Bill Gross’ Departure: What Plan Fiduciaries Need to Know

Retirement plan fiduciaries may choose to put PIMCO’s $222 billion Total Return Fund on their “watch list” in the wake of Bill Gross’ departure as the firm’s chief investment officer. 

The departure of such an important part of the PIMCO investment team certainly could be grounds for closer scrutiny of the Total Return Fund, ERISA lawyers say.

In a report Friday, the day that Gross made his surprise announcement, research and brokerage firm Sanford Bernstein said that Gross’ departure could spur 10% to 30% in redemptions from PIMCO funds.

Investors had been pulling money from the Total Return Fund as the world’s biggest bond fund trailed 63% of peers over the past year, on track to underperform a majority of rivals for the third year in four. The fund’s assets have shrunk from a peak of $293 billion last year.

Gross, who was in charge of $2 trillion at PIMCO, the bond manager he helped found 43 years ago, is joining Janus Capital Group Inc., a stock-fund manager. Janus shares surged 43% on the news of Gross’ hiring, the most in 14 years. 

Gross’ departure comes after a dramatic year at Newport, California-based PIMCO. Mohamed El-Erian, PIMCO’s former CEO, abruptly left the firm, provoking widespread speculation that the leadership team was in disarray as PIMCO’s key funds continued to underperform a majority of their fund peers. 

Many fiduciaries, including advisors to plan sponsors, had PIMCO’s funds on a “watch list” even before Gross decided to leave the firm he co-founded, indicating their dissatisfaction with the funds’ performance and the news of turmoil among top management, according to Henry Yoshida, co-principal of the Maresh Yoshida Group and an advisor to 401(k) plans. 

Yoshida told Bloomberg News that the announcement of Gross’ departure will have real consequences on 401(k) plans. “Our group and many others will begin making recommendations to map assets from PIMCO to another fixed-income fund,” said Yoshida. 

In a conference call Monday with analysts, PIMCO CEO Douglas Hodge said the firm is expecting client redemptions on the news of Gross’ departure, but that it is too early to tell how significant. Hodge also said many of Pimco’s large clients, including Calpers, are sticking with the firm and that the new investment team led by Daniel Ivascyn has removed a lot of “uncertainty” for clients. 

In a blog post, Brian Berglund, an ERISA attorney and partner at Bryan Cave, noted that PIMCOs Total Return Fund, previously managed by Gross, is a “pillar” of many 401(k) investment platforms. 

“One thing is certain,” wrote Berglund, “Gross’ departure from PIMCO means that many 401(k) plan fiduciaries are, or soon will be, discerning how to react.” 

Berglund suggested sponsors use the occasion to revisit core procedural prudence best practices. 

Specifically, sponsors need to make sure their Investment Policy Statement is current, he said, particularly if investment managers and advisors are placing particular funds on a watch list. 

He said that the larger sponsors his firm works with almost uniformly have an IPS in place.