Administration November 6, 2023

CFA Institute-Led Group Publishes New Definitions for Responsible Investment

The new definitions aim to provide language for investors that allows them to communicate their responsible investment practices accurately and consistently, according to the CFA. 

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In an effort to standardize terminology and enable institutional investors, regulators and industry participants to communicate with precision about environmental, social and governance investing and other responsible investing terminology, the CFA Institute recently published new definitions for sustainable finance-related terms.  

Margaret Franklin, CEO and president of the CFA Institute, said that this project is “critical to ensure that professionals can communicate efficiently and effectively with each other, as well as investors and industry professionals across the market.” 

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The definitions report was published as legal challenges continue to the Department of Labor’s rule permitting the consideration of ESG factors when selecting investments for defined contribution retirement plans, along with other conflicts at the state and federal over the role ESG in the proxy voting process and other systems. 

The CFA Institute collaborated with the Global Sustainable Investment Alliance and the Principles for Responsible Investment to harmonize definitions for the following responsible investment terms: 

  • Screening 
  • ESG integration 
  • Thematic investing  
  • Stewardship 
  • Impact investing 

Chris Fidler, head of industry codes and standards at the CFA, said in an emailed response to questions that well-defined terminology is essential for clear communication. 

“Unclear and inconsistent terminology can cause confusion in the marketplace, making it harder for both clients and investment managers to achieve their goals,” Fidler said. 

For this project, Fidler said the CFA selected commonly used terms that needed additional clarity and consistency. 

“We focused our efforts solely on terms associated with responsible investment approaches, but these are not the only sort of terms that cause confusion,” Fidler said. “Greenwashing, for example, is a frequently used term that does not have a precise and consistent definition.” 

Screening 

Screening is the process for determining which investments are or are not permitted in a portfolio. According to the CFA, this process is used for attaining an investment focus, complying with laws and regulations, satisfying investor preferences and limiting risk. 

The new definition for screening is “applying rules based on defined criteria that determine whether an investment is permissible.” The defined criteria can be qualitative or quantitative.  

For example, criteria can be whether the issuer or security in question is a constituent of a specific ESG-related index or whether a sovereign issuer achieves a given human rights performance score from a specific ratings provider. 

The CFA argued that if rules are not based on defined criteria and applied consistently, the activity should not be characterized as screening. 

ESG Integration 

ESG integration should be defined as the ongoing consideration of ESG factors within an investment analysis and decision-making process with the aim to improve risk-adjusted returns, according to the CFA.  

This integration involves identifying and assessing the ESG risks and opportunities that are relevant to investments, weighing that information and making decisions about those investments. The CFA argued that this is an ongoing part of the investment process—not a one-time activity. 

Consideration of ESG factors, however, does not imply that there are restrictions on the investment universe and that ESG factors are given more or less consideration than other types of factors. 

“When communicating to general rather than professional audiences, investors should avoid the term ‘ESG integration’ and instead use plain language to accurately describe how ESG factors are considered in the investment process,” the CFA recommended in its report. 

Thematic Investing 

Thematic investing, according to the CFA, involves selecting assets to access specified trends. 

“Thematic investing is underpinned by the belief that economic, technological, demographic, cultural, political, environmental, social, and regulatory dynamics are key drivers of investment risk and return,” the report stated. 

This term essentially refers to selecting companies chosen in a top-down process for inclusion in an investment portfolio that fall under a sustainability-related theme, such as clean technology, sustainable agriculture, health care or climate change mitigation.  

The CFA noted that thematic investing differs from constructing a portfolio with a particular focus. For example, investors may wish to invest in a portfolio of a veteran-owned business because they want to support veterans while earning a financial return, but this would not be considered “thematic investing” unless a case was made for how veteran-owned business enable access to a specified trend or trends. 

“Thematic investing often—but not always—results in a focused portfolio, but not all focused portfolios are the result of thematic investing,” according to the report. 

