daunting and overwhelming. If you’d like help preparing for these changes and more, we’d welcome the opportunity to assist you. At PlanPILOT, we have been navigating legal and regulatory changes as qualified plan consultants for over 20 years. If you’re ready to take the next step with your employer-sponsored retirement plan, we would love to hear from you. Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to get started today.

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.

Litigation Trends Remain Steady

Litigation Trends Remain Steady: Considerations to Help Plan Sponsors Stay Vigilant

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By Mark Olsen, Managing Director at PlanPILOT

The number of class action 401(k) and 403(b) lawsuits in 2022 was significant, due in part to the U.S. Supreme Court decision vacating a Seventh Circuit decision in early 2022. The decision makes it easier for plaintiff lawsuits to survive motions to dismiss. As a result, in our Year Ahead in Review 2023 article developed last year, we shared that we expect the steady trend of plan monitoring and excessive fees to remain in focus. In this article, we provide actionable insights for plan sponsors to assist in taking steps to help in plan management.

What Can a Plan Sponsor Do to Mitigate Risk? 

We have some ideas…

The idea of litigation is a daunting one. While there is simply no way to insulate your plan from litigation, there are steps plan sponsors can take to mitigate circumstances. Overarchingly, let’s start with the main point: Plan sponsors must be vigilant in their plan oversight. But what does that actually mean? We list specific action items below to help the plan sponsor community be in good stead should litigation arrive at their doorstep.

Critical Plan Oversight Activities 

Document Decisions 

Document, document, document. We see this written and talked about often, but we can’t emphasize enough how documentation can be on your side if done right. Meeting minutes should not be considered a meeting transcript, but it is helpful to approach meeting minutes in a manner that captures the high-level review and decision activities of a meeting. It can also be greatly beneficial to incorporate key rationale. While a dissertation isn’t necessary, insight into the rigor and final decision could go a long way in helping represent the choices made by committees. 

Be Attentive to the Investment Policy Statement (IPS) 

First, while an IPS is not required, it can be informative in helping committees meet plan goals and objectives, as well as support documentation. An IPS should not be a prescriptive document. Rather, it should provide guidance and be written in the context of your plan specifications and oversight objectives. Using rigid language or absolute triggers in an IPS can set committees up for failure and make it challenging for committees to pivot and evolve as appropriate without introducing risk. Using broad language that enables latitude for committees to apply their informed judgment is a valuable approach to help committees shift as necessary and make decisions in the context of the circumstances at hand. Most critical is to ensure that the spirit of the IPS provides guidelines to support the committee in meeting plan objectives. Rigidity is not your friend.

Establish a Monitoring Pattern and Stick to It

Whether it is related to plan fees, investment fees, performance monitoring, or provider monitoring, having a schedule or a checklist that outlines the (general) timeline of monitoring activities and steps the committee takes in monitoring can be a way to not only conduct prudent plan oversight, but in equal form, in the event litigation comes knocking, your committee has a track record to point to showing the diligent work conducted. 

Be Consistent…and When You Aren’t, Document Why

Consistency in plan oversight is key; in fact, repetition can even be helpful as a means of maintaining consistency. (Side note: This doesn’t mean robotically conducting work where an assumption of apathy or lack of engagement could be assumed.) Still, it’s okay to change course. Markets change, plan and participant circumstances evolve, goals and beliefs shift, suitable new products and services come to market, and so on. 

Retirement plan oversight is not a static exercise and it should adapt to changing circumstances. However, it’s important that committees be clear about the drivers of change and ensure that evolution is grounded in sound decision-making connected to the best interest of your participants. And, of course, documentation (see first bullet point) should capture why changes were made.

Investment Beliefs and Understanding Value for Cost

Fees and costs have the attention of everyone—nothing new about that statement—but it should not be a race to the bottom for the cheapest fees (unless the selections suit the plan objectives). 

For example, skilled committees working with their advisors have likely established a point of view between active and passive investment management and use in their plan. Many litigation cases are rooted in casting a single (negative) dye that higher costs are bad, and, in turn, this can result in active investment options in the plan being considered “expensive.” 

However, this is a linear approach to a very complicated topic. One way a plan sponsor can thread this needle is to have their committee establish investment beliefs with their advisor. This helps committees center their decisions pertaining to active and/or passive investment management on what value is received for the services given in connection with their belief set. This turns the linear argument on its head and enables committees to be very clear about how and why they established their preferred choice. Neither active nor passive are right or wrong for everyone; rather, the decision should connect to what the plan sponsor is trying to solve and ensure a commensurate trade of value for cost. Having an evaluated, discussed, and documented view on this topic can go a long way in clarifying and perhaps thoughtfully contesting any litigation matters. 

