Client Service December 10, 2015

Why Plan Sponsors Search for New Advisers

Data from RFP assistance provider InHub reveals why plan sponsors search for new plan advisers, what they ask for, and mistakes advisers make in the RFP process.
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Creating the first draft of a request for proposals (RFP) was voted the most difficult task in the RFP process by institutional investors who recently issued investment consultant RFPs, according to data from InHub, provider of an online RFP solution and guided process for the institutional investment community.

Data from 20 recent investment consultant RFPs issued directly by investment committees of defined benefit plans, defined contribution plans and foundations/endowments, found eight in 10 RFPs resulted in a new hire. Most RFP issuers indicated a potential replacement as a probable outcome prior to the RFP starting, for several reasons.

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The No. 1 issue motivating an RFP was a reduction in proactive service or response rate (80%). Clients stated their advisers no longer initiated new ideas and had to be reminded of what used to be regularly scheduled services. For some, their advisers were no longer accessible, the client had to follow-up multiple times on meeting action items or the followup information was incorrect and unthoughtful. Some investment committees searched for a specialist due to a general feeling that they “could do better.”

Clients also had issues with adviser expertise; conversations with advisers may become generic and the client loses confidence in the adviser. They may discover opposing philosophies about plan design or investing, or the plan may have evolved to require more of a specialist adviser.

Other reasons for conducting an RFP for a new adviser could include changes to the plan or plan sponsor or changes to the adviser firm (75%), and the desire to benchmark for proper due diligence (5%).

NEXT: What plan sponsors are asking for and adviser RFP mistakes

The most popular adviser services requested by clients were in-person committee meetings (100%), ongoing plan benchmarking and vendor analysis (100%), and investment policy statement (IPS) review and implementation (100%). This was followed by a 3(21) fiduciary investment consultant contract in writing (more than 90%).

Forty percent of clients stated in the RFP that they want the adviser to perform a formal recordkeeper RFP immediately following selection of the adviser.

Clients asked for retirement plan participant education services too; one-fourth wanted the adviser to structure and track success of education leveraged from the plan provider, and one-half wanted the adviser in-person for participant education.

InHub says seven popular questions in more recent RFPs include:

  • Does your firm target a specific client type or size? If yes, please elaborate.
  • Provide the following information for this consulting team’s defined contribution clients. Please respond in the following order: number of clients, DC assets under advisement, median client size, and largest current client.
  • If you had to choose an object to best represent your firm, what would it be and why?
  • How does team measure the success of consulting relationships?
  • Please outline, in detail, the process, resources and tools you would use to benchmark a plan of our size and how often you would recommend it is conducted. Does it also benchmark the Consultant services and fees? Please also attach a sample benchmarking report.
  • Please outline, in detail, the process, resources and tools you would use to conduct a recordkeeper request for proposal, for this plan and how often you would recommend it is conducted. Please also attach a sample deliverable.
  • Please provide any feedback/comments on our current investment policy statement and current fund lineup.

Common mistakes advisers make when responding to an RFP include:

  • Not customizing key questions to the plan;
  • Dodging questions about client base;
  • Missing deadlines;
  • Sloppy, confusing and excessive addendum documents;
  • Showing little ‘personality’, or differentiating factors; and
  • Not choosing brevity when applicable.
The Markets December 10, 2015

DB Investing Strategies to Consider in 2016

Advisers may want to recommend defined benefit plan sponsors pursue more active strategies and different asset classes.
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In the past couple of years, a big focus for defined benefit (DB) plan sponsors has been the interest rate environment. Rising interest rates may be a reality for 2016, says Michael A. Moran, senior pension strategist at Goldman Sachs Asset Management (GSAM) in New York City.

Jeff Coons, president of Manning & Napier in Rochester, New York, agrees: “We’ve been talking a long time about what happens when the bond market gets more volatile. We will now see plan sponsors forced to address it.”

