Reasons to Offer a Mix of Passive and Active Investments in DC Plans
PGIM’s Head of Institutional DC, Josh Cohen, suggests that plan sponsors should instead offer a blend of investments.
As the Defined Contribution (DC) market continues to evolve, many plan sponsors are looking at innovative solutions to support their participants' retirement savings needs. Some of those sponsors are also looking for further support to help them in the design and implementation of those programs and are evaluating Outsourced Chief Investment Officer (OCIO) solutions. On the heels of our proprietary research on OCIOs, PGIM recently brought together a panel of DC thought leaders to discuss the latest trends in that corner of the retirement market. Following are a few highlights of the discussion:
PGIM’s research into the OCIO market was the first in a three-part series examining key trends in the DC space. Future research will look at alternatives, income in retirement and the growing impact of ESG. For more information, contact Josh Cohen, Head of Institutional Defined Contribution, PGIM Institutional Relationship Group, at email@example.com.
[ Music ]
>> Hello everyone. Thank you for joining our webinar, Filling the Gap with OCIOs: A Roadmap for Plan Sponsors. My name is Josh Cohen. I head the Institutional Defined Contribution efforts at PGIM, the asset management businesses of Prudential. Welcome all to this webinar. We really are happy that you joined us. The topic today is to review research that PGIM conducted on the outsource CIO space, OCIOs, and as it relates to defined contributions specifically. And to help me do that, I have some really expert guests on my panel with me that I will introduce. So today we're going to talk about the trends in OCIO as it relates to defined contribution. What is it? How is it implemented? And we're also, there's a lot of opportunity for you to ask questions. We'd love to respond. At the bottom of your screen and other spots, there is a Q and A opportunity. I did want to mention there may be some press on the call. All comments are not to be attributed. If you are a member of the press and you want to follow up with one of us, please do so afterwards. So why did we conduct this research at PGIM? We are not an OCIO. We really have no horse in the race as they day. But we work with a lot of plan sponsors, some who work with OCIOs, some who don't. And we just felt it's a growing trend in the marketplace. There's a lot of conversation in the market about it, in the press, at events. And at the same time, we think there's a lot of misunderstanding and there's an opportunity for a firm like us to educate the market on the space, you know, and all the considerations. We do see it as an area of innovation. I work with a lot of plan sponsors who want to implement more and more best practices when it comes to DC plans. But sometimes they have some headwinds in order to be able to do that, and perhaps something like an OCIO is a way to fill some of those gaps. And then finally, I just think it's instructive to understand what organizations who take on a fiduciary role like an OCIO, how do they think about some best practices and how they would ideally implement a plan. So even if you're not considering going to an OCIO, what are those who are taking this fiduciary role, how do they think about effective plan design? So that's the purpose. Again, as I said, I have three great guests. We are going to be sharing a lot of research that we did. We did two main pieces of research, and one was partnering with Phil Edwards at Curcio Webb. So Phil, I'd first like you to introduce yourself and the role that you play in this space.
>> Thank you, Josh. Appreciate inviting me to be on this panel. As Josh said, I work with Curcio Webb, and we're known as a search consultant. And in that role, we're working with plan sponsors to help them find the right investment consultant or investment management partner for their asset pools or plans. Our role, we partnered with PGIM and Josh on this, and Curcio Webb's role was to survey OCIOs and get their feelings on DC plans.
>> Great, Phil. It's a great partnership. We've really enjoyed it. And speaking of OCIOs, we have two other panelists who represent, who work at firms that have, provide OCIO services and other defined contribution expertise, Liana Magner and Chris Lyon. Liana, could you introduce yourself?
>> Sure, thanks Josh, and thanks for having me here today. I'm Liana Magner. I'm from Mercer. I've been at Mercer for over 20 years, and I currently am the US defined contribution and financial wellness leader at our organization. And part of my responsibilities includes overseeing our US DC OCIO business. And in that business, which has been one of our fastest growing areas over the last several years, we currently manage over 60 billion in assets in US defined contribution clients today.
>> Great. It's really a pleasure to have you here, Liana. And we have also Chris Lyon from Rocaton. Chris.
>> Great. Well thank you also for having me. Glad to be part of this today. I'm Chris Lyon, as Josh mentioned. I lead the fine contribution business at Rocaton. Most people are familiar that we're part of Goldman Sachs Asset Management, so I'm involved in the broader strategy of how Rocaton and DC fits into GSAM. I also am the volunteer vice chair of the industry trade group DC that many of us are and have been very involved in over time and involved in the OCIO efforts of our firm. So I look forward to sharing some of those experiences today.
