Managing retirement plan governance in today’s complex world 

Today’s investment and regulatory environment has become increasingly complex in a number of ways. The result is that the responsibility for managing both defined contribution and defined benefit plans has become more challenging. 

• Fiduciary liability has increased for plan sponsors of defined contribution and defined benefit plans with the SECURE 2.0 Act, which was officially signed into law in December 2022. The statute consists of 120 pages of text and 90 individual sections, increasing complexity for plan sponsors as they navigate both mandatory and optional provisions.
• There are an overwhelming number of investment strategies and products from which to choose, potentially creating the need for greater investment expertise.
• Private market investments bring their own challenges, including but not limited to higher due diligence standards (manager, legal and operational), documentation, amendments, and managing capital calls/distributions.
• Periods of market volatility can require more frequent plan monitoring for rebalancing, and in the case of defined benefit plans, potential glide path adjustments.

While it is possible to manage this in-house with the right resources, delegating some or all aspects of investment governance may result in better decisions, reduced fiduciary risk, improved performance, and may free up internal resources for other strategic purposes.

As a matter of good practice, plan sponsors and investment committees should review governance practices every few years. When thinking about governance structure, it is important to note that there is a continuum along which plan sponsors can delegate responsibility. Governance for investment programs can be divided into three categories: strategy, evaluation and implementation.

While input from the advisor can be advantageous, strategy decisions often rest with the client as they are key to ensuring that the investment program meets the objectives of the organization and plan. Strategy decisions should be reviewed periodically.  Evaluation and implementation also require frequent reviews and action. They can also require specialized investment knowledge, regulatory knowledge, and operations support/skills. As a result, we’ve found implementation and evaluation are often the first areas that plan sponsors choose to delegate to an advisor.  

The following questions can help organizations determine whether to consider partial or complete delegation:

If most of the responses line up on the right side of the table, it could be more desirable to delegate some or most of the responsibility for managing the investment program to an advisor. Every organization is different and has unique needs, so customized solutions can often be a good fit. 

The delegated advisor, typically referred to as an Outsourced Chief Investment Officer (OCIO) provider, has extensive resources. These include, but are not limited to, legal counsel and compliance to assist with oversight and plan requirements, an understanding of the fee landscape, as well as operations and trading systems. Additionally, they have specialized investment knowledge in asset allocation for numerous plan types and investment managers across a diverse set of investment styles and regions.

A key goal is to bring these resources to the plan sponsor to reduce their fiduciary and administrative burdens. The ultimate goal, however, is to add value through specialized investment expertise in the areas of strategic asset allocation, dynamic asset allocation, opportunistic investing, manager selection and cost reduction.

Mercer provides investment consulting and OCIO services to a range of institutional investors, including defined benefit and defined contribution plans, endowments, foundations, insurers, wealth managers and family offices. Our team’s deep and specialized industry knowledge helps ensure investment program alignment with an organization’s unique mission and values. Our scale, dynamic solutions, global intellectual capital, and manager research helps support organizations in addressing challenges, improving governance, recognizing efficiencies and capturing opportunities across investment operations.

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