Investing January 4, 2019

Mission-Based Employer Embraces ESG TDFs, In-Plan Income

UWC-USA makes all of its decisions and policies with its broader mission in mind; based on a commitment to education, sustainability and global thinking, the school has embraced an ESG target-date fund, as well as in-plan guaranteed income.
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Art by Andrea D'Aquino

Very quickly in a conversation with Victoria Mora, Ph.D., president of United World College (UWC)-USA, one gets the sense that she has a clear passion for her work and her employees—as well as a belief that UWC-USA is a values-driven educational organization, which defines its raison d’ĂȘtre as more than to financially succeed.  

Similar to other trendsetting retirement plan sponsors, the employer’s enthusiasm for institutional excellence bleeds directly into the domain of employee benefits and financial wellness. As a result, United World College-USA has become one of the first plan sponsors to embrace environmental, social and governance (ESG) investing principles within its defined contribution (DC) retirement plan’s default investment option. And if that weren’t innovative enough, the plan’s automatic features also include a guaranteed retirement income component, made possible via TIAA’s custom model portfolio services, and glide path consulting from LongView Asset Management.

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“Our core belief as an institution is that education is an incredible force that can work beyond itself to create broad social change and improvement,” Mora told PLANSPONSOR. “Education can often be seen or talked about as a personal accomplishment, but we know that the value of a good education goes far beyond the individual person to impact the whole community. Education is a force for change for the better, for global peace and a sustainable future.”

According to Mora, UWC-USA makes all of its decisions and policies with its broader mission in mind. This includes decisions and policies to do with employee compensation and retirement benefits.

“People already know that, throughout the education space, hardworking educators are often not valued or compensated at the level [many] think they deserve, given the crucial role they play as the conveyors of knowledge from the older generation to the next,” Mora said. “In the last few years, we started to talk a lot about what it really means to live your mission and live your values, especially where the rubber hits the road with financial matters.”

So, as the ESG topic has gained momentum, Mora and UWC-USA saw “a wonderful opportunity to align what we’re doing for employees’ retirements with what we are helping our students to learn every day.” In basic terms, the default investment product UWC-USA offers to retirement plan participants is a custom target-date solution that weighs ESG factors directly as part of its asset-allocation process and includes an automatic in-plan retirement income component for educators that reach and enter retirement.

How a Custom ESG TDF Came Together

Mora credits TIAA and LongView Asset Management for helping her and her colleagues—in particular, the plan’s fiduciaries and finance staffers—see the opportunity that ESG investing presents.

Douglas Lynam, director of educator retirement services at LongView Asset Management, credits Mora and her colleagues for being willing to try something new. In fact, he and Mora have a strong rapport that has inspired stakeholders to embrace an innovative strategy for the plan’s default investment scheme.

“When we were looking at this plan as a potential client, we saw a big opportunity to help UWC-USA understand its fiduciary duty and how it could implement its mission while also improving retirement outcomes for employees,” Lynam said. “We naturally had a lot of discussions about the Department of Labor [DOL]’s fiduciary duty requirements under ERISA [Employee Retirement Income Security Act] and what the law says and doesn’t say about the use of ESG investing programs.”

Using language adopted by a growing number of institutional asset managers that have enthusiastically embraced ESG, Lynam said LongView “knows that ESG-thinking is a benefit to performance, lowering risk as it helps to improve diversification.”

“Sustainability and environmental issues are absolutely material to long-term investment decisions being made today, and those include decisions about the qualified default investment alternative [QDIA] in retirement plans,” Lynam said. “The data and research is clear that ESG can give you a performance edge, when implemented effectively.”

As to why the custom model portfolio approach was best in this case, Lynam suggested there are “still only a pretty limited number of options out there now for an off-the-shelf ESG TDF [target-date fund].”

“Especially when it comes to the price of the prepackaged options, we felt that was more expensive than what we would normally recommend as a default investment,” Lynam said. “When we looked closely at the TIAA model portfolio approach, the light went on. We realized we could create a custom portfolio that incorporated ESG and retirement income at the same time, while, from the user perspective, appearing to be essentially a low-cost TDF.”

There are other recordkeepers that can do this, of course, but Lyman said TIAA was “very helpful in creating this solution.”

“We are proud to be partnering with them on this solution, especially because the cost we achieve with this model is less than half of what you might pay for a prepackaged ESG target-date fund,” Lynam said. “The price is down to 27 basis points [bps], which we feel is pretty spectacular for the value the client is getting, especially considering this is a $1.8 million plan. It’s a small plan sponsor taking the lead here.”

