Evaluating a DC plan OCIO offering

My last expert column piece looked at what outsourced chief investment officer, or OCIO, offerings look like for defined contribution plans. It also highlighted the various considerations in evaluating the fit of an OCIO solution for a particular plan sponsor.

In this column, I’ll explore five key issues to consider when evaluating an OCIO provider in the DC space.

The Investment Offering

This includes the range and quality of the funds in the offering. Most DC offerings will offer both target date funds as well as a range of individual asset class funds that can be used by members to tailor a customized portfolio to their current risk and return profile. The line-up should be assessed for the range of approaches. This would include considering whether the line-up includes:

– Passive funds: Many DC lineups will include both active funds, for those hoping to outperform the market, as well as passive funds for those that want to get market performance, in key asset classes.

– Alternative Asset Classes: Most DC plans will cover the traditional asset classes – Money market funds, Canadian bonds, Canadian equity and foreign equity. Some DC plans are extending the options to include a broader range of asset classes, which could include core plus bond funds, long bond funds, small cap equity funds and even real estate and infrastructure funds.

– Customizable TDFs: The customization could include specific asset classes or modified glidepaths to tailor the fund to the population of that specific employer.

– Style-tilted funds: For active asset classes, there is a bias towards a well diversified core offering. If there is a style bias, it is often value oriented, a style that generally protects the portfolio in falling markets. Some plans will offer multiple styles in key asset classes (i.e. a growth and value-oriented equity fund). Those DC OCIO offerings that utilize proprietary fund-of-funds offerings will often combine managers with different styles (style offsets) in their offerings.

In terms of evaluating the strength of the offering, it is important to remember that fund line-ups will change over time. Given the fluidity of these funds, an effective way to project future success is to assess the track record of the OCIO manager research teams in assessing their manager performance in key asset classes. Many OCIO providers track and report the aggregate value-added performance of their research-rated fund picks, in each asset class.

The communication material and focus

Depending on the nature of the DC OCIO offering, the provider may rely on the standard communication material used by the selected recordkeeper, which, for the most part, is quite advanced in Canada. However, some DC OCIO providers build their own tailored communication material customized to their own compliment of investment options. These may offer a more comprehensive and tailored experience for members.

Decumulation options

Decumulation refers to the options available for terminated or retired members of a DC plan. Decumulation platforms are in their early stages of evolution in Canada, where many members transfer their entitlements to mutual fund offerings at retail pricing levels. Regulators have attempted to enhance the decumulation solution by introducing new more flexible permitted decumulation options, however to this point the introduction of new products by DC providers to meet these needs have not been widespread.

A well-built DC OCIO decumulation offering could help better achieve the objectives of the capital accumulation plan members by enabling members to remain in the same investment options at below institutional fee levels post-retirement. It can also offer more tailored options that can take advantage of new regulatory options. As well, it can offer more tailored education over the course of the plan membership to help members better prepare for retirement and select an investment strategy that better achieves their objectives.


As mentioned in my first column about DC OCIO offerings, controlling DC fees is a key responsibility for DC plan sponsors. This is a significant area of DC fiduciary risk, as is evidenced by the significant number of class action lawsuits in the United States relating to high fee levels under DC plans. When evaluating a DC OCIO model, it is important to be able to benchmark the fees against a competitive traditional DC model. A significant incremental fee must be evaluated against the overall quality and effectiveness of the OCIO service offering.

Organizational Stability and Commitment

This factor involves an assessment of the stability of the DC OCIO and the commitment to the business. This assessment would include an analysis of the OCIO’s organizational commitment. Is management committing the resources necessary to grow the business, in terms of headcount growth on the key teams and investment in tools and systems? It would also include looking at the stability of key personnel and asset flows as scale facilitates the investment in people and technology. Scale can also help facilitates the enhancement and flexibility of the funds.

Overall, a DC OCIO may be a better fit for some organizations than others depending on the current structure of the plan and intensity of the existing governance and oversight functions. However, a better understanding of the DC OCIO model and different DC OCIO offerings will help ensure more informed decision-making by DC pension committees.