>> Great. So let's get through and into the research, and I'm going to review some different findings that we had and then ask our various panelists to make some comments on that. Again, what is an OCIO? We have a definition here. It's someone who takes a discretionary investment management role for investment options. It's one that shares fiduciary responsibility with the plan sponsor related really to the investments in the plan. We did research, as we said, we did research that Phil Edwards at Curcio, this is the bottom bullet, where we, where Phil researched 20 OCIO firms, the largest ones out there in the DC space to get some of their perspectives and attitudes around OCIO. We also surveyed plan sponsors themselves, and we partnered with Greenwich Associates to do that. We had over 140 plan sponsors, 138, I'm sorry, plan sponsors respond. You can see the breakdown. We had from mega plans to kind of midsize and smaller plans respond to the survey. So it was pretty comprehensive, and some of them do use a OCIO, pardon me, for the DC plan, and others do not. And let's look a little bit more at some of the high level findings. Fifteen percent of those surveyed, you can see in the left chart with the circle, currently use an OCIO for all of their 401K investments, another 1% do it for some of their investments. And that's something we're going to talk about. You don't have to OCIO the entire plan. Another 2% are considering using an OCIO. And then another 17% that they evaluated decided not to move forward. And the rest do not. As we look at the size breakdown, and I'm going to ask our panelists to comment on this a little bit more in a bit. At least based on this survey, and surveys are, you know, it's interesting to see what the surveys say, but it's also interesting to see what the practitioners have to say, what they're saying. The majority was in that $250 to $500 million range or $500 to $1 billion range. We see less in the mega space, but I think as we'll discuss, that is, you know, does seem to be an evolving space as well. What does it mean to provide OCIO? What are those services, those discretionary services? Again, we asked the plan sponsors that do use an OCIO. What are you using them for? The most prevalent response was that these OCIOs help us select a third party target date fund or single manager fund for their investments. So you know, there's, instead of giving recommendations from possible managers to select, they are saying that these OCIOs are actually just taking discretion for the hiring and firing of these single managers. However, we do see some, not as many, say that their client, that their OCIO is either building custom funds for them, or some of these OCIOs have built their own multimanager, for example, vehicles, collective trust funds or what have you, to implement some of the manager selection within those, what we call exclusive vehicles. OCIOs we are told by both DC plan sponsors and the OCIO managers themselves, as you look at the right, also provide other types of services as well. We call these nondiscretionary services or additional services from vendor searches to plan design to participant communication, etcetera. And most OCIOs say they provide these services, and for the most part, plan sponsors are taking advantage of these as well. One more slide and them I'm going to go to our panelists, just a couple other survey findings. About a quarter of those who use an OCIO said they used a search consultant. I'm sure Phil would love to see that number grow, and I think it probably will. I think this is getting more and more complex. As far as satisfaction in the middle, really high levels of satisfaction from those who did move to an OCIO. And finally from fee structure, we see both flat dollar and acid weighted fees being offered. So I'm going to pause right now and first as Phil Edwards to comment a little bit more on, you know, I reviewed Phil the spectrum of solutions that we see are utilized. What's your view of what you're seeing being offered in the market in the different types of ways that OCIOs are working with plan sponsors?
>> Yeah, thank you, Josh. Spectrum is a great word to use there. And I want to talk about two spectrums really. One of the spectrums is in terms of the service model. If you think about traditional consultant, all the decisions rest with the committee or board or whoever is governing the fiduciary that's responsible for the assets. When you move to the OCIO side, you're beginning to bifurcate those decisions. You know, some decisions are kept with the committee or board. Other decisions are delegated to the OCIO. And the OCIOs have been very flexible in terms of the services that have been delegated. You know, the most common services delegated is the manager selection service. But even within that, there are some committees who say look, I want to voice still in that selection process, especially early in the engagement as they're building trust between the plan sponsor and the OCIO. And that may change over time as well. So there's not a one size fits all service model for OCIOs. It could be negotiated between the plan sponsor and the OCIO to fit that specific plan sponsor's needs. The second spectrum I would talk about is the type of investments that they use to populate the plan. The most common is what we call off the shelf where they're picking third party managers, the fidelities, the Vanguards of the world or maybe some, you know, lesser known managers like Sands, something like that, Westwood, that would come in and populate the plan. And then you move to custom options. Josh mentioned custom options for larger plans. They're increasingly considering custom options because it simplifies the menu. It makes participant decision making a little bit easier. And then finally at the other end of the spectrum there's what we call exclusive funds or what plan sponsors sometimes call proprietary funds. And these are manager of manager products. These are typically products where the OCIO is really not making any money on it. It's just an efficient way to bundle managers, a diverse set of managers together. I think it's interesting that plan sponsors when you go back to this spectrum, when they're picking off the shelf funds, you know, the track record that goes with that still seems to stick with the off the shelf manager, you know, the Vanguards, Fidelities of the world. And then as you move closer to the exclusive funds, the track record begins to move to the OCIO. And sometimes it's the OCIOs name that are on those funds too. And so performance becomes a bigger factor as you move through custom and to the more exclusive funds.
>> Yeah, that's an interesting observation. I'm seeing more and more articles about how you're evaluating performance for OCIOs in different types of fields, not just DC, certainly. So I think maybe that's something we could talk about more. Liana, I'd love to turn it over to you now and observations you had. I showed that slide earlier where we're seeing, at least what the respondent said in terms of size of plan. Maybe can you make some comment about what you've observed in that area and tie it to the types of services that are provided as well?