The Recordkeeper’s Perspective

In a separate interview, Mark Foley, managing director for institutional financial services at TIAA, commended the work done by LongView and UWC-USA, calling their custom ESG solution a clear trendsetter.

“Clients come to us wanting to directly address lifetime income a lot more, these days, but the industry is only now reaching the point where we can operationalize this type of solution,” he said. “When we can get lifetime income solutions linked up with the default options in a plan, we think that can be a really powerful combination for improving participant outcomes and confidence about retirement.”

Foley said other clients have taken their own innovative approaches using this type of adviser-supported custom model portfolio arrangement as the default retirement plan investment.

“Some clients make ESG the focus of their custom solution, while others take other approaches,” Foley observed. “Each institution now has the ability to design its own structure and allocations—and not just the mega-sized investors. As the recordkeeper, we are striving to offer a very flexible platform, which will allow our asset management partners and our plan sponsors to take a variety of approaches.

“From the outset,” he continued, “we could see that ESG was really important to UWC-USA and its adviser. They believe that ESG brings the best combination of risk and return, and we are happy to operationalize that for them.”

Mora emphasized that this was a long-term effort to get an ESG-focused custom default investment up and running.

“Working with Doug and TIAA, we really had some eye-opening conversations about the potential alignment between financial decisions and the alignment of values and principles,” she said. “There was this moment where it really crystalized. Doug helped us see that ESG is absolutely material right now by asking, what does it mean to invest in an individual’s future while ignoring the future of the whole society or the planet? It’s a hard thing to un-think. At UWC, our employees believe in education as a force for good, so it was not very difficult to generate conviction around this new approach.”

Asked if she was nervous about being a trendsetter and trying something new in a space with strict regulations and an all-too-eager plaintiff’s bar, Mora said, “It’s always a bit scary to be out front. But, when you feel like you’re doing something that is right, then you set your fear aside and do it. A significant part of the work in the first year was demonstrating to all of our stakeholders that it’s a good thing to be a trendsetter.”

Administration December 27, 2018

Progressive Sponsors Will Push Custom Designs, Fee Transparency in 2019

Year-end conversations with recordkeepers suggest plan sponsors are highly focused on improving fee transparency, exploring custom default solutions and strengthening fiduciary processes.
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Art by Luyi Wang

As managing director for institutional financial services at TIAA, Mark Foley frequently speaks with plan sponsor clients about their evolving goals and expectations in offering defined contribution (DC) retirement benefits to employees.

Like other executives working at both established and up-and-coming recordkeepers, Foley told PLANSPONSOR 2018 has been a big year for both his firm and its clients—and for the broader retirement services industry.

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“Especially from my perspective being in charge of default solutions, it’s been a very busy year in terms of working with plan sponsors on improving their plans and creating innovative solutions to long-standing challenges,” Foley said. “We have been doing a lot of work to continue to enhance and broaden the use of custom approaches to default offerings, and we’re pleased with the steps that our clients are taking to address participant outcomes.”

According to Foley, clients are increasingly asking for helping in addressing lifetime income within the DC plan context.

“This is another very positive development we saw in 2018,” Foley said. “When we can get lifetime income solutions linked up with the default options in a plan, we know this can be a powerful combination for improving participant outcomes and confidence about retirement.”

Foley said the lifetime income conversation among DC plan sponsors “is really ramping up,” but one of the persistent challenges is being able to actually operationalize this type of a solution.

“I joined TIAA from Prudential, and when I was there I was directly involved in their plan-linked lifetime income products,” Foley noted. “So, I can say I’ve been in the trenches on this issue for some time. My assessment is that the industry is only now getting to the point where we can offer this type of solution in a pretty straightforward way. We can make it relatively simple for the participants and the sponsors, and so we’re seeing increased demand as a part of that.”

Whether talking about clients using customized solutions or those going with pre-packaged default products, Foley said conversations about fee transparency remain front and center as 2019 approaches.

“Talking about fees and transparency remains a key part of client conversations; it is inherent to the discussions we have about the new custom solutions we are trying to deliver,” Foley said. “With our custom model service, for example, it is a key selling point that the client gets transparency all the way through. It’s one of the things that makes this kind of approach appealing to a wide variety of sponsors.”

Foley was candid that plan fiduciaries have to pay “a little more attention to performance and costs” when they run a custom default investment, because they maintain additional responsibility for controlling and overseeing the different pieces of the custom model. Providers and advisers can ease this oversight burden significantly, but plan sponsors cannot wholly offload their fiduciary duties.

