Investing November 4, 2022

Callan: DC Plan ESG Use Drops in ’22 On Backlash, Rule Confusion

A potential backlash on ESG investing along with confusion over DOL guidance led to a 14% drop in ESG implementation by institutional investors, including large pension and DC plans, according to new research from Callan.

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Pushback against ESG investing by state governments and some in the investing community led to a drop in use among institutional investors this year, according research released by fund consultant Callan.

In an annual survey of 109 institutional investors on environmental, social and governance implementation, Callan found just 35% of respondents incorporated ESG factors into investment decisions this year, down from 49% in 2021.

“Overall, we’ve never seen more interest in the topic of ESG, but at the same time there’s also a segment of the institutional population and the broader set of stakeholders that has a backlash against ESG,” Thomas Shingler, a senior vice president ESG practice leader for the Summit, New Jersey based firm said on a webinar.

This sentiment was also reflected in respondents who do not use ESG saying they will in the future, which fell to 20% this year, down from a peak of 24% in 2020, Callan said.

While the survey showed increased interest in ESG topics, it also showed confusion over differing ESG regulation by state as well as a lack of clarity from the Department of Labor and Biden administration, Shingler said while presenting the results.

“We’re in a bit of purgatory while we await the final word from the Biden Administration,” Shingler said on the call.

The DOL’s guidance on ESG drew over 20,000 comments since it was announced in October 2021. The DOL then called separately for more responses in a request for suggestions on how it could take “actions to protect life savings and pensions from threats of climate-related financial risk.” Finally, on Oct. 6 of this year, the agency sent the rule to the White House’s Office of Management and Budget for final review, with potential passage before the end of this year, according to Shingler.

Small Plans, Less Focus


The lack of ESG incorporation was most acute among smaller plans with fewer resources and guidance, Callan said.

ESG incorporation was lowest among plan sponsors with under $500 million in assets at 25%. That figure increased as asset size rose, with investors managing $3 billion to $20 billion at 47% of ESG incorporation.

“It’s typically the larger institutional investors who can commit resources to ESG focus,” Callan said, noting an example in which a large institutional investor has a dedicated ESG person on staff to attend plan management meetings.

Among those that incorporate ESG, public organizations were actually least likely to implement them at 24%, followed by corporate plans at 26%. Finally, endowments came in next at 47%, and foundations made up 53% of active ESG users.

Those institutional investors that did incorporate ESG into investment decisions were mixed in their reasoning, Callan said. About 42% said they incorporated ESG to address stakeholder concerns, 20% did so for higher long-term returns.

Those that did not incorporate ESG mostly noted that the results were unproven or unclear (47%), don’t believe there is good research tying ESG to better performance (34%), and another 28% said they only consider factors that are purely financial.

When asked if ESG can lead to improved investment results, Thomas said the debate is ongoing. There is a “slew of research” arguing it does, as well as those arguing it doesn’t, he said.

The survey was conducted in May and June of 2022 with a mix of public and private retirement plans (DB and DC), foundations, and endowments. The full research results will be available to clients in two to three weeks, a Callan spokesperson said.
Compliance November 3, 2022

Excessive Fee Complaint Filed Against Large Freight Transporter

The Phoenix-based company is alleged to have breached its fiduciary duty to plan participants.

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Retirement plan participants employed by Knight-Swift Transportation have filed a class action lawsuit alleging breach of fiduciary duty against the Phoenix-based trucking company’s 401(k) plan under the Employee Retirement Income Security Act.

Plaintiffs allege in the complaint that fiduciaries mismanaged the plan by having participants pay excessive fees for recordkeeping and administrative services to the plan’s recordkeeper, Principal. Additionally, plaintiffs have alleged a plan sponsor fiduciary breach caused by participants paying excessive revenue sharing as direct and indirect compensation to Principal, according to the complaint.

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The Knight-Swift Transportation retirement plan uses revenue sharing to compensate Principal for the cost of providing recordkeeping services. Under the plan sponsor’s revenue-sharing arrangement, payments are derived from investments in the plan.

“The direct and indirect payments defendant caused the plan, participants, and beneficiaries to make for recordkeeping and administrative services during the class period were excessive and unreasonable,” the complaint states. “Defendant breached its duty of prudence by failing to monitor, control, negotiate, and otherwise ensure that indirect compensation plan participants’ pay to Principal [was] not excessive and unreasonable.”

The complaint explains that revenue-sharing payments are not “per se imprudent,” but must be closely monitored for reasonableness.

“Plaintiffs are not making a claim against defendant merely because it used revenue sharing to pay administrative expenses,” the complaint states. “However, when (as here) revenue sharing is left unchecked, it can be devastating for plan participants.”

The complaint further argues that the plan sponsor failed to implement a prudent fiduciary process to properly monitor and control the fees that plan participants were paying for recordkeeping costs, as “prudent fiduciaries implement three related processes to prudently manage and control a plan’s recordkeeping costs,” the complaint states. 

According to the complaint, “this [proper fiduciary process] will generally include conducting a request for proposal process at reasonable intervals, and immediately if the plan’s recordkeeping expenses have grown significantly or appear high in relation to the general marketplace. [A]n RFP should happen at least every three to five years as a matter of course, and more frequently if a plan experiences an increase in recordkeeping costs or fee benchmarking reveals the recordkeeper’s compensation to exceed levels found in other, similar plans.”

The plan sponsor has not undertaken a “proper RFP,” since 2016, plaintiffs state in the complaint.

The plaintiffs alleged that the defendants failed to properly evaluate if the plan sponsor had caused participants to pay more than a reasonable fee for the services provided to the plan. The complaint also argued the plan sponsor failed to stay informed on trends in the marketplace regarding fees paid by similar plans, as well as the recordkeeping rates available in the marketplace.  

The complaint also alleged the plan sponsor breached its fiduciary duty to participants by selecting more expensive share classes of investments instead of less expensive institutional shares of the same funds. By causing plan participants to pay more for identical investments, the plan sponsor failed to uphold its statutory duty under ERISA to prudently monitor and defray costs of the plan, plaintiffs argued in the complaint.

“Plan participants, in most cases, are paying about double to invest in the imprudent share classes,” the complaint states.

The lawsuit was brought before the United States District Court for the District of Arizona. Attorneys for the plaintiffs and the proposed class are from Scottsdale, Arizona-based law firm McKay Law, Tampa law firm Morgan and Morgan and Tampa law firm Wenzel Fenton Cabassa, the court document shows.

Knight-Swift Transportation did not respond to a request for comment on the lawsuit.

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