>> Sure. So within Mercer's DC OCIO business, we really started off offering those services to mega plan sponsors. And it really was demand from those larger plans who were looking to move to more custom approaches, building custom multimanager options specific to their plan. So it was surprising to me in your survey results that we did not see much uptake in OCIO for the billion dollars and plus because we certainly have quite a few plans that are over a million dollars and even several that are over $5 billion. So what we find there is a more customized approach. Again, it really depends on what the client is looking for. We have somewhere those large plan sponsors have internal staff, and we work really collaboratively with the staff on their sort of strategy and philosophy and implement that policy for them. But keep them involved along the way as well. We then have others who say we are delegating this to you for a reason, because we don't have the time or expertise to do it. So we want you to take care of it. So, you know, we really see, you know, no two clients are really exactly the same. But I mentioned our business really started in that mega space. And over the last couple of years we've seen it move down market. And so our clients really span the gamut from typically about $100 million up through, you know, over $10 billion in plan assets. We also service the smaller end of the market, plans from 10 million to 100 million in a group of plan structures. So it's more of a bundled solution that bundles OCIO services with 316 administrative fiduciary services in a group of plans. And that has, we launched in 2017, and has really grown. And that has over $1 billion and over 30 clients as well. So we've seen OCIO in our experience move down market. And the services there for the smaller plans what we're seeing is helping them to implement an institutional approach. And sometimes, we're first educating them on what that means because in that small and midsize market they may not have been thinking about custom solutions or implementing multimanager strategies and what does that benefit or how does that benefit the participants. So oftentimes, as we're talking about this spectrum of governing solutions and advice versus OCIO solutions, we're also talking about the philosophy and the approach. And so, you know, as we have built multimanager investment funds, we typically employ those in the smaller plans where it's ease of implementation, and they don't necessarily have the economies of sale to build the custom solutions, which is what we build for those mega plan sponsors. So there's a spectrum of how we work with the different clients. There's a spectrum of how we implement investments for those different clients. And it's been a growing trend as we've all seen.
>> Well that's very helpful. And yeah, I think, you know, got to love these surveys. But sometimes they're as good as, they show you trends and general directions. But talking to practitioners on the ground, it's important, but I think what we've definitely seen and what I'm hearing even today is it's not just a one size fits all approach. There's different segments. There's different types of approaches. And I think that's the way I've seen this space evolve. Chris, I'd love for you to comment on what's been talked about today as well as some of those ancillary services that you also tend to see included with OCIO.
>> Sure. So I agree that this is something where we've seen interest and have clients across the size spectrum. And that the needs of sponsors in the specific organization and plan definitely vary by size. But on a lot of dimensions as well. So having a service model that's not one size fits all and whether it's the type of responsibilities that the OCIO takes on or whether they only work on a portion of a plan on a discretionary basis or so on, you know, is very important because as, you know, Phil probably sees the most, you know, different plans have different needs it's trying to solve through an OCIO search process. In terms of some of the things that we were discussing in terms of the service model and plan sizes, you know, one thing in addition to Liana's point, which I generally concur with, that I wanted to mention is that OCIO certainly can free up staffing committee resources as well. But particularly when there is a lot of decision making that needs to be made, OCIO can really help, for example, a new company, you know, large spinoff of, you know, in this kind of MNA intrinsic action-oriented world that we live in. Oftentimes, you know, you could have thousands of people who are part of an employer that's being spun off and needs to stand up its entire benefits program very quickly. The investment committees might not even be formed yet to select a new, you know, 401K program. And so engaging in OCIO can, you know, help, you know, really speed up that process pretty dramatically. So there's a lot of different circumstances where this service might really be applicable where a traditional more advisory type committee-led model just doesn't work or there's not time for it or it's not in place yet. So we've seen a lot of interest, a lot of interest there. And then in terms of some of the specific services, Josh, you asked kind of about some of the ancillary things. But I think it's important to note that, you know, sometimes plan sponsors may want to look to the marketplace to find a new advisor, but they're not sure if they want to go OCIO or advisory. And so the important thing is that most of the services that you were referencing on the prior page are typically available in the marketplace under both models. It's a question of how they're implemented and who's making the decisions. So, you know, sponsors who aren't sure can start with one model, and we've often had people as they got into it switch to another model because they felt it was more appropriate, mostly commonly from advisory to OCIO rather than the other way around, of course.
>> Now your comment made me think of another question unplanned here, so maybe I'll throw it back to you, Chris, and Liana, you can comment. Do you ever have a plan sponsor who asks you maybe just for a certain portion of the plan, certainly like a glide path for a custom targeted fund could be considered in some ways an OCIO but maybe even an asset class or two, just take discretion over that versus an all or nothing. Do you ever see examples of that?
>> Yeah, I think there's some need for that depending on the structure. So for example, you know, particularly the further up market you go on plan size, there's a great prevalence of these custom multimanager or private label options. But some plans might have their entire menu of like that, and others might just have them in categories where they thought it added the most value or where it helped them, you know, reduce the number of discreet managers and strategies they were otherwise offering to participants. So, they may just want assistance with particular areas. We also find that it's not just by asset category but in some cases the client may want to retain more of the decision making but provide authority to do the implementation, to negotiate the fees in terms with the managers and, you know, coordinate the movement of assets and transition between portfolios and so on. And so, you know, there are a number of different approaches there as well that may not be considered full OCIO but perhaps partial.