“But in turn, you have really good visibility into exactly what is going on with the fees, returns, etc.,” Foley explained. “We find that clients who go with custom default investments tend to put a high value on having this visibility into fees, underlying holdings and performance.”

Clients Focused on Fees and Fiduciary Oversight

Another plan service provider executive who candidly discussed year-end trends with PLANSPONSOR was Mark Klein, CEO of PCS.

“If we think back to where we were at the start of 2018, it’s been a dramatic 12 months for DC retirement plans,” Klein said. “At the start of the year the new Department of Labor fiduciary rule was still in effect, for example.”

According to Klein, a lot of industry stakeholders have overlooked what it means that the system has returned to the older set of fiduciary advice regulations and prohibited transactions rules.

“If you remember, the updated fiduciary rule that was vacated this year would have made a lot more advisers into fiduciaries, but it also included a new set of prohibited transaction exemptions that would have eased the compliance burden of being a fiduciary adviser,” Klein said. “Those exemptions required certain disclosures, yes, but they otherwise freed fiduciary advisers to make recommendations that would result in a higher fee being paid to them or to a partner—i.e., prohibited transactions under the old system.”

As 2019 draws nigh and the DOL fiduciary rule overhaul languishes, Klein said, the retirement industry is “left in kind of a limbo situation.” The crux of the issue is that some fiduciary advisers and service providers (and by extension, their plan sponsor clients) decided to rely on the new fiduciary rule to make or permit certain recommendations that they might not feel as comfortable with today, Klein said.

“This will remain a sensitive and pressing topic in 2018, both for advisers and their plan sponsor clients,” he warned. “I still pause now and again and think about what an incredible regulatory struggle we’ve seen advisers and providers go through in the last two years. Together with the influence of accelerating litigation, this has been a very influential time period for our industry and our clients.”

On Klein’s assessment, even though the retirement plan industry has evolved in a lot of important ways, the manner in which providers present fees and articulate value to plan sponsors and to individual participants and beneficiaries has not really evolved. He is firmly in the camp advocating for more transparency.

“At PCS, we strive to explain the benefit of per-capita pricing for recordkeeping versus asset-based pricing—we’re always trying to coach advisers and sponsors about this,” Klein said. “One challenge we have is educating advisers and sponsors about looking at the overall fees.”

According to Klein, even when the structure will result in a better deal overall, there is often a reluctance among plan sponsors to accept a new, stated per-capita fee up front, rather than to just continue to pay what appears to be a small asset-based fee.

“We are working hard to educate advisers and sponsors about not only the benefit of being up-front and more transparent about our fee, but also about how this approach is likely to be less expensive over time,” Klein said. “We are working to find ways to better express this and prepare our advisers to talk about the long-range impact of different pricing structures.”

Revenue Sharing Debate Will Continue

According to Jason Brafman, director at John Hancock Investments, DC retirement plan sponsors continue to pare back their investment menus in the interest of making it easier for participants to build rational allocations.

Brafman spoke recently on a panel with Vincent Smith, partner and senior consultant at Fiduciary Investment Advisors, during the Best of PSNC 2018 event in Boston.

While it may seem almost patronizing from the perspective of those working in daily on retirement plans, Smith and Brafman said, it is important to be frank with participants and make sure they don’t think their funds or account administration is free. In fact this remains a pervasive incorrect belief among plan participants, they warned.

“It is the responsibility of providers and sponsors to be transparent about how fees are being assessed, why they are being assessed this way, and what the exact terms of that structure are,” Smith said.

Both panelists agreed there is still a debate going on about the use of revenue sharing—a debate that is unlike to be resolved even by the end of 2019. In particular, plan sponsors are debating whether simply declaring no revenue sharing is better in the name of simplicity and transparency, or whether it is still worthwhile to collaborate with a recordkeeper to create pricing efficiencies through proprietary investment revenue sharing on a net cost basis.

“Often you can get a cheaper all-in cost by using revenue sharing, but the other side of the coin is that this can be very confusing for participants, and for that reason alone it may be better to go with zero revenue sharing, unless you can really educate the plan population and get everyone to realize what is really going on,” Brafman said. “That’s where the trend away from revenue sharing is coming from.”

According to the pair, most plan sponsors placing new recordkeeping business today are favoring paying up front a flat dollar fee for recordkeeping. However, Brafman and Smith agreed this is also not always the best way to pay, especially for smaller plans.

“Plan sponsors want to know how they should address the ‘fee-leveling’ conversation with participants,” Smith said. “This will remain an important conversation to have with advisers and providers.”

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