Institutionalization means ensuring that the standards of DC investment options are raised in line with the best practices of institutional investors. Among other things, this includes advanced portfolio design and implementation, as well as rigorous ongoing evaluation and control.
These advanced practices were (and still are) developed by and for sophisticated institutional investors, including some of the largest and most innovative pension plans and endowments in the world. While such approaches have become routine for these investment professionals, they are beyond the reach of most others, including DC plan participants who do not have the necessary scale to justify the cost and expertise required to navigate their complexity.
Historically, DC plans have typically been judged on how many investment options they offer to participants. However, many participants lack the knowledge of how to construct a portfolio that balances risk and return, in which case a longer list of investment options only serves to increase the potential for a suboptimal return outcome.
Huge efforts have been made to educate participants in this regard, and the situation has improved significantly as a result. But education only tackles one side of the equation – the investor. Even greater improvements can be achieved by rethinking how the investment products themselves are designed and run.
This switch in focus lies at the heart of institutionalization – instead of focusing squarely on giving individual participants control, the focus is instead on outcomes. Outcome-based solutions are designed and run according to the aforementioned institutional best practices, in order to optimize risk, return and cost. But this is all easier said than done:complexity remains the main barrier to widespread adoption of these practices.