>> Right. Yeah, so again, that theme of the spectrum. Liana, any other additional comments on that?
>> No, I agree with Chris there. I would say, you know, in our experience, probably the majority of our clients do go for OCIO over the entire plan. The most common, you know, sort of single sleeve or partial delegation is with custom target date funds. And even with we've got some target date funds, you may have someone who, you know, outsources the entire target date series. So meaning develop us a glide path and select these strategies that are implemented in that glide path. Others may say just design the glide path for us and then we will implement it ourselves. So, there's a spectrum there. But so yes, we do have full delegation as well as partial and the, kind of we call it the single sleeve investment, and the most popular would be custom target date funds.
>> Yeah, that's consistent with what I've seen as well. I found this next slide to be really interesting. We effectively asked the DC plan sponsors, as well as their OCIOs what are the top reasons for moving to an OCIO? And we got some similarity, but we got a few areas where there was some differences. You know, in particular, you know, we saw, you know, the move by some plan sponsors to OCIO was to utilize in part to implement what's called more institutional quality solutions, more best practices. We can talk about that a little bit more. But and while some plan sponsors are concerned about the fiduciary risk, that was certainly ranked very highly. It was the number one stated reason from the 20 OCIOs that we talked to. You know, others, you know, these plan sponsors to say they need help getting there. They may not have the investment sophistication or the committee time. Interestingly, the OCIOs put the desire for expertise in implementing institutional quality solutions as their, you know, number six reason. So I thought that was interesting. Phil, when you have sponsors come to you and say that they are interested in moving to an OCIO, what are you tending to hear? Is this consistent with what you're hearing?
>> It is. And we do have the benefit of listening to a lot of plan sponsors talk about that, because I think as was mentioned earlier, part of an RFP can be deciding whether or not a plan sponsor is going to go with an OCIO model or a traditional consulting model. And a lot of our RFPs are tailored that way to kind of try and help answer that question. But if I were to summarize the plan sponsor's viewpoint, I think a lot of what they're saying here in these categories could be look, if as a business management person, I'm responsible for managing this business it is, if I spend more time managing the business, I'll do a better job with the business. I can put money into the plan. Participants at the end of the day will be better off, and I have somebody else who specializes in investments, helping to manage that part of the business. So, you know, it's an allocation of expertise. And the people who run the business want to minimize the time on the governance of the plan, maximize the time on the governance of the business, and hopefully everybody is better off at the end of the day after that.
>> Yep, very well said. Chris, what are some of your observations and some of these responses here?
>> Yeah, so I would, if we just look at the plan sponsor responses, I was surprised that four, five and six weren't ranked more highly. But they all seem like strong responses. And particularly, I would say for kind of the 50, I'm making up a range here, but $50 to $500 million type plans and not to overgeneralize. But most commonly I hear that, you know, there's not a lot of committee time. There is usually not dedicated staff. And oftentimes, and maybe this blends into number three, but there's a desire to use the committee time much more strategically. And the most time consuming exercise, I think, in an advisory relationship is often manager searches. But that's not necessarily the most impactful thing with all due respect to the managers on the ultimate outcomes for participants. It's just one piece of the puzzle, but it gets a disproportionate amount of committee time if there's, especially at the start of a relationship. Or as things develop, if there's a need for a lot of searches. So, you know, we kind of have these conversations, and I recall one with, you know, a CHRO who said, well we trust you to get us from thousands of funds to three. And, you know, why don't we trust you to go from three to one. And in many other cases, you know, you've shown three or five or whatever, but you're making a specific recommendation, nonetheless. But you're walking through, you know, with a lot of committee time of pretty robust analysis. So if you can be doing that behind the scenes and just present the results of your decision making and as far in advance of actually implementing the changes the committee would like so they can see what you're doing, that frees up quite a lot of time and doesn't put people in a position to be making decisions on things that aren't part of their day job or their expertise. They might be interested. They may become knowledgeable, but if it's not something that they've really focused on, you know, I think they feel ill-equipped in some cases to make those decisions.
>> That's helpful. Liana, you've touched on this before, but you had some observations about some of these responses particularly around the institutional investment approaches.
>> Sure. I guess I would say, you know, particularly on the large and mega plan market, I think that's absolutely true that, you know, sponsors are looking for being able to implement institutional quality structures. And that takes time to set up the custom funds and manage those custom funds, set the, you know, target allocations and rebalancing and coordinator with the various service providers, whether it's the recordkeeper or custodian. I think I was a little surprised to see it as number one considering the respondents in the survey tended to be the small and mid client sponsors who, you know, were adopting OCIO. I think in that case, you know, really, all of these are reasons why someone would adopt OCIO. And I guess maybe as sponsors go through the process, they're going to identify something as what was the key driver. And, you know, to my point before, sometimes we're educating on the small and mid end of the market around what are constitutional structures. And you know, how can you implement them in a plan your size? And so maybe that resonates and then becomes one of the key benefits for why they may, you know, move to an OCIO solution. But I think, you know, you also can't really ignore the fiduciary risk because we see new lawsuits coming forward against 401K plan sponsors every single day. So that fiduciary risk perspective is always top of mind.
