Higher Fiduciary Bar:
A Case for Investment
Joseph Gelly, Jr., Practice Leader, Investment Outsourcing,
aiCIO: Russell Investments has been at the forefront
of the investment outsourcing trend for 30 years. Can
you provide insight into how it has evolved over the
past few decades?
Gelly: When Russell first offered investment
outsourcing in 1980, it was in response to a client
need. We came to the table with a fully implemented
investment solution which, at that time, was a new
and provocative approach. Since then, investment
outsourcing has become standard practice for hundreds
of pension plans, endowments and foundations.
As their needs have grown, so has the demand for
investment outsourcing and the expertise required of
investment outsourcing providers. Clients still want
investment solutions, but what’s really changed and
driven growth in the investment outsourcing space is
the level of complexity addressed by these solutions.
As a result, many larger plans are increasingly joining
the conversation and starting to embrace the concept.
They are coming to the realization that investment
outsourcing represents an opportunity for more than
just small plans.
aiCIO: Plan sponsors increasingly are turning to
providers to help them with their fiduciary duties.
From that perspective, what are the most important
capabilities plan sponsors should consider when
looking at an investment outsourcing provider?
Gelly: In today’s environment, plan sponsors are
looking for an outsourcing provider to help shoulder
the burden of fiduciary responsibility. They are
seeking professional expertise in risk management,
effective implementation and good governance.
These are critical roles, so it’s important for plan
sponsors to select the right provider. Above all, plan
sponsors need to understand that one size doesn’t fit
all, a misconception that has existed in this space
for years. They need to carefully evaluate whether
or not the provider can offer a range of investment
options and capabilities, if the provider is truly
objective, or whether the use of proprietary products
or proprietary services is required. Will the provider
be able to deliver customized, forward-looking
insight based on what’s occurring in the investment
marketplace? Lastly, plan sponsors must determine if
the provider has the experience to provide access to
specialized investment strategies and to recommend
appropriate and effective investment solutions that
will help achieve their investment goals.
aiCIO: Can you describe Russell’s view on the plan
sponsor and provider relationship as it relates to
Gelly: An outsourcing provider should be called
on for a wide range of solutions—from asset
allocation strategy to investment manager selection
and monitoring to investment implementation—so
that the investment committee can fully focus on
its fiduciary duty to plan for and address long-term
strategic issues. It’s important for plan sponsors to
have the right outsourcing provider to address key
areas of concern.
The majority of clients we work with are looking for
more risk management and additional diversification.
Multi-manager implementation is an efficient and
cost effective means to achieve these two goals. From
a governance and fiduciary standpoint, plan sponsors
need to be confident that the provider they are using
has the necessary capabilities and experience, as
well as a rock-solid process in place. When it comes
to evaluating, selecting and replacing managers,
Russell has been in the business longer than many.
Operational expertise also plays a central role. A
provider’s ability to evaluate not just the investment
process but also assess the operational back-office
practices of the managers can result in reputation and
aiCIO: In your white paper, “Investment Outsourcing
Means Insourcing Pension Management Best
Practices,” you outline the job description for an
investment outsourcing provider. Can you share the
Gelly: Strategic advice, oversight and experience are
the key takeaways. Working with an outsourcing
provider that has a long history of delivering
advice is critical. Second is investment strategy:
The plan sponsor must be comfortable that the
outsourcing provider can help evaluate and select
not only traditional asset classes, but also complex
investments. Next is the need for operational
experience. Managing an outsourced relationship is a
complex, ongoing process with lots of moving parts.
This makes the implementation phase extremely
important. You can have a great solution and a great
model, but implementation is key as errors or skill
gaps can negatively affect the portfolio.
aiCIO: Can you touch on the importance of good
governance as it relates to the pension plan?
Gelly: Good governance is a theme we have
underscored for some time, and I am glad to see the
topic getting the attention it rightly deserves. Good
governance means running your plan or your fund
like a business and having the proper process, controls
and strategy in place. You want every decision to be
made by the individuals who are in the best position
to make them and for their accountability to be
unambiguous. Trustees must be allowed to develop
the long-term objectives of the plan and to evaluate
how the plan impacts the financial health of the
organization. Plan sponsors should then work with
their outsourcing provider to connect investment
implementation with the strategic objectives set out
by the trustees—whether it’s the corporate financial
goals, the liabilities of the plan, obligations they have
to their current and former employees or all of these.
At Russell, we drive the governance discussion with
our clients because those are the conversations that
align plan objectives with implementation. The
true benefit of Russell’s investment outsourcing
relationship is that our experts help plan sponsors
develop a framework that evaluates their current
governance structure, their decision-making process
and helps them better understand and home in on
their own areas of focus.
aiCIO: How does Russell see investment outsourcing
and its role as a firm evolving over the next 30 years?
Gelly: We expect investment outsourcing to continue
to see growth. The investing world has become
more global, more complex and more challenging,
which has heightened the demand for outsourcing
expertise. We also are seeing more and more plans,
including larger plans with more than a billion in
assets, finding themselves resource-constrained and
in need of strategic advice and assistance. The biggest
evolution we’re seeing is a redefinition of what the
investment outsourcing landscape represents. Plan
sponsors are interested in more than the traditional
outsourcing model; they are looking for a customized
solution. We also are seeing increased interest in
discretionary capabilities as well as separate accounts
and non-proprietary fund solutions. Organizations
like Russell that have a rich consulting heritage are
positioned well to respond. n
For more information, contact Joseph Gelly at
212-702-7815 or via e-mail at firstname.lastname@example.org.
Russell Investment Group is a Washington, USA, corporation,
which operates through subsidiaries worldwide, including
Russell Investments, and is a subsidiary of The Northwestern
Mutual Life Insurance Company.
First used: October 2010