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Since DB plans have a natural time horizon and duration of liabilities, fixed-income investing is to some extent in bonds, but plan sponsors must consider asset return assumptions, and a rising rate environment can be a drag on absolute returns, according to Coons. “We’ve bee talking about what can happen for a few years, but translating it into mandates for portfolios hasn’t occurred. With bond market risk more front and center, plan sponsors will have to address allocations to fixed income.”

The benefit of long-duration bonds in a falling rate environment is important to keep up with liabilities, but it will turn the other way with rising rates, Coons says. He contends there will be more focus on a Barclays-type benchmark. “We will see more active mandates and nontraditional and unconstrained bonds. As an analogy, over time equity allocations have moved from hiring managers whose performance looked a lot like their benchmarks and turned out little value to managers performing above their benchmarks. The same trend will happen with bond allocations,” he tells PLANSPONSOR.

Moran says preparing for a higher rate environment will be a catalyst for a shift to more fixed income. GSAM is seeing continued interest in unconstrained fixed-income strategies that give managers more room to address duration. In addition, they are adding one or two more fixed-income managers to their portfolios to increase fixed-income holdings from, for example, 40% today to 50% next year and 60% thereafter.

NEXT: Need for more returns

With rising rates, it will probably be a tougher return environment in the next couple of years, Moran says. For many plans, this is a risk management exercise; he notes that on an aggregate basis, DB plans are about 83% funded, same as last year, so plan sponsors need return. Plan sponsors should look to shifting equity exposure to protect from downside risk; hedging and smart beta strategies are being used.

Many corporate and public DB plans have reduced their long-term return assumptions, but it may still be a challenge to hit those, Moran predicts. He says passive management has worked for corporate plans the past couple of years, but now they need active management, or to use asset classes such as real estate, private equity or emerging market debt.

Public plans, in general, have always been more return-focused than corporate plans, as more corporate plans are closed or frozen, Moran notes. With a longer term time horizon, and many public plans not well funded, as well as the expectation of a more muted return environment, GSAM has seen them expand their use of alternative investments. 

With the divergence of performance in the developing world, Coons expects plan sponsors will rebalance their portfolios to take advantage of what is growing. He notes that before and shortly after the credit crisis, there was a big push to make emerging markets a larger percentage of DB plan holdings, since that was where growth was expected to be. However, since 2011 and 2012 emerging markets have shown a dramatic underperformance, and now there are lower allocations to emerging markets across the pension universe.

“My guess is that there will be a need to rebalance to bring back some of these allocations, but the focus will be on more active mandates,” he says. Coons also notes that growth is coming from the consumer and sciences sectors, so it’s likely mandates will take advantage of emerging markets and consumer-oriented growth.

NEXT: Risk transfer prompts changes in portfolios

Changes in the regulatory environment—funding relief and higher Pension Benefit Guaranty Corporation (PBGC) premiums—are enhancing risk transfer activity, either lump-sum offerings or annuitization, Moran tells PLANSPONSOR. Investment strategies can help prepare portfolios for risk transfer, and after risk transfer, liabilities will be different so portfolios will have to change.

If preparing to purchase an annuity to transfer some pension liabilities, how the plan sponsor pays for the contract will affect pricing, according to Moran. “Typically plan sponsors are paying out of plan assets, so they need to look at what securities in the portfolio are more attractive,” he says. After the transfer, since usually plan sponsors only transfer part of the plan to an annuity, plan sponsors need to change their asset allocations to match the different liability.

When offering lump sums to a group of DB plan participants, plan sponsors will be liquidating a substantial portion of their portfolios. Moran says they need to anticipate from where they will withdraw assets. “They will want to draw from the most liquid assets, so they are not paying a spread. They need to consider how this will affect the remaining portfolio after the lump-sum window.”

Moran concludes that there is always something going on in the markets, but a confluence of factors, particularly on the regulatory front, means we will see DB plan sponsors doing some different things in 2016.

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