>> Yeah, well said. And I think, like you said, maybe you guys are doing a great job educating on this institutional approach. But retroactively they're saying yeah, that's what I wanted. But also, these are also intertwined. They want that institutional approach. They have the fiduciary concerns. They have the lack of staff time concerns. So I think these are all very interrelated. Similarly, certainly a lot of plan sponsors said they do not use an OCIO. Why is that? Certainly you tend to see that in the larger plans. And the top reasons tend to be around the desire to retain more control. They feel they have the expertise internally. Maybe, you know, number three, some of them don't understand the value proposition. So education in the market probably continues to be a need, etcetera. So, but again, I think as respondents have said so far, there's a spectrum of ways that control can be shared as well. So I thought that was interesting. You know, many times we've talked about --
>> Can I just chime on that real quick?
>> Oh yeah.
>> Because I was just going to say that, you know, one of the things as we were kind of prepping for this is that it wasn't necessarily a choice in the multiple choice on the prior slide, but I also think that there are a number of sponsors who just, they really like what they have in place. And I think they're afraid that there's going to be more change and maybe might be the case. Or they just don't want any change at all, and the hope is that in an advisory relationship maybe the advisor won't push too hard if they don't love what's in the program. So, you know, kind of turnover in the current investment menu I think is maybe one has it, and it's on the part of some sponsors to move to OCIO.
>> And do you all when you take a new relationship tend to have that big turnover or --
>> It's going to vary depending on what you're inheriting and you'd like to understand not only what's there but why it's there, how long it's been there, how participants are engaging with it. So all those factors come in. And it's quite possible that in an OCIO relationship, there'd be very limited turnover. And in other cases, you know, there might be some opportunities to do something or leverage our scale or, you know, Liana, I'm sure feels the same leverage Mercer scale to, you know, to come in at different price points with different, a different range of managers. So, there can be, and that's an upfront discussion that people can have with the OCIO provider so that they have some expectation for how different things might look. But I do think it's one concern that maybe wasn't captured fully on the page.
>> Yeah, that's very helpful.
>> Not to pile on too much, I think it's a really interesting question and I think we have one question from the audience that kind of gets to this as where does consulting stop and OCIO start.
>> And if a plan sponsor hires an OCIO but is very reluctant to make, to allow that OCIO to delegate responsibility to that OCIO and allow them to make decisions, are they really an OCIO? And we do have a lot of conversations with plan sponsors who aren't sure whether they want a consultant or an OCIO. And it does evolve greatly around this topic that Chris brought up of how much are they going to let go of the steering wheel. And instead of, you know, putting the consultant in the passenger seat, allow the consultant to be a drive and become and OCIO. And you know, if there's not going to be a lot of discretion there, we had one situation where we came in and the plan sponsor was very concerned about the performance of the OCIO and why weren't they doing better and why weren't they taking, you know, more opportunities here. And then when we opened up the investment policy statement and looked at it, and they had so many constraints on the OCIO that the OCIO couldn't move. And so it really, you know, raised the whole question of well do you even want and OCIO? Are you just looking for that fiduciary responsibility, but if you're taking back all the decision making, are you really, you know, sharing that fiduciary responsibility.
>> Yeah. You know, maybe that's a good follow up. We are getting a lot of questions which we really appreciate. Keep them coming. Phil, maybe I'll keep going. Maybe this is the question you were referring to. And I know a lot of times in the market, you know, one area of education is sometimes people call this 338 services, OCIO, you know, that gets into sort of some legal questions too. But like how, do you see those terms interchangeable 338, OCIO, how should one think about those terms in terms of discretion and whatnot.
>> Yeah, we have not reached a nomenclature in the industry yet. There's a lot of different names for a lot of different things. But we use 338 and OCIO interchangeably.
>> And in the retirement plan space, an ERISA 338 fiduciary is considered an outsourced chief investment officer. When you get into things like endowments and foundations where there's no ERISA and the code's not there, they're not, you know, the same ERISA code's not there. The 338 kind of drops away and you become an OCIO just by the nature of the responsibility you assume. So yes, we use those in the ERISA case interchangeably.