Stewardship 

In the context of ESG, stewardship refers to “deliberate deployment of rights and influence (beyond capital allocation) to protect and advance the interests of those clients and beneficiaries.” This includes the common economic, social and environmental assets on which their interests depend. 

Some examples of ways in which investors can exercise their rights and influence include serving on or nominating directors to a company’s board, filing shareholder resolutions or statements and voting on proposals at shareholder meetings. 

The CFA argued that the term stewardship should not be used to refer to activities like proxy voting and engagement unless these actions are “undertaken to protect and enhance overall value for clients and beneficiaries.” 

Impact Investing 

Lastly, the CFA defined impact investing as investing with the intention to generate positive, measurable social and/or environmental impact alongside a financial return.  

Impact investing can be pursued across a range of asset classes, including fixed income, real assets, private equity and listed equity investments, according to the CFA.  

This concept differs from philanthropy in that it pursues a financial return in addition to a positive, measurable impact. Impact investors have discretion over the rate of return they target. 

Wilshire Advisors LLC also recently released a report arguing that while ESG stands for environmental, social and governance, “its meaning differs from individual to individual and from organization to organization.”  

The Wilshire report argued that ESG investing is too often viewed monolithically deemed either “good” or “bad.” 

“Ultimately, considering all ESG ‘good’ or all ESG ‘bad’ is not prudent,” the Wilshire report stated. “This binary view fails to acknowledge the nuances of ESG investing. Like any investment, the product, people and process matter. Furthermore, this view of ESG limits the ability to see that folks on either side of the debate have a lot more common ground than the headlines and rhetoric would suggest.” 

Benefits November 3, 2023

IBM Plans to End 5% Employer Matching in 401(k) Plan

The American multinational technology company is pulling its traditional 401(k) company match in favor of a company retirement account contribution for all employees.

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IBM plans to end 5% matching contributions and 1% automatic contributions to employees’ 401(k) accounts in favor of an automatic 5% retirement benefit provided to all employees, starting January 1, 2024, a company spokesperson confirmed by email.

The technology corporation will still allow employees to make deferrals into a 401(k), but it will direct 5% of each employee’s salary into what it terms a “Retirement Benefit Account,” according to a spokesperson and details from a company memo posted to a conversation on the web site Reddit.

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“IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account within the existing IBM Personal Pension Plan, which helps save for retirement automatically, with no contribution required from the employee,” explained the spokesperson by email. “The RBA adds a stable and predictable benefit that diversifies a retirement portfolio and provides employees greater flexibility and options.”

IBM employer contributions were based on an internal IBM pension formula that varied depending on an employee’s eligibility for the IBM Personal Pension Plan as of December 31, 2007, and a different set of options for those hired on or after January 1, 2005, according to the firm’s 2022 Form 5500, filed in July 2023.

Currently, IBM automatically enrolls new employees into the DC plan at 5% of eligible salary and performance pay after approximately 30 days of employment with IBM, unless they elect otherwise. New hires become eligible for the IBM automatic contribution and the IBM matching contribution after completing the applicable service requirement, which generally is one year.

Additionally, in plan year 2022, “matching and automatic contributions were made once annually at the end of the year. In order to receive such IBM employer contributions each year, a participant must be employed on December 15 of the Plan year, and meet all eligibility requirements,” according to information included in the 2022 Form 5500.

Participants in the existing IBM plan are fully vested at all times “in their account balance, including employee contributions, employer contributions and earnings thereon, if any,” according to information in the 2022 Form 5500. The IBM memo said the company plans to end matching contributions in a change planned as part of continued improvements to support workers’ well-being.

“By introducing this retirement benefit within IBM’s Personal Pension Plan, which is stable and well-funded, IBM is able to provide a benefit to IBMers that also helps diversify their retirement portfolios,” the leaked IBM memo stated. “We periodically benchmark the benefits IBM offers compared to industry peers, and 5% is aligned to the market—but in addition, with the RBA, no employee contribution is required.”

