As the Labor Department mulls a proposed rulemaking on
environmental, social and governance investment options by retirement plans,
advisers say the rules are likely to temper a “chilling effect” caused by the
prior administration’s guidance.
Advisers say more retirement savers are asking about ESG
investing and that the forthcoming rules could place them on equal footing with
many retail and institutional investors who examine factors such as
environmental sustainability and corporate responsibility on social issues
alongside traditional financial metrics.
“I don’t know if DOL is going to go as far as requiring plan
sponsors to think about ESG investments as part of a plan menu, but I am pretty
confident we’re going to get a level playing field,” National Association of
Plan Advisors Executive Director Brian Graff told attendees as he led a panel
discussion of experts during the NAPA 401(k) Summit this week.
Retirement plan fiduciaries haven’t had that much leeway in
directing investments into ESG options. Experts are hoping that will change
with updated Labor guidance. In December, the department’s Employee Benefits
Security Administration issued a final rule that required retirement plan
advisers to select investments based on “pecuniary factors.”
That policy limited ESG options for retirement plans, and many
stakeholders reported a “chilling effect,” according to the Labor Department,
which said in March it wouldn’t enforce that policy and would draft new rules.
President Joe Biden also issued an executive order that
directed federal agencies to consider financial risks tied to climate change.
The order specifically asked the Labor Department to consider rescinding the
previous administration’s rule while taking steps to protect worker pensions
and retirement savings.
Senate Democrats introduced legislation to amend a law known
as the Employee Retirement Income Security Act to specifically allow
fiduciaries to consider ESG factors in selecting investment strategies for
employer-sponsored plans.
“Retirement plan sponsors and participants deserve the freedom
to choose the 401(k) investment that best suits their needs,” Graff, who is
also CEO of the American Retirement Association, said in a prior statement in
support of proposed legislation.
ERISA governs a broad range of retirement and health benefit
plans. This includes defined benefit plans, such as pensions; defined
contribution plans, such as 401(k)s for private sector employees and 403(b)s
for public educators and employees of nonprofits and government entities; and
many other variations.
These plans contain more than $10 trillion in assets and
cover more than 150 million American workers and their dependents, according to
Labor Department data. Retirement accounts are also the vehicle through which
the vast majority of Americans invest in capital markets.
While more than half of Americans are in the market, less
than 15 percent hold stocks directly, according to the Pew Research Center.
Most stock market holdings are indirect, through retirement accounts.
Labor regulations may have so far kept many ESG options away
from retirement savers despite a rapidly growing interest in those investment
strategies.
The total assets under management at funds focused on ESG
last year surged to more than $40 trillion, almost twice the size of the U.S.
economy, from $22.9 trillion in 2016, according to Opimas LLC, a management
consultancy focused on global capital markets.
Demand for more choices
Investors worldwide are seeking more ESG options, according
to another panelist, Charles Nelson, vice chairman and chief growth officer of
Voya Financial.
“We meet with analysts and investors, and every time there’s
a question around ESG,” Nelson said at the event. “I think this is one of the
greatest opportunities for advisers in your practices as you go forward,
because businesses, whether they're publicly traded or they're privately held
by private equity or ultimately a hedge fund, they're getting asked these
questions.”
Another panelist noted it gives plan advisers more
credibility with clients when they can discuss and offer ESG options.
“You're now not just the guy or gal that comes in to do the
401(k) review — you become a strategic business partner with them, so it puts
you at a much different level,” said Jania Stout, senior vice president at
OneDigital Retirement. “I think that’s a huge opportunity for us as advisers.”
Joe DeNoyior, president of retirement and private wealth
with HUB International, said he hopes plan advisers don’t merely offer
retirement savers a single ESG option.
“[W]e’re starting to hear from our advisers, saying we can’t
just put one in,” he said. “If ESG portfolios are the No. 1 portfolio that is
attracting assets for the wealth side, then maybe we should market it a little
bit differently, like having a one-stop solution for these participants in the
ESG side.”
Other panelists included Karen DiStasio, head of retirement
consulting services at Commonwealth Financial Network, and Donald MacQuattie,
co-head of institutional fiduciary solutions at Raymond James.
MacQuattie said he’s not seeing a huge demand for ESG right
now, but he said the Labor Department rules might give advisers more comfort
offering these options.
DiStasio noted the quality of data could be improved and
said investors can’t simply take third-party data at “face value.”
“You’ve got to do the homework, like we do on any
investment,” she said.
Nelson, from Voya Financial, agreed and said that vague
terminology remains a challenge for ESG-minded investing in retirement plans.
“I think for many recordkeepers, most of us will use a
source or two to determine if a fund is ESG certified or not,” Nelson said. “We
have the capabilities, so we can do a lot of those types of things, but the
broader challenge that I think we have with it is that it’s not necessarily a
litmus test, it’s not either yes or no, because many investment managers and
fund managers will apply and utilize ESG principles in their investment
philosophy and their processes.”
The panelists pushed back on ESG skeptics who claim that
this investment philosophy requires a sacrifice in financial performance.
“I don’t think that just because you choose an ESG fund,
that you’re not going to get good performance,” Stout said. “The funds we found
are meeting the criteria. … I think there’s enough out there that you can still
provide good performance, but also be more relatable to the people that are
going to be the major labor force in the next few years.”
While ESG proponents and retirement plan advisers alike
continue to await the updated framework from the Labor Department, experts said
ESG questions are becoming almost standard practice in public sector funds'
requests for proposals. DeNoiyer said HUB International is seeing an increase
in questions about ESG topics, particularly among larger plans.
“It wasn’t just to check a box in their RFP; they actually
cared about those issues when it came to our investment due diligence process,”
he said.
One notion shared by all the panelists: ESG investing is
here to stay.
“Look, you can run your practice how you want, and you all
should, but there’s a reason investors and shareholders are asking about this
around the world and increasingly in the U.S,” said Nelson. “And I really
believe it’s going to continue to build here in the U.S., and those advisers that
lean into it and can find a way to engage with their customers in a different
way on this will find some new growth as well.”
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