>> Yeah, the way I sometimes think about it is I think 338, you know, again, that's an ERISA term. It's a code in ERISA about someone taking discretion. And I'll stop there in terms of any more legal kind of advice before I get shut off by compliance. But, you know, that's what, that's the legal term. OCIO is more the overall services that are provided, and 338 can be a part of that, you know, to take some discretion. As we said, there can be other things that are incorporated that aren't necessarily discretionary in nature, you know, that can also be a part of kind of taking these OCIO services. And as we said, there's a spectrum of approaches there. We hit upon this institutional approach a little bit more or often, and I'd like to talk through that a little bit more. What does that even mean? It's something that, here at PGIM we've talked about it a lot. I know we have a lot of long time listeners on this call. You've probably heard me talk about this in the past. But we really advocate for the benefit of participants in these savings plans. We think they benefit from a more institutional approach. And you know, some people call it the D beatification [phonetic] of DC. I like to call it just more of an institutional approach. How do institutions think about solving for a liability, you know, whether it's a DB plan, an endowment, a foundation, sovereign wealth fund, etcetera. And there are lot of characteristics you see on the screen having outcome-oriented approach, thinking about broad diversification, not just simple asset classes but thinking how do you use the benefits of diversification through different types of asset classes, including liquid and illiquid. Going down there, thoughtful mix of active and passive. Most institutional investors are not dogmatic one way or the other but are thoughtfully thinking about both. You know, maybe on that a little bit further some of you may have seen this analysis we've done in the past where we modeled why would you, have a mix of active and passive. And we looked over an individual's time horizon, very simplistic model. But in that blue bar, if you can net a fee's 35 basis points, alpha over a lifetime, that can equate to six extra years of savings in retirement. Now again, we know that's not guaranteed. It's episodic. But most institutional investors will say if you're thoughtful about what asset classes you do that in, it's not a heroic type of assumption to try to net that over a long period. And it can have a meaningful result in terms of retirement, readiness. We also talked about institutions using more diversified asset classes, the benefits of diversification. Why would you do that? I won't belabor too many of these numbers, but we did analysis that suggested one asset class that many institutional investors look at is real estate, and we model, if for example, 25 year olds and 55 year olds incorporating real estate into a sort of an equity fixed income glide path you could say. And really, it's not necessarily a return story. It's a diversification and risk mitigation story. And that those, you know, when we modeled it, those portfolios with real estate had a much, didn't have as high of a draw down, a max draw down as those without it. So the benefits of diversification, that's just an example of one asset class. There's lots of others. So that's all the setup for questions we asked. And I'd love Phil to review this slide, because Phil in his survey asked OCIOs some of their attitudes around plan design and some of these different structures. So Phil, could you take a few minutes and review some of the observations from this survey question?
>> Yeah, absolutely. And I'm going to start as the audience is looking to slide to the audience's far right-hand side where it says preferred clients use extensive comingled investment trusts and, you know, there seems to be a big disagreement on the part of OCIOs that they prefer that. I do think there's a bit of a disconnect there with plan sponsors. I think plan sponsors perceive, rightly or wrongly, they do perceive that some firms prefer to use their investment vehicles. And I think that gets into the perception of what these investment vehicles are, the inclusive investment vehicles. I referred earlier to them being considered proprietary vehicles. And, you know, we would take issue with that. We don't think they're necessarily proprietary vehicles. They are an opportunity to efficiently bundle good managers in a structure that can lead to cost savings. I think a lot of the OCIOs are pushing the cost savings as opposed to pushing the exclusive funds. But unfortunately, that difference is lost on the plan sponsors. So while there may be a lot of apathy on the part of OCIOs about the use of exclusive, I don't think there's the same apathy on the part of plan sponsors. As we start to move to the audience's left, there's about in the middle it says, you know, plan sponsors should provide lifetime income options in their DC plans. And they're, you know, the biggest area there is three. There seems to be, you know, maybe more indifference on the part of OCIOs there. And we do hear a lot of plan sponsors that they want to think about what's become known as the retirement tier. It may not be annuities exactly. But there is a, you know, a growing discussion among plan sponsors about, you know, A, should I retain retirees or terminated participants in my plan. If so, what should I offer them? And then I'll take you all the way over to the left side as the audience is looking at the slide, the first column on the left, plans should have a mix of active and passive management for their core menu options. I don't think you get a lot of disagreement from plan sponsors there, but again, with the huge shift of participant assets to index funds, I think plan sponsors are beginning to ask more and more questions about the value of active management. And especially, you know, the dispersion we've seen between growth and value has kind of raised a lot more questions, and this dispersion has not been a short term thing. It's been a fairly long term cycle for that, the difference in returns there. I think that type of thing continues to raise questions on the part of plan sponsors about the value of paying for active management within a plan. So those are the three big things I take from this slide.
>> That's great. Thank you for summarizing that. Liana, what are some of your observations, particularly on things like active passive, white label, etcetera, different types of investments
>> Sure, I guess, you know, we talk a lot about flexibility of solutions and customizing to the particular plan sponsors. We think there's no one size fits all solution for all plans. And what we do in every case is work with the plan sponsor. We look at what's the size of their plan. Assets, we look at their participant demographics to see, you know, what are the number and type of options that you are making available to participants? How are they using those options? Do you have a particular, you know, philosophy within the organization around active versus passive? I think, you know, we, you know, to Josh your slide, about active management and the value it can add over a lifetime of savings, we are proponents of using both a mix of active and passive investment options. You know, all our sort of, the type of investment structure we lead with on the DC side is that because participants are directing their own portfolios, managing their own portfolios, what you want to provide to them is a diversified lineup that includes choice. So we often, you know, recommend just through the target date funds a suite of passive low cost index options in each major asset class category. And then similarly on the active core side, a suite of actively managed options in each major asset class category. And then you can let participants choose. You know, I think we all know large kept equities were the most efficient markets. It's the hardest place to add value, yet that's one of the most popular investment options that participants choose. So, if they want that option, you can make it available to them. You could also give them the S&P 500, which is going to be low cost. But they can build that portfolio. Within the target date suite, that's where we would typically say, we would lead with using a blended approach that has a mix of active and passive management using active management in those asset classes that are less efficient. But then again, you need to talk to the plan sponsor about their philosophy. And also, what are they coming to us with, right? You know, most of these plans are already in existence today. They already have investment options in their lineup. Do they want to, you know, maintain what they currently have? Do they want to make a change? And in today's world, I think it's a little bit harder to move from a really low cost passive target date fund to something that's more active because it's going to increase fees. And that's very visible to participants. So, you know, again, it's customized for every client and to the point of retirement income too it's what problem are you trying to solve? What's the percent of your participant population who's at, near or in retirement? And do you want to keep them in the plan? And, you know, depending on the answers to those questions, maybe it makes sense to offer a retirement tier. But again, it's, you know, talking it through what with each fund sponsor and seeing what's right for their own participant demographics.
