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  • Writer's pictureBrian Schroeder


Plan sponsors subject to ERISA are held to the highest fiduciary standards known in U.S. law. Courts have held that to act as prudent fiduciaries plan sponsors should sometimes hire qualified experts. Courts have further held this entails the duty to monitor those experts.

In recent years, plan sponsors have chosen to delegate greater discretionary authority to their investment consultants. They have made the move from non-discretionary investment consultants to discretionary investment consultants. The industry name for this latter role is Outsourced Chief Investment Officer (OCIO.)

By going OCIO, plan sponsors expect faster execution, greater fiduciary protection and improved results. Many have reasoned that financial markets have become too complex and dynamic for them to competently approve/deny recommendations in a timely manner.

Although plan sponsors have delegated investment decisions, they can never cede their duty to monitor. For the reasons below, plan sponsors that try to go it alone are outmatched and unable to prudently monitor their OCIO.

Expertise, Involvement & Time

Gone are the days of just long-only strategies in publicly traded markets. Today, investors are piling into private markets, alternatives, leveraged and illiquid strategies. The complicated fee calculations, esoteric benchmarks and fuzzy return attribution muddy the waters. Plan sponsors must ask themselves if they have the expertise to evaluate these complex strategies on top of the value-add of their OCIO. If they have reasoned the markets are too complex to competently approve recommendations, they then acknowledge they are incapable of effective monitoring.

By stepping away from the decision process trustees no longer review and approve asset allocation studies, manager searches, manager due diligence and rebalancing. Trustees now have less ongoing education about their investments and must therefore make an extra effort to “catch up.” Are they conscientiously making the effort?

Most trustees are not investment experts. Again, this is a reason to go OCIO. But they also often have full-time jobs away from being a trustee and cannot devote the necessary time to adequately monitor their OCIO. Is reviewing a report quarterly prudent and thorough?

Relying on one Source

If a plan sponsor does not get an outside opinion, they are left with just the OCIO’s performance report to evaluate the OCIO. There are obvious problems with the fox guarding the henhouse. The simple fact is these reports are incomplete.

There are five duties that every OCIO performs that determines outcomes. These are:

  • Strategic Asset Allocation

  • Tactical Asset Allocation

  • Rebalancing

  • Manager Hiring

  • Manager Firing

Due to incomplete feedback loops in the OCIO’s performance reports, there is not enough information to determine if the OCIO is adding value in any of their duties. This is by design. For a detailed explanation of why this is undeniably true, please read Decoding Investment Consultant Alpha.

Performance Reporting Tricks, Gimmicks and Conflicts

Without an independent monitor accurately calling balls and strikes, the OCIO controls the narrative. In fact, without a monitor, they may be tempted to employ unethical tactics to paint their performance in the most positive light. For the last 10 years I have helped plan sponsors monitor their investment consultants and have uncovered several reporting gimmicks that a casual observer would never find. Every OCIO employs one or more of these tricks.

Without an expert monitor, investment consultants and OCIOs may be currently employing these reporting gimmicks and tricks without the plan sponsor’s awareness. Please read 6 Tricks Investment Consultants Use to Fool Their Clients to learn in detail these tricks. An independent monitor will see through any smoke and mirrors.

Investment consultants and OCIOs face many conflicts of interest when executing and reporting their duties. I have published two articles describing these conflicts faced by investment consultants and OCIOs. The first and shorter one is Field Guide to Overcoming Investment Consultant Conflicts of Interest. The second and more detailed piece is How Conflicted is your Investment Consultant?

Should We Hire a Competing OCIO to Monitor our OCIO?

Ask yourself, can one competitor objectively monitor another? Hiring a competitor to do this may be worse than having no monitor at all. I previously wrote Can One OCIO Monitor Another? It explores the conflicts of such an arrangement and how there is an incentive for the OCIOs to wear kid gloves and possibly work together to suppress vital information to the plan sponsor due to mutual benefit.

Further imagine if an OCIO monitors another OCIO, and for another client the roles are reversed. Even if that is not the current situation, the mere fact that it could happen in the future creates the incentive to always be politically correct and never criticize for fear of retaliation. It is analogous to the Cold War theory of “mutually assured destruction.”

Plan Sponsors are Outmatched

Unless a trustee has specialized knowledge, training and experience in both investments and statistics, you are outmatched by your OCIO when it comes to performance attribution and analysis. Add in the fact that the starting point for all conversations is the OCIO’s own performance report, and you have little chance of ever uncovering their value-add and learning whether the OCIO is competent.

Hiring an independent monitor that is not a competitor is the prudent solution.

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