Additional text of the leaked document included a description of the “key features of the Retirement Benefit Account”:

  • Guaranteed 6% annual interest rate for the first 3 years; 
  • Tax-deferred growth; 
  • Even when the market declines, your balance will not; 
  • No enrollment necessary. No investment decisions to make; and 
  • Immediately vested and portable.  

‘Concerning’ for Employees

IBM planning to end the employer match is uncommon, says Rob Massa, managing director and Houston operations retirement practice leader at Qualified Plan Advisors.

“The U.S. [private] retirement [system] is a voluntary one and, as long as a plan sponsor follows the law and IRS/[Department of Labor] regulations and administers the plan in accordance with its plan document, they may make any plan design settlor (i.e., non-fiduciary) decisions in any way they prefer,” he says. “The decision to eliminate the match is legally acceptable, and there is no fiduciary liability associated with it.”

Phillip Hulme, chief financial adviser and COO at Atlanta-based Stars & Stripes Financial Advisors, explains that the move by IBM is “concerning for employees.”

IBM is shifting risks for retirement benefits from the company and onto employees by taking away workers’ matching contributions, which means they will be “earning less,” Hulme says.

The leaked IBM document addressed some of the differences to the existing plan, called the IBM 401(k) Plus Plan. “[W]e recognize 5% is less than employees are eligible to receive through the current 401(k) Plan,” the memo stated. “To offset the difference, IBM is providing a one-time salary increase effective January 1, 2024, separate from the annual salary plan later in the year.”

IBM reported in a September 2022 SEC filing about its transfer of $16 billion worth of defined benefit pension plan obligations to Prudential Financial and MetLife, one of the biggest pension risk transfer deals ever. The IBM defined benefit plan was frozen to new hires in 2006.

In the 2022 plan year, 168,865 IBM retirement plan participants held retirement balances in the IBM 401(K) Plus Plan, comprising more than $53.3 billion in total assets, as of the latest data available.

Rebrand

Plan adviser Massa had not previously heard of a plan sponsor offering something called a “Retirement Benefit Account.”

“However, under the law, a plan sponsor can name any retirement plan anything they want,” he says. “For example, while most plans use the [IRS’] IRC [Internal Revenue Code] Section 401(k) in the name of their salary deferral plans, there is no requirement to use that term.”

Employees will become eligible for the RBA regardless of whether they participate in any other IBM retirement plan, but similar to eligibility for the 401(k) plan, the new benefit has a one-year service requirement, according to the memo.

“Based on what has been shared from IBM, this sounds like a cash balance plan,” adds Massa. “IBM currently sponsors a cash balance plan called the ‘IBM Personal Pension Plan,’ and my educated guess is that they are either using this program and rebranding it or constructing a new cash balance plan and calling it the IBM Retirement Benefit Account Plan. Cash balance plans are designed to have both a contribution credit (i.e., 5% per year) and an earnings credit (e.g., 4% per year). So that’s my best guess as to what they are up to.”  

Cash balance plans share some similarities with both DC and DB plans but are regulated as defined benefit plans.  

IBM’s plan to eliminate the company match was first reported by The Register, a technology news website based in the U.K. Early reporting was based off of a leaked internal IBM memo and a note on LinkedIn from adviser Hulme, a former IBM employee who says he was aware of the move.

“On the face of it, I see no [Employee Retirement Income Security Act] issues or legal risks with what they are doing,” says Massa. “But going forward, if this is a cash balance plan, IBM would be assuming the investment risk on the cash balance plan portfolio and will also be assuming the cost of PBGC premiums.”  

Despite IBM’s uncommon move to end retirement plan matching contributions, the company should not face legal issues under ERISA, agrees Drew Oringer, a partner in and general counsel at the Wagner Law Group.

“The entire private retirement system is voluntary, and IBM has no obligation to continue or provide any particular ongoing benefit,” says Oringer. “An employee benefit, like a 401(k) plan, is in many ways nothing other than another part of the overall compensation package that includes basic salary.”

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