>> Yeah, thanks for that. And, you know, we tried to then take this data and see, well what were the plan sponsors saying? So again, back to this slide we saw a pretty strong message from the OCIOs that at least let's say in the core menu there should be a mix of active and passive when the target date funds, still pretty strong that it should be a mix. Maybe a little bit more ambivalence towards that. But still pretty strong. So then we wanted to translate that to, well what were those plan sponsors saying? How did their lineups look when they went OCIO or didn't? So in the top, again, we looked at overall the plan, together says the core menus. And it does appear that those that currently are using OCIOs at the very top bar are primarily taking that advice to a more active and passive if not even more active management. No one responded that they're 100% passive or using an OCIO. Which would pretty much make sense relative to those not using. We also looked at the same thing on target date funds. Again, pretty consistent with what we saw on the last slide. Those currently using tends to be kind of mixed more. Where those not using, some of them are actually using 100% active. But you actually see more prevalence of 100% passive for those who are not using an OCIO. So we thought directionally, those were some interesting observations. And I'd like to wrap up this conversation to talk about these areas of opportunities. Again, I think all of us who are in this space can acknowledge that we're going to need to continue to innovate to help solve the retirement challenges of American workers through the employer-based system. You know, so you'll see a lot of buzz words out here, multiple employer plans, retirement income, white label custom, some of these we've already touched upon. But you know, is OCIOs or even some of these other models, maybe these areas of innovation that can kind of move some of these things along. There are two, for those that have been following the legislation, about a year ago now, almost exactly the Secure Act passed. There were a lot of provisions related to DC plans in the Secure Act. Two that I wanted to hit upon, one is the use of more guaranteed income solutions or annuities. There has been a lot of headwinds in the corporation of guaranteed income. So we did ask plan sponsors now that the Secure Act has passed, has this increased your interest in considering the use of annuities in 401K plans. And you see that there was some agreement, it was kind of mixed, somewhere in the middle to some agreement that yeah, maybe there is a little bit more interest in the are themselves. But again, some more opportunities for OCIO type of approaches. In addition, the other, one of the key initiatives was the new structure under the rubrics of multiple employer plans. We've gotten already several questions on that. But a multiple employer planning, particular the Secure Act creating a straight, created a structure called a cap, a polled employer, which is a type of open multiple employer plan. Where, you know, many see this as almost the ultimate outsourcing. It's really delegating plan sponsor responsibilities to a third party. And, you know, many of this is to address the small plan market and many employers who work for small companies who don't have a plan at all. They don't have access to quality low cost plans. But also some are looking at this even up market as well. It does seem like when we ask the question, many are still saying they're unlikely to do this. There's probably an area, it's so new that there's probably a need for education. But on these two topics, Chris, I'd like to start with you maybe. I think you have some thoughts about the retirement income question in particular how you think about that relative to some of the other discussions we've had today.
>> Sure, happy to comment on that. And kind of combining that together with the prior topic and as Liana was speaking about, some of the menu trends. I think what we're starting to see more and more as the demographics cycle through in the plans as the power of default options really has kicked in in recent years and so on. But is that there are fewer people, and there probably should be fewer people, who are mixing it themselves in the core menus. And these default choices, the target dates, sometimes the managed account or other solutions are really becoming much more critical. And I think some of this OCIO discussion also shows how, you know, there's a lot of line items to keep track of in the core menu, for example. It's so important to have the robust and thoughtful core menu. But if you can shift how committee, staff and advisor time is being spent towards the default options, towards the advice that's being given, whether from a variety of different plan service providers, including perhaps affiliates of the recordkeeper and so on, you can find other ways to be more impactful. And incorporating retirement income into that discussion is really important. I think the challenge and, you know, Phil was speaking about one of those slides you mentioned kind of lifetime income and kind of the mixed response from the OCIO providers to that. But there's not a standardized definition of what we're talking about here. And so the most important thing is to figure out what's a problem we're trying to solve. Who are we trying to solve it for? Dig into the demographics, as Liana mentioned. Oftentimes, too, I think when you start to look at something like a retirement tier, which is a different way of kind of curating the experience is the way I would put it for people who are starting to plan for retirement or who are already in it. You know, it sounds like a big lift for many plan sponsors to build a retirement tier. But in reality, most plans already have components of it. It's a matter of organizing it differently, figuring out what the gaps are and which of those gaps are the highest priority to fill because they're going to help the most people unique to your demographic and circumstance. Or they're the easiest lifts because, you know, there's less fiduciary risk to them or they're already available at your recordkeeper, whatever, or the committees. Are you comfortable with the concept? We were very encouraged at the beginning of the year before the seriousness of the pandemic was apparent to everyone that, you know, in kind of January early February discussions, right after the Secure Act, that retirement income scooted way up towards the top of the agenda for many plan sponsors to figure out how to take things to a new level or take that next step or do some further education with the teams or the committees. Many of our clients have been independently researching it as well. Some of those processes continued, some slowed down. But as we build agendas for 2021 and people are able to focus on what's that next nice proactive thing they like to do for their participants, retirement income has returned to many of those workplans. And then once you figure out a definition, then you can kind of use an OCIO to implement that. But it's hard to go to the OCIO without a definition and just say, you know, we'd like to make sure we have lifetime income solution. You know, it needs to be much more collaborative than that before you can think about whether you want the OCIO to do it, or it's going to be a committee decision.
