Monday, September 28, 2009

Terminology: Plan Sponsor

Last week I had an "a ha" moment when during a meeting, discussion turned to the meaning of the term "plan sponsor." I always considered it a broad expression, that refers to institutional clients (e.g., pension funds, endowments, foundations). But at least one of the participants restricted its meaning to pension funds. Interestingly, a pension fund representative at the meeting shared my view!

Well, I have concluded that the term is a tad ambiguous, though the formal definition DOES seem to limit it to pension funds. I did a quick "Google search" and found two definitions:

"An employer who sets up a pension plan."

"While some plan sponsors will take matters into their own hands and handle all the investment decisions for retirement plans, most of them outsource the fiduciary management of the assets in the plan to one or more third parties. This way, multiple investment options run by different money managers may be offered to suit various risk profiles among the company's employees."

It is evident that I'm not alone and even among those who know what the term is intended to mean, they often use it in a broader context, too. And so we can add this term to the growing list of words and expressions that often have multiple meanings.


  1. There is even greater confusion around the term "plan sponsor" than your comment indicates. True, the first question is about whether this term refers to only pension clients or more broadly to institutional clients. However, a more serious question is around the area of being a "fiduciary." It is quite worrisome that one of the web postings says that a company may delegate investment responsibility to one or more "fiduciaries." This indicates a lack of understanding on the part of these so-called "plan sponsors." Why? First, because there can only be ONE chief fiduciary for any client portfolio, whether it is an institutional or a private client. And because the first and most important fiduciary responsibility is one of "appropriateness." This involves developing the right asset allocation and style diversification needed so that the financial goals have a high chance of being met. To equate individual asset managers as having an equal responsibility of the chief fiduciary is wrong. If you were building a house, you would assign overall responsibility to a general contractor, who would in turn hire out specialists for each task: foundation, framing, electrical, plumbing, etc. You would not put each of these contributors on an equal level of responsibility for the success of the overall project. That's because the responsibility of the chief fiduciary is broader and more significant than the asset managers.

    In most pension plans this responsibility of the primary fiduciary has been a dismal failure, demonstrated by the significant underfunded status of pensions, leading to the emergency Pension Protection Act. Just look at how much of this underfunding was caused in 2008, as the decline in interest rates caused the value of their liabilities to soar, while the value of equities dropped significantly. Of course, pensions were mostly invested in stocks, instead of bonds, and the duration of the bonds was significantly lower than the duration of the liabilities they should have matched. As a result of this mismatch between the assets and the liabilities, the underfunding gap was made much worse.

    I reviewed one pension plan where the plan sponsor boasted of being 300 bps ahead of the asset benchmark. This meant that they only lost 22% instead of 25%. However, the liabilities were valued using a long corporate bond index, which lost only 8%. So, was the plan 300 bps ahead or 1,400 bps behind? You decide. I think instead of giving each other "high fives" they should have been addressing the real problem of a mismatch of investment strategy and fiduciary goals.

    The typical corporate pension plan is now underfunded by 20% - 40% while government plans are underfunded anywhere from 30$ - 50%. How did we get here? Two reasons. F irst, the "plan sponsors" don't understand their responsibility to take care of making the right macro decisions. Instead, they put their focus on the success in the selection and monitoring of the underlying asset managers. That's pretty much the entire focus of the GIPS standards, isn't it? Second, and perhaps more significantly, they compare their relative performance to an asset benchmark, instead of to the liabilities that their assets are supposed to match. So, they have the wrong plan and they compare their success to the wrong thing. It's a recipe for disaster.

    Does it sound like they really understand their "fiduciary" responsibilities? Or that they understand what it means to be a "plan sponsor?" Unfortunately, the pension guys are not the only ones who don't understand this. As a result, most investment committee meetings are preoccupied with short term performance, and the endless scrutiny of the individual asset managers with respect to their asset benchmarks. Until the industry wakes up to an understanding of what it really means to be a "plan sponsor" we won't have any improvement in the financial health of the clients we are supposed to serve.

  2. Analyzing human behaviour using historical data is both interesting and funny sometimes. When the market is moving up up up, we want our assets to move in tandem or better relative to the market. If the market is moving down down down, we want our asset to earn a minimum return level.

    Concerning your second point, I do agree except people forget the reason why asset maangers are hired. Is the purpose to beat the benchmark or meet the pension liability?

    Making a right decision requires a person / people to understand both short term and long term goals. We can point the current asset / liability problems not just to people you stated in your comment but to the beneficiaries of these plans as well. Who doesn't want big returns!!!!

    The answer to this original blog and pension dilemna maybe what you stated in your pervious comment, "Diversification"!!!! We need to teach everyone one set of languages and expectations. Then again, who doesn't want big returns!!!!


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