Balancing Fiduciary Duty With ESG Demand

As desire for sustainable investments increases, retirement plan sponsors are still cautious about offering ESG funds while regulatory guidance is stalled.

Interest in environmental, social and governance (ESG) investing continues to increase, but how can defined contribution (DC) plan sponsors meet participants’ and their own interests while still abiding by their fiduciary duties under the Employee Retirement Income Security Act (ERISA)?

That balance is so important that the Department of Labor (DOL) issued a strict proposal last year, ordering plan fiduciaries to avoid investing in ESG funds that may offer a lower return or increased risk compared to other, non-ESG funds. The proposal later was the target of intense scrutiny, with many arguing that ESG considerations are financial considerations. In response, the DOL issued a much softer stance as its final rule.

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In the public comments about the DOL’s proposed rule, Voya reported that its research found 76% of individuals surveyed felt it was important for their employer to apply ESG principles to workplace benefits, with more than half (60%) noting that they would likely contribute more to an ESG-aligned retirement plan if it was reviewed and certified as socially and environmentally responsible.

“ESG funds provide diversity and low costs, plus many investors want them,” says Patrick Dinan, a Certified Financial Planner (CFP) at Impact Fiduciary. “Some investors may be more inclined to participate in a plan if it aligns with their personal values.”

Yet, other studies show there is only slight uptake of ESG investments. A 2019 study by Cerulli Associates found that while 56% of plan sponsor respondents are interested in offering ESG funds to investors, when asked to identify the top three most important attributes they considered when selecting plan investments, “environmental and social responsibility” ranked last, chosen by only 16% of respondents.

“There is still a significant amount of uncertainty,” notes George Sepsakos, principal at Groom Law Group. “This has put plan sponsors and fiduciaries in a bit of a tricky situation.”

While the Biden administration issued a non-enforcement policy on Trump-era ESG regulations, many plan sponsors remain skeptical on the matter, adds Sepsakos. “While we can assume the Biden administration is indifferentiable on ESG matters, we still don’t know much,” he says. 

At the moment, Sepsakos sees most plan sponsors that are interested in offering ESG investments working with plan advisers and consultants to compare them with non-ESG funds. Other plan sponsors are reminding participants that they can invest in sustainable funds through a brokerage window.

However, Sepsakos anticipates the Biden administration will issue future guidance to ease any concerns about fiduciary liability. “They’ve signaled that what the Trump administration had issued is under review and I think it’s very clear that they will amend that,” he says.

Jodan Ledford, CEO of Smart, anticipates this journey toward ESG standardization will take a crawl, walk, run approach for plan sponsors and participants alike. Instead of automatically defaulting participants into an ESG fund, plan sponsors will likely start with offering an option on the investment lineup. “That’s a pretty safe bet from a fiduciary perspective because those [participants] have to opt into those investments, and then, over time, as the market evolves, I think you’ll get more and more of a standardization,” he says.

Charlie Nelson, vice chairman and chief growth officer at Voya, echoes that sentiment, saying that as standardization in ESG investments grow, so will adoption of sustainable features such as e-delivery tools, digital engagement, automatic features and match structures. “As more companies increasingly embrace ESG values in their business models, it seems inconsistent to not also do so within their benefit plans to support their employees, ultimately becoming more of the standard than unique,” he says.

Did the In-Service Distribution Age Change for 457(b) Plans?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

I work with a private 501(c)(3) health care organization that sponsors both a 403(b) and a 457(b) plan. We permit in-service distributions in our 403(b) at age 59.5, and would love to allow such distributions in our 457(b) plan as well for administrative and communication consistency purposes, but have always been told that the law that applies to 457(b) would not allow that. However, I recently read an article indicating that a SECURE Act-related provision would permit in-service distributions in 457(b) plans at age 59.5. Is that correct?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

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That is partially correct, but unfortunately not in a way that would help your goal of consistency. The American Miners Act of 2019 was indeed signed into law at the same time as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and it did modify the distribution rules that apply to 457(b) plans as you indicate. However, as you can see from the language from the Act, below, It only modified the permissible distribution age for GOVERNMENTAL plans:

“APPLICATION TO GOVERNMENTAL SECTION 457(b) PLANS.—Clause (i) of section 457(d)(1)(A) of the Internal Revenue Code of 1986 is amended by inserting “(in the case of a plan maintained by an employer described in subsection (e)(1)(A), age 59½)” before the comma at the end.”

Thus, the earliest age at which in-service distributions would be permitted for governmental 457(b) plans was lowered from age 70.5, which was the age for all 457(b) plans prior to the American Miners Act enactment, to age 59.5. However, since you are a NONGOVERNMENTAL 457(b) plan sponsor, the earliest age at which an in-service distribution may be taken from your 457(b) plan is unchanged and remains at age 70.5. This has become yet another one of the numerous differences between governmental and private tax-exempt 457(b) plans. We described some of the other major differences in a previous Ask the Experts column.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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