>> That's great. That makes a lot of sense to me. Liana, I'd love for you to comment on this. And I think maybe you could talk a little bit more about these PEP questions and maybe bite into retirement income and anything else we've talked about today.
>> Sure. So I guess, you know, I'll maybe kind of start with, you know, the PEP discussion to say we sort of view it as, you know, the availability of PEPs really expanding the spectrum of solutions that's available in the DC marketplace. So, you know, an OCIO solution versus a PEP, a PEP really expands that outsourcing. So an OCIO solution as we've been talking about is more around delegating the investment management capabilities, manage your selection, monitoring termination, whereas a PEP does that plus there is delegation of administrative fiduciary responsibilities. There is, you know, a transfer where the sponsor's still responsible for selecting that PEP provider, but many of the, you know, plan operations are then taking over. You know, there's obviously, you know, an audit that gets taken care within the PEP. There will be one 5500 within the PEPs. So it's really expanding the outsourcing. And you know, Josh, you had commented on, you know, who we think may look to join PEPs, and as the, you know, regulations were written, it was really targeted toward trying to address the coverage gap for those people who don't have access to a retirement plan. So for small employers who otherwise weren't sponsoring the plan, this can give an opportunity for those small employers to join a PEP and make that benefit available to their participants. But we also think that, and as we've seen in other countries, once these types of structures were made available, they quickly moved up market. A lot of times, how quickly they moved up market has to do with what the regulations were, and we're still waiting on some guidelines to be released around PEPs. But I think there's some thought that particularly for plans in the small and midmarket, there can be some economies of scale that could be garnered to help reduce costs overall for participants. And also as Chris mentioned, we tend to see greater resource constraints on those small organizations in terms of having the time and staffing to really manage the day to day of the plans. But you know, if you think about PEPs, you know, targeting the 401K market that for plan sponsors that already exist today, one of the ways that PEP pool plan providers can differentiate their PEPs in the marketplace is by including innovative solutions whether that be a retirement income feature. Whether it means incorporating alternative assets in, you know, a target date fund or other multi asset class, you know, investment options that are available. We could see greater innovation as a way to differentiate those solutions for plan sponsors. And then maybe, you know, for those plan sponsors would be attractive because many see it as a heavy lift of, you know, evaluating retirement income solutions and taking on that responsibility for selecting that. Whereas, selecting the PEP, it comes with some of that innovation. So we'll certainly see where that lands, but I think, you know, those are some of the thoughts that we have in the marketplace today.
>> I think that's really observant. I think it's going to be interesting how this all evolves. Again, I've worked with employers for almost 25 years now, and so many are trying to do all these best practices, and many are successfully doing it. Others have challenges, just a lot of the headwinds from staffing to fiduciary to committees, etcetera. So, I think, you know part of our job, yeah, go ahead.
>> Sorry, I was going to say I think what's interesting is just the fact that PEPs are coming to market and the solution's available in the DC marketplace are expanding. Whether or not a PEP is the right solution for a plan sponsors remains to be seen. But I think it will certainly result in plan sponsors evaluating their current governments models to say, is the one that I'm in working for me? Where do we want to be in the future? And, you know, there's a standard set of options available today. So maybe that means OCIO grows, you know, we'll see.
>> Yeah, I agree, and like I said, even if you're not thinking about these structures today, I just think it's instructive to see, you know, how these other structures are evolving and what are some of the best practices that you can apply to your own plans. You know, we're at the top of the hour. I want to be respectful. We did have a few more questions on costs and alternatives, all really important. We touched upon some of them. But again, I think as we really want to be a trusted source of information as we really help those plan sponsors move to some of these best practices and be available to help you think about some of those best ways to do it. What are those best practices? How are different ways you can think about implementing them? And we did all of this in the spirit of that. So Liana, Chris, Phil, thank you so much. Phil, thanks for the partnership in the survey. Thanks for all the comments. For those questions we didn't get to, we will certainly follow up afterwards. But we really appreciate everyone joining. And we hope everyone has a great rest of their day and holiday season.
[ Music ]
PGIM does not establish or operate pension plans.