Discretionary Investment Managers Minimize Sponsor Risk

Defined contribution plans have now surpassed defined benefit plans as the primary savings vehicle, said Michael Cagnina, managing director of institutional business development at SEI, speaking during a webcast Wednesday on how defined contribution plans are changing and how plan sponsors can minimize their risks.

“Scrutiny of sponsors’ fiduciary responsibilities has intensified and there are more lawsuits that ever before,” Cagnina said. “Forty lawsuits representing fees have occurred in the past four years.”

The use of target-date funds will also continue to escalate, he continued. “Between 2010 and 2015, assets in target-date funds have increased by 200%, and it is predicted that by 2019, 90% of contributions to 401(k)s will flow into target-date funds. This means they need to be monitored and improved to ensure participants meet retirement income needs,” Cagnina said.

In addition, “there has been a decoupling of asset management from recordkeeping,” he said. “Bundled providers are being challenged for transparency and independence.”

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On the participant side of the equation, not enough of them are participating in their plans, and among those who are, few are actually saving enough, Cagnina said. “This could lead to their inability to retire, which affects plan sponsors. Auto enrollment and auto escalation have helped sponsors and participants, but menus need to be simplified and there needs to be more education and advice,” he said.

While some plan sponsors have their investment committee take full responsibility for the oversight of the plan without the help of an outside fiduciary and others hire an investment consultant, in both cases, when making changes to the fund lineup, it can be disruptive; blackout periods can last anywhere from 60 to 365 days, he said. “In addition, you can lose confidence of the participants,” Cagnina added.

"This is why SEI recommends that sponsors hire a discretionary investment manager who can provide greater fiduciary insulation and hire or fire investment managers within a fund, resulting in less disruption when changing the lineup,” Cagnina said. "Hiring a discretionary manager also enables the plan sponsor to focus on education, savings rates and strategic issues, which will ultimately drive success for the participants. The discretionary manager also has access to independent, open architecture, which means no revenue sharing and greater fee transparency.”

SEI also recommends that sponsors replace lineups that are complex and have many choices that participants don’t understand with a streamlined menu of white-label funds and/or target-date funds, he said.

Discretionary investment managers can be accessed in four ways, Cagnina noted: a fiduciary manager, an outsourced chief investment officer (CIO), a 3(38) fiduciary manager or a delegated investment manager.