DCIO Execs Talk ‘Battle-Tested’ Investment Process

PLANADVISER’s “Practice Progress” webinar series on Tuesday previewed some of the highlights from the magazine’s 2021 DCIO survey that will be released the week of June 22. It also covered the need for advisers to recommend “battle-tested” investment approaches for retirement plan investment menus.

Putting this in context, the webinar’s speakers pointed to the 2008 mortgage-induced financial crisis that led to a market meltdown and the similar effect that COVID-19 had on the markets in March 2020.

“We have had really strong markets in the past 12 months,” said Edward McIlveen, principal and chief investment officer (CIO) at Francis Investment Council. “This should be a strong reminder of the importance of having an investment process and framework for investments put in place when you are not in an emotional situation. A market meltdown situation becomes a lot easier with a battle-tested process in place.”

Greg Adams, a consultant with Fiducient Advisors, said, right now, many of his plan sponsor clients are interested in helping their participants protect their assets.

“We are beyond the acute phase of the pandemic,” at a point where inflation is a looming threat, he said.

Like McIlveen, Adams said retirement plan advisers need to work with plan sponsors to develop a diversified, time-tested investment lineup for participants to choose from, intimating that a market correction could be around the corner given that the Dow Jones Industrial Average is at roughly 34,600, up from its low of 21,200 when the COVID-19 pandemic first swept in.

An investment lineup needs to take such important economic factors as taxes and unemployment into account, McIlveen said. Yet, regardless of what taxes and unemployment are doing at any given time, he noted Francis Investment Council’s “work stays the same with what we are doing with our retirement plan, wealth, endowment and foundation clients. The market environment doesn’t change how we interact with our clients.”

That said, retirement plan participants are worried about inflation, so he said the firm is having a lot of conversations with clients about how to hedge inflation.

“That is the topic today,” McIlveen said. “2008 was the last time we had significant discussions about inflation. If you look at economic history, at this point, we are in a period of rising inflation, so we are advising that participants consider TIPS [Treasury inflation-protected securities], emerging market equities and commodity-oriented bonds.”

However, adjustments to any portfolio should have an underlying investment process and proper governance supporting it, McIlveen said. “This gets everybody on the same page, regardless of the circumstances.”

The bulk of a retirement plan participant’s investments should not change—regardless of the market environment, he said.

“Staying true to a process and reminding people of that process will help them make sound investment decisions.”—Edward McIlveen, principal, chief investment officer, Francis Investment Council

Just as in 2008 and 2020, should a market correction occur, retirement plan advisers need to remember that “people want to hear from their advisers,” he said.

And this very even-keeled approach to investing is what institutional investment managers are doing with their own portfolios right now, McIlveen said. “We are having very good interactions with investment managers,” he added.

Francis Investment Council’s advice for advisers just coming into the marketplace is to understand the critical need to put a prudent process in place, McIlveen added. Otherwise, their retirement plan participants’ portfolios could be “torn apart.”

“Staying true to a process and reminding people of that process will help them make sound investment decisions,” he said.

The Value of DCIO Partners

The speakers then turned to the value of defined contribution investment-only (DCIO) providers in retirement plans. As investment managers that specialize in retirement plans, DCIOs can offer mutual funds, collective investment trusts (CITs), target-date funds (TDFs) or other investment choices that make the best sense for a particular plan, yet few sponsors really grasp what DCIO managers do, Adams said. However, committee members do have some understanding of the open architecture and non-proprietary funds that DCIO firms can offer to them.

Fiducient Advisors helps plan sponsors select the most suitable and cost-effective funds, be they stable value, TDF or index, and helps sponsors see their “effect on the recordkeeping cost, depending on which direction they want to go—and when to use proprietary funds for pricing purposes,” Adams said. “They [proprietary funds] are getting a lot of attention right now, especially in light of litigation.”

The 2021 PLANADVISER DCIO Survey to be published by the end of the month will continue to show a “trend toward more institutional vehicles, and that trend is moving down market,” said Brian O’Keefe, vice president of research and surveys at ISS Media, publisher of PLANADVISER.

However, year after year, the majority of assets in DCIO plans continues to be in mutual funds, O’Keefe said. Mutual funds, which held 56% of DCIO plan assets in 2020, “will continue to play a major role and not go away anytime soon,” he said.

According to the 2020 DCIO Survey, nearly two-thirds (65%) of assets reside in asset allocation- or equity-based products.

Proprietary Annuities and CITs

An emerging development for retirement plans is likely to be the inclusion of proprietary annuities, Adams said. CITs are another very popular fund choice among sponsors right now, and they can be 20 basis points (bps) lower than mutual funds, McIlveen said.

“There is a feeding frenzy to put them in place”—and advisers need to realize that CIT clones of mutual funds come in all shapes and sizes, he said. In some cases, they could even be tracking a different benchmark than the mutual fund they are based off of and have a different investment policy, McIlveen said.

Another important consideration is that it often takes CITs two to three years to catch up to the performance of their mutual fund parent, which is why Francis Investment Council has a “policy in place for a two- to three-year track record for clones before we put it on a fund menu as a mutual fund replacement,” he said.

One of the largest recordkeepers told the firm that its proprietary TDF, packaged in a CIT, matched the mutual fund—but Francis found significant differences, he said.

Uncovering the differences among funds offered by DCIO managers is one of the ways retirement plan advisers can act as “quarterbacks and intermediaries” in helping their plan sponsor clients navigate the DCIO landscape, said John Manganaro, managing editor of PLANADVISER.com and moderator of the webinar.

The PLANADVISER “Practice Progress” webinar series is halfway through its 2021 offerings and all webinars are relevant for advisers and available on demand. “They cover regulation and legislation, artificial intelligence [AI], environmental activism, succession planning—and all the tough questions associated with these topics,” Manganaro said.