Pros and Cons of Outsourcing Investment Decisions

To outsource or not to outsource: That is the question. Okay, that’s not what the Bard of Avon wrote. But it is the focus of a recent blog entry that outlines the advantages and disadvantages of outsourcing decisions about how a retirement plan’s funds are to be invested.

“The responsibility for a plan’s investments is a serious one,” notes Peter Ferrise, PNC Retrirement Solutions Investment Director in “What to Consider if Outsourcing Investment Decisions,” a recent entry in the PNC Insights blog. That duty “involves making complex decisions that can affect the future retirement security of plan participants and has consequences that may result in personal liability,” Ferrise adds.

“It’s no wonder then that many plan fiduciaries look to outsource this critically important investment decision-making role,” Ferrise writes. But like any such decision, there are pros and cons – though with higher stakes, since it involves other people’s money and the attendant fiduciary duty. Ferrise offers his ideas on what those plusses and minuses are of outsourcing investment decisions.

Advantages

One of the cornerstones of Ferrise’s reasoning is that “few companies have the requisite expertise or technology to fully evaluate investment alternatives.” Having another party handle investment of retirement plans can give an employer and its plan access to expertise, processes and technology that they may not have otherwise have had, he says, overcoming that difficulty. And having an expert third party handle deciding how to invest retirement plan funds frees a company to focus more on its core business and spares the financial and human resources they would have expended.

Not only that, Ferrise argues, an outside party may be able to widen the scope of investment opportunities, as well as lower-cost investment.

Ferrise also centers on how taking on an outside expert for this function can assist a company and its plan in better meeting their fiduciary duties. For instance, he observes that a third party may institute superior processes for investments, documentation, plan administration and compliance, and can better manage fiduciary risk and help them realize better outcomes from the investments.

Disadvantages

Regardless of what contracting with an outside investment expert offers, Ferrise includes the caveat that it is not a panacea.

For instance, Ferrise notes, contracting with a third party can cost a company some of its control and flexibility concerning its plan. And while an outside expert can spare a company much effort and expense, it will not completely absolve a company of all responsibility. For instance, Ferrise points out, a plan sponsor still will need to monitor the vendor’s work; in addition, the plan sponsor still will retain some fiduciary responsibility and potential liability.