Define Risk 

We published an article on risk literacy last year, which outlined the various forms of risk most common in defined contribution plans: volatility, downside, inflation, participant behavior, retirement shortfall, and interest rate risk. This topic is a critical one for committees to tackle to help clarify plan objectives that inform their choices. Plan litigation seems to take a linear approach to risk as well. Plan committees that have clarity as to what risks they are trying to solve in order of importance can use that insight to drive their decisions. In turn, this can be documented and help them navigate and explain their choices. 

For example, if a plan sponsor has done the work with their advisor and are most concerned about shortfall risk in retirement for their participants, this may lead them to select a glide path in their plan’s Qualified Default Investment Alternative (QDIA) with higher equity. 

A second example is, if a committee is most concerned about volatility relative to a benchmark, this may lead them to select a passive investment management strategy. There is no single right answer for committees on how to assess and prioritize risk. Rather, the point is to take the time to be clear on developing risk literacy, risk hierarchy for the plan, and letting that drive their decisions, which could go a long way in helping reinforce decisions if litigation appears.

Fiduciary Training and Education

This one can be kept short. Committees are wise to periodically receive ongoing education in plan oversight and specific fiduciary training. This helps keep them up to date on all matters related to plan oversight, litigation trends, and universal understanding among members regarding their fiduciary obligations. This single act can increase awareness and help keep plan decision-making grounded in sound fiduciary principles.

The Bottom Line

While this list is not exhaustive and no plan can be insulated from litigation, we believe it is possible to make the process smoother and maybe even less expensive if your committee takes an opportunity to address the above points. Vigilance is key, and these actions establish documentation, clarity, and informed pursuits.

Want to learn more? 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.

Assessing Suitability of Advisor Partnerships

Assessing Suitability of Advisor Partnerships

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By Mark Olsen, Managing Director at PlanPILOT

Choosing the right advisor is essential for employers who want to offer their employees a high-quality retirement plan. The right advisor can help plan sponsors navigate the complex world of retirement planning, keep them up to date with the changing landscape of legal and regulatory requirements, and verify that the plan meets the needs of the company and its employees. However, not all advisor partnerships are created equal, and plan sponsors need to assess the suitability of potential advisors before making a decision. Read on to learn more about what to look for in a qualified plan consultant and how you can make the best decision for your company.

Client Services

A clear and effective client services model is essential for building a successful partnership between the plan sponsor and advisor. Plan sponsors should ask potential advisors about their approach to client service, including their communication and reporting practices, and how they handle your questions and concerns. 

The advisor should have a well-defined client services model that aligns with your expectations and needs. This includes flexibility with virtual versus in-person meetings, proactive decision support when significant regulatory changes occur (e.g., SECURE 2.0), as well as the availability of online resources, such as educational materials and calculators. A commitment to client services is the foundation for a strong advisor partnership.

Conflict-Free Business Model

Another important factor to consider when assessing the suitability of advisor partnerships for retirement plan sponsors is the advisor’s business model. Plan sponsors should look for advisors who have a conflict-free business model, which means they don’t receive any compensation from third-party providers for recommending their investment products or services. This is important because it ensures that the advisor’s recommendations are based solely on the best interests of the plan sponsor and its participants, rather than any financial incentives. 

You’ll also want to assess whether the advisor is acting as a fiduciary and if so are they willing to put that in writing in the client agreement. A fiduciary is an advisor who is legally obligated to act in the best interests of the plan sponsor and its participants. Fiduciary advisors must avoid conflicts of interest, disclose all fees and compensation, and provide impartial advice. Be sure to ask potential advisors if they are fiduciaries and how they plan to fulfill their fiduciary responsibilities.

References and Reputation

Anyone can say they are a fiduciary with a robust client services model, but the proof is truly in the pudding when it comes to whether they can back up those statements with a strong reputation and positive client references. When assessing the suitability of advisor partnerships for retirement plan sponsors, it is crucial to consider the advisor’s years of experience, client feedback, responsiveness to client questions, communication skills, and the number of clients serviced.

Plan sponsors should also ask potential advisors for references and speak to current or former clients about their experiences working with the advisor. This can provide important firsthand knowledge about the advisor’s strengths, weaknesses, and overall suitability for the plan sponsor’s needs. Through speaking with references, you can gain a more complete picture of the advisor’s capabilities to be confident you’re making an informed decision.

How PlanPilot Can Help

At PlanPILOT, our well-developed client services model, commitment to conflict-free business, and stellar reputation have set us apart from other qualified plan consultants for over 20 years. We are dedicated to creating and maintaining the best plans for you and your employees. If you’re ready to take the next step with your employer-sponsored retirement plan, we would love to hear from you. Call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to get started today.

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.