Compliance October 30, 2020

DOL Issues Final Rule With Softer Stance on ESG

The final version of the regulation emphasizes the importance of using only ‘pecuniary’ factors in the assessment of investment options within tax-qualified retirement plans.

Reported by

The U.S. Department of Labor (DOL) has published the final version of a new retirement plan investing rule, retaining the proposed version’s formal title: “Financial Factors in Selecting Plan Investments.”

According to senior leaders at the DOL and Employee Benefits Security Administration (EBSA), who briefed reporters on the regulation during a conference call Friday afternoon, the final version of the rule includes some important differences compared with the proposed version, though the substance of the proposal largely remains intact. By way of background, the proposed rule, which focused on environmental, social and governance (ESG) considerations for retirement plan investments, was published on June 30, and it generated a tremendous amount of public input during the 30-day comment period. The DOL’s website shows there were more than 1,100 unique comment letters and more than 7,000 signed form letters submitted by the investment industry and the public.

Get more!  Sign up for PLANSPONSOR newsletters.

The proposed version of the rule proved to be controversial—reflected in the fact that the majority of public comments called the rulemaking unnecessary and antiquated in its hostile views of ESG investing. Many of the comment letters argued that ESG-themed investments are an important means to address the very real and quickly emerging investment challenges presented by climate change, social inequality and other major societal issues.

The final version does include some significant changes compared with the proposal, which will seemingly protect the use of ESG investing to some extent. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG.” Rather, it presents a framework that emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. In this sense, the rule does seem to leave ample room for the use of ESG-related investments, presuming these types of investments are assessed in a purely economic manner and that their financial features make them prudent investments.

The preamble to the final rule, on the other hand, does speak directly to the ESG topic. The DOL and EBSA officials said the preamble seeks to help stakeholders understand how the pecuniary framework may apply to the assessment of ESG investments in practice.

Another important change emphasized by senior DOL and EBSA leaders is that the final rule does not explicitly prohibit the selection of a fund that uses ESG factors as a plan’s qualified default investment alternative (QDIA). Once again, the final rule requires that a fund being selected as the QDIA must be assessed using purely pecuniary factors that are directly material to its financial performance. Beyond this, the final rule does stipulate that a fund is not appropriate as a QDIA if its stated objectives include explicitly non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.

Responding to questions from several reporters, the senior DOL and EBSA leaders said they felt the 30-day comment period was sufficient to create this final rule. They said they examined and considered each written submission to reach the final rule, noting that the DOL and the EBSA have long been engaged with the public on these topics.

Participants October 30, 2020

Gen Z Needs Opportunity to Save for More Than Just Retirement

Gen Zers likely had a great start to saving for retirement, but they are facing near-term financial challenges.

Reported by

401(k) plans have always existed for Generation Z, and it’s likely that most members of the generation were automatically enrolled in their company’s retirement plan when they were hired. Furthermore, industry experts say Gen Zers are tech savvy and are conscious of their futures—most begin saving for retirement as soon as they start their career.

But, despite Gen Z’s potential great start to saving for retirement, it’s worth noting the setbacks this group faces. Aside from rising student loan debt, younger employees are more likely to have less emergency savings than their older counterparts, and they are more likely to be unemployed or laid off, especially in the COVID-19 economy.

Get more!  Sign up for PLANSPONSOR newsletters.

Employees are encouraged to save between 12% to 15% of their income a year for retirement, but many Gen Zers are falling off track, says Sandra Pappa, principal consultant at Buck Global LLC. “For that group of employees who may have had to tap into their retirement savings because they were furloughed or took a cut in pay, all of those factors reduced their ability to stay on track with that 12% a year,” she notes. “When those things happened, they have to make up for lost time.”

Dan Keady, chief financial planning strategist for TIAA, says a TIAA survey found that across all age groups, employees are listing paying off debt, saving into an emergency fund and saving for retirement as top priorities. And, Gen Z employees are looking to their employers to assist with their financial futures. “People are looking at their employers, and plans, to provide more than just retirement savings, to be the starting point to really creating financial wellness and getting rid of as much financial fragility as possible,” Keady says.

Pappa points out that some employers offer benefits to help employees with their finances, including student loan debt repayment solutions, after-tax Roth accounts and investment advice.

Chris Keller, a partner at Kingman Financial Group, explains that having a Roth account helps with overall finances because rising tax brackets influence a worker’s retirement savings. “If our taxes are going to go up in the future, we need to pay attention to what the taxes will be on it when we retire,” he says.

In addition, Pappa says some employers offer a Roth account that employees might use as an emergency savings vehicle. Having an account in a 401(k) or 403(b) offers professional oversight and investment management that most employees can’t get on their own on that same level, she adds.

Keller says individual retirement accounts (IRAs), Roth IRAs, fixed-income annuities and life insurance are additional vehicles that can help Gen Zers safeguard their financial futures. Keller recommends Gen Zers look into life insurance in particular because of its growth potential for tax-free income. He suggests that younger employees contribute up to their employer-sponsored match in their defined contribution (DC) retirement plans, and then invest savings into some other assets. Gen Z employees should think about risk in their portfolios, taxes and how their savings would be affected if they have a family one day.

Employers should recognize that Gen Zers grew up in the digital world. A Morningstar study found most Gen Zers use at least one financial app for budgeting, investing or everyday banking, and most use these apps every day. “They want to have budget apps that help them with their cash flow. They want to be able to keep up on their emergency funds and their retirement savings. You’re going to see more of these basics are done through technology,” Keady says.

Despite their dependence on technology, the Morningstar research found Gen Zers trust human interactions with financial advisers more than robo-advisers. Thirty percent reported that they’ve met with an adviser at least once before. It’s likely that despite their tech-savviness, Gen Zers still value the expertise an adviser can offer. “Most don’t have the ability to do the in-depth research,” Pappa says.

«