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Trends in retirement plan investment governance

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By Alex Slivinski | August 21, 2020

Why sponsors of all sizes are considering delegating

Nearly $2 trillion of institutional assets are now delegated globally, more than double the amount from just seven years ago. Two-thirds of those assets are in the United States.1

The trend holds for both corporate defined benefit and corporate defined contribution plans, with over 40% of sponsors currently delegating or planning to delegate in the next two years.2

Delegation is now the norm for smaller asset pools (78% of pools below $100 million in assets and 50% of pools between $100 million and $500 million in assets delegate or plan to delegate) and has become increasingly common for large asset pools (27% of pools above $1 billion in assets delegate or plan to delegate).

Percentage of factors listed as “very important” or “important” by asset owners who have delegated
Figure 1: Percentage of factors listed as “very important” or “important” by asset owners who have delegated

Source: ai-CIO, 2020 Outsourced-Chief Investment Officer Survey. Survey conducted from January 24, 2020, through February 10, 2020, with 86 participants.

Why are your peers delegating?

Sponsors delegate for many reasons (Figure 1); however, in our experience, the high propensity for delegating is driven by two key factors.

Delegating has helped empower [sponsors] to act without eating up their limited bandwidth.

First, many organizations with less than $1 billion in assets have little or no dedicated investment staff (Figure 2). Usually, staff members (or committee members in their absence) look after the plan’s investments among a number of other key responsibilities. Because of this competition for time, decision makers find themselves constrained in their ability to make, implement and monitor decisions. Delegating has helped empower them to act without eating up their limited bandwidth with implementation issues.

Size of investment staff by investable portfolio size
Figure 2: Size of investment staff by investable portfolio size

Source: ai-CIO, 2020 Outsourced-Chief Investment Officer Survey. Survey conducted from January 24, 2020, through February 10, 2020, with 86 participants.

Second, in the institutional investment world, even plans with hundreds of millions in assets have limited investment opportunity sets. Investors often struggle to negotiate fees, and it’s either difficult — and expensive — or impossible to build a truly diverse portfolio given investment minimums. Pooling of assets through the delegated model could enable you to 1) leverage the provider’s collective buying power to seek lower costs and 2) effectively “split” investment minimums with other sponsors so you can access investments that were previously inaccessible for you.

Why would a large plan ($1 billion) delegate?

Contact Us

Large plans typically have some dedicated investment staff and buying power, so any resulting delegated solution has to be more tailored to support their internal structures. For some of our large delegated clients with limited internal resources, we serve as an extension of staff, stepping in as the primary investment function across the whole portfolio and performing almost all the tasks short of setting the strategy. For others, we act more like another team member; for example, we bring new ideas, oversee certain asset classes or provide a dedicated back office. In any case, we have significant flexibility to customize our responsibilities to a specific client’s needs.

Conclusion

If you haven’t previously considered delegated investment services, you could be an outlier. Being an outlier isn’t necessarily a good thing or a bad thing, but it should be a deliberate decision. If any of the information in this piece comes as a surprise to you, it might be worth revisiting how the delegated approach might improve your financial outcomes, operational efficiency and costs. Let us know if you’d like to explore further.

About Willis Towers Watson

Willis Towers Watson manages $140 billion in assets globally3 and has the highest organic growth rate as of 12/31/19 in clients among large delegated providers – three years in a row.4 Thirty percent of our U.S. delegated clients oversee $100 million or less; 55% oversee between $100 million and $1 billion, and 15% oversee $1 billion or more.

Sources

1. Pensions & Investments: “OCIO growth assisted by volatile times.” As of March 31, 2020.

2. ai-CIO, 2020 Outsourced-Chief Investment Officer Survey. Survey conducted from January 24, 2020, through February 10, 2020, with 86 participants.

3. As of March 31, 2020.

4. P&I OCIO rankings from 3/31/2017 to 3/31/2020. Largest OCIO providers includes all OCIO providers with $50B+ in AUM. Growth rates reflect one-year change from 3/31. Organic growth excludes profits or growth attributable to re-categorization of existing clients, takeovers, acquisitions or mergers.

Disclaimer

This document was prepared for general information purposes only and does not take into consideration individual circumstances. The information contained herein should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Towers Watson Investment Services, Inc., and its parent, affiliates, and their respective directors, officers, and employees (“Willis Towers Watson”) to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. The information included in this presentation is not based on the particular investment situation or requirements of any specific trust, plan, fiduciary, plan participant or beneficiary, endowment, or any other fund; any examples or illustrations used in this presentation are hypothetical. As such, this document should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice. Willis Towers Watson does not intend for anything in this document to constitute “investment advice” within the meaning of 29 C.F.R. § 2510.3-21 to any employee benefit plan subject to the Employee Retirement Income Security Act and/or section 4975 of the Internal Revenue Code.

This document is based on information available to Willis Towers Watson at the date of issue and takes no account of subsequent developments. In addition, past performance is not indicative of future results. In producing this document Willis Towers Watson has relied upon the accuracy and completeness of certain data and information obtained from third parties. This document may not be reproduced or distributed to any other party, whether in whole or in part, without Willis Towers Watson’s prior written permission, except as may be required by law.

Views expressed by other Willis Towers Watson consultants or affiliates may differ from the information presented herein. Actual recommendations, investments or investment decisions made by Willis Towers Watson, whether for its own account or on behalf of others, may differ from those expressed herein.

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