Personal Touch Matters in 3(38) Fiduciary Marketplace

Phil Edwards is principal of Curcio Webb, a unique firm that helps both defined contribution (DC) and defined benefit (DB) plan sponsors identify the most appropriate service providers for 3(38) fiduciary investment management.

As PLANSPONSOR has previously reported, Edwards says the marketplace for 3(38) fiduciary investment management services is expanding for a variety of reasons—and it will very likely continue to do so as complex new market pressures emerge.

“We have been serving in this role of 3(38) matchmaker for about 10 years and over the last three years alone have completed about 30 of these projects, involving about 45 providers,” Edwards explains. “Our clients range from plan sponsors with $100 million to $8 billion in assets across defined contribution, defined benefit and endowment/foundations.”

Use of Curcio Webb 3(38) provider search support has moved up market over time, Edwards adds. Initially the firm was serving plans in the $100 million to $300 million range pretty exclusively.

“Today the demand for 3(38) search support and monitoring has moved up market into the range of plans with billions of dollars in assets,” he notes. “The big emphasis from many of the smaller plan sponsors is pursuing cost savings. These clients have an understanding that working with an outsourced chief investment officer [OCIO], as we tend to describe the 3(38) relationship, can help them purchase investments with far greater economies of scale.”

Over time the average client has climbed up to probably $500 million, and recently the firm has worked with clients with assets north of $8 billion.

“I mention this less to boast about our success and more to highlight that larger and larger plan sponsors are resonating with the idea of getting 3(38) support,” Edwards says. “As you move up market the opportunity for cost savings is not as big a deal, because these sponsors can achieve pretty good leverage on their own to negotiate better pricing. So why are they pursuing 3(38) support? A lot of it is a resource and staffing issue on the part of the plan sponsor.”

Even though they might have the legacy of having the pension plan and/or a large DC plan in place, as the organization changes and personnel move out of the firm, there can be an emerging sense that expertise is being lost and that more support is needed. And as the competition and quality of the 3(38) marketplace has improved, even the largest plan sponsors see it as increasingly attractive and reasonable to pursue this course.

“We very commonly hear from the larger clients that managing the pension plan is just taking too much time and too much expertise—and it just one day starts to make a lot of sense to look for that outside support,” Edwards notes. “And the other trend as you move up market is that you find that the circumstances and goals facing each plan, especially on the DB side but also with DC plans to some extent, really start to become quite different from sponsor to sponsor. They can find it hard to maintain a strong direction and orientation for their plans.”

Looking across a pool of $100 million plan sponsors, the goals and challenges are often more homogeneous, Edwards explains, because the plans are still just getting started and they are likely focused on implementing all the best practices and features that one commonly hears about in the industry trade publications. But as the plans mature and become more sophisticated, the conditions will become less homogeneous, and the nature of the support the plan needs can really change.

“Against this background we have a crop of about 45 or 50 3(38) service providers that we have gotten to know quite well through our request for information and monitoring processes,” explains Uma Kolluri, a lead consultant with the Pennington, New Jersey-based firm. “It is important to highlight that these firms provide very different ranges and styles of services. Some are very high touch or very low touch and they can really bring different services and solutions to bear that can really benefit plan sponsors in quite different situations.”

This is where the real leg work comes in from firms like Curcio Webb: “We work to get to know the plan sponsor and its needs and goals, and then we look across our book of providers that we know, and we work together to reach a recommendation,” Kollure notes. For example there are some providers out there who might specialize in helping an underfunded pension plan at an employer with high cash flow more aggressively purse full funding through tactical risk-taking in the markets, whereas another provider that emphasizes liability-driven investing would be a better fit for a sponsor that has only a slight deficit and wants to ensure that they do not slide backwards on the funded status.

“We have done cases where we have helped plan sponsors specifically find a provider that is good at establishing pension plan hibernation, and others where we have connected providers and sponsors that are interested in moving down the road towards pension risk transfer,” Edwards observes. “I would point out that in many of the searches, it is just as much about the plan sponsor gaining back-office administrative support as it is about finding them new expertise in investment management. There is a lot that we can help plan sponsors do.”

Importantly, each new search starts with a formal kick-off meeting.

“The data that we collect in advance of that meeting is certainly informative, but it is also crucial to have that early meeting in person so that we can get to know the personality and history of the plan sponsor,” Kollure says. “As you know, in the retirement plan services field, yes it is about technical capabilities and the optimal alignment of resources—but successful projects are also very much about aligning the right philosophies and personalities. These cultural factors matter quite a bit when ultimately selecting and working with a 3(38) provider.”

The firm will do this first meeting with the plan sponsor and then go back and run its analysis to come up with a short list of between five and ten providers that might be a good fit. The firm strives to present a variety of providers and approaches that could fit the plan sponsor’s needs.

“We have come to see that it is not really helpful to present the plan sponsor with five or ten different flavors of vanilla, so to speak, and ask them to pick one,” Edwards says. “It’s the same idea as trying to present plan participants with a more rational and simplified choice architecture. Plan sponsors really value seeing the different approaches and comparing what the value of each might be.”

The final short list will generally contain some very large global firms, which take one approach to the outsourced chief investment officer business, and then some mid-sized regional providers with their own strengths—and then finally smaller independent firms that purposefully focus on very specific services or on serving a limited number of clients. All of these approaches have their relative merits, and it’s really up to the plan sponsor to decide what will be the best fit, based on both technical capabilities and culture. Beyond these basic factors, there are different service models that each provider can bring to the sponsor.

“In some service models you have the hub-and-spoke approach, for example, where a centralized portfolio management team is on one side doing its work and the sponsor is served by a distinct client support team,” Edwards concludes. “Other providers have a service model where the portfolio manager is very much directly involved in the client relationship. And of course you have very different investment philosophies out there, with some firms being more strategic and others more tactical. They all believe in diversification, but they all define and implement diversification in different ways. There are different definitions of liability driven investing and different philosophies about what it means to de-risk and how you should go about doing that. So it’s a very dynamic and active and evolving marketplace.”

More information about Curcio Webb and its services is available here.