As companies struggle with underfunded defined-benefitpension plans, more are deciding to offload the chore of investingtheir plan assets.

Russell Investments, which has been providing such outsourcedinvestment management, which it calls fiduciary solutions, since1980, said it received 31% more completed requests for proposals(RFPs) for investment outsourcing last year than it did in 2011.And a recent survey by Asset International's Chief InvestmentOfficer Magazine showed 55% of companies with pension plansdid some investment outsourcing or plan to do so within the next 24months.

“The interest level has increased quite a bit,” said Eric Macy,managing director of fiduciary solutions at Seattle-based Russell.“People talked about it for a few years, but last year we reallystarted seeing it.”

Macy linked the pickup in interest to the financial bind inwhich many corporate pension plans find themselves. While equitymarkets rose last year, interest rates remain low, which boostspension plan liabilities. Actuarial firm Milliman estimated thatthe 100 largest U.S. pension plans faced a total funding deficit of$412 billion at the end of last year, which was $74 billion higherthan the deficit at the end of 2011, and had an average fundedratio of just 76.4%.

“The great majority of pension plans are underfunded,” Macysaid. “Plan sponsors are saying, 'We need a plan to get us fullyfunded and keep us there.'”

The situation is a painful one for corporations. Regulatorychanges mean pension plan finances now filter through to thecompany's balance sheet. And a number of large companies have hadto make sizable contributions to their underfunded pension plansover the last couple of years.

Companies traditionally have employed investment advisers tohelp them decide on asset allocation and select investmentmanagers. When a company outsources the investment of its pensionplan assets, it gives the outsourcer the authority to selectinvestment managers.

This fits with the “more dynamic approach” to investmentmanagement companies are adopting, according to Macy. Rather thanhaving the investment committee assess the performance of theplan's investments and discuss possible changes to thoseinvestments at its periodic meetings, companies see an advantage tomonitoring the markets on a daily basis for investmentopportunities

“That's a new segue into the need for a more outsourced CIOapproach,” Macy said. “They don't have someone to do it in house,they need someone who can look at opportunities on a daily basisand take advantage of opportunities.”

Companies are also questioning whetherinvesting their pension assets in-house is the best way to spendtheir time and energy, he said. “Companies are saying, 'Thingshaven't gone that well, we're a tire company, we need to focussenior management's attention on the core business. So if there's agovernance model that can help us focus on the high-level issues ofthe pension plan and outsource the more day-to-day issues toseasoned professionals, that's a good approach.'”

Agreeing, Debra Woida, head ofdelegated investment services for the Americas at Towers Watson,said that interest in outsourcing among companies withdefined-benefit pension plans has grown over the last severalyears. In fact, these days even RFPs for investment advisoryservices often include a request for more information aboutinvestment outsourcing, said Woida, pictured at right, adding “Ithink in the current environment, everyone is feeling they at leastneed to feel they understand what it is.”

Some companies, even those with internal investing expertise,adopt investment outsourcing to handle more complex investments,such as real estate, hedge funds or distressed debt, Woida said.“Picking and monitoring an equity manager is very different fromthe due diligence to pick a hedge fund manager.”

Woida also links the interest in outsourcing to the decisions bymany companies to freeze or close pension plans. Once the pensionplan is no longer part of the company's benefits package, itbecomes less strategic. And the company may be less interested intargeting a certain return on their assets and more focused onlimiting the risk involved in the plan and possibly preparing toshutter the plan completely and get it off the balance sheet. Thosegoals involve tactics that go beyond traditional investmentselection, like devising a lump sum buyout or an annuitypurchase.

Companies also like investment outsourcing because it allowsthem share the fiduciary liability for the plan. The company doesnot eliminate its responsibility and shares it with the outsourcer,Woida said. “Instead of being responsible for each and everydecision, they're responsible for seeing that the person theyselected as their [outsourced chief investment officer] is aprudent selection and has the proper resources.”

As interest in investment outsourcing has grown, many newplayers are entering the field. Woida cautioned that companiesshould make a careful selection. “What position would you be in ifthey're not in the business in a year?

“The level of due diligence around selecting a provider needs tobe carefully thought out,” she said. “It is more than just adviceso you need to be sure to document that it's a prudent selectionand this provider has the proper resources, the proper staff, theproper commitment to the business to provide you with that.”