Compliance June 28, 2023

House Republicans Call for More Transparency in ESG and Proxy Voting

Republicans focus on the environmental aspect of ESG in a recently published report on Republican policy goals concerning investor activism.

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An “ESG Working Group” established by Republicans on the House Committee on Financial Services in February, published an interim report, June 23, highlighting the various policy goals it intends to pursue. These include: regulating proxy voting and environmental, social and governance rating firms, mitigating application of European Union regulations to U.S. issuers, and blocking the Securities and Exchange Commission’s climate disclosure proposal.

The report indicates that the group is primarily interested in the “E” for environmental in the ESG moniker, a focus that is reflected in the lawsuits brought by fossil fuel industry groups seeking to overturn the Department of Labor’s Employee Benefits Security Administration’s rule proposal permitting ESG factors to be used by fiduciaries making retirement plan investment decisions: “The initial focus of the Working Group centers on the environmental aspect, specifically the current promotion of environmental policies in the financial services industry and by regulatory bodies.”

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To that end, the group recommended reforms to the proxy voting industry. They identify the two largest proxy voting firms, Glass Lewis and Institutional Shareholder Services Inc., which is the parent company of PLANSPONSOR. The House group states that proxy voting firms need to be more accountable and transparent to shareholders, including being required to publish their methodologies and data regularly and only considering pecuniary factors in making their voting recommendations. Additionally, the report says  proxy voting firms should be required to disclose whether any of the proposals on which they are offering a voting recommendation was submitted by a client, so as to reduce conflicts of interest.

The report makes broadly similar recommendations for ESG ratings firms (ISS also provides ESG ratings). The House members write that firms selling ESG ratings should disclose their methodologies and data used in assigning the ratings.

The group also identifies the volume and content of some shareholder proposals as a problem. They argue that shareholders submit too many politically motivated proposals that consume time and resources for issuers. They state that the SEC should make it harder to submit and resubmit previously denied proposals by increasing the ownership thresholds for making proposals to enable shareholders to submit a proxy proposal if they have owned $2,000 of the company’s securities for at least three years; $15,000 of the company’s securities for at least two years; or $25,000 of the securities for at least one year.

The SEC’s current proposal on climate disclosure should not be allowed to proceed, the group argued. It said that the proposal goes beyond the SEC’s authority to require climate-risk and greenhouse gas disclosure because these are not material concerns, and accuses the SEC of prioritizing “social justice” over investment returns.

The largest asset managers were also a target of the report. The “Big Three,” or The Vanguard Group, BlackRock and State Street Global Advisors, were identified by the group as posturing as passive investors that are actually quite active in voting to approve ESG and diversity, equity and inclusion initiatives. The report criticizes the firms for having signed an international net zero commitment, which Vanguard left at the end of 2022. The report says, “Congress should consider policies that better align the voting behavior of passively managed index funds with retail investors’ best interests.”

Lastly, the report argues that the U.S. government should be more active in advocating for U.S. securities issuers in the context of foreign regulations. The report specifically identifies the EU’s Corporate Sustainability Due Diligence Directive, which requires issuers with more than $150 million in market capitalization to disclose scope 3 emissions, referring to the carbon emissions of firms within a company’s supply chain, but not the company itself. The regulation applies to many U.S.-based issuers operating in the EU, and the group argued that the U.S. government should negotiate with foreign jurisdictions to remove or mitigate the applicability of foreign regulations to U.S. businesses.

 

Administration June 28, 2023

PSNC 2023: Addressing In-Plan Annuity Reluctance

Employers are reluctant to incorporate annuities in-plan because they don’t feel the best options have come to market yet.

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Plan sponsors have not incorporated in-plan annuities because retirement plan committees are held back by fear of missing out on better offerings and concerned the plan will be stuck with the selection, according to industry experts.

Despite an increase in the retirement income conversation in recent years, in part driven by participants saying they want additional guaranteed income beyond Social Security, employers have remained reluctant to offer a retirement paycheck that can be paid out from an individual’s accumulated balanced by a guaranteed lifetime income annuity option, explained John Doyle, a senior vice president and defined contribution strategist, at Capital Group, at the PLANSPONSOR National Conference last week in Orlando, Florida. 

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”While we can talk about the roadblocks and the reluctance that we’re seeing, one of the big issues right now is fear of making a decision and missing out on better options that [employers] think are coming in the near future,” Doyle said. “Talking to a lot of committees on the corporate side—large, small, mega, all different sizes—[there] is this hesitancy to make a decision.”

When Doyle is out talking to plan sponsors, he has found that their knowledge and comfort with adding annuities is low. Another reason employers may be reluctant to add annuities because the products are not familiar, he said.

“There’s an education process that is not a one-month process,” Doyle said.  “[That] may end up being a multiple year process with some of these committees to start to understand how to apply [guaranteed income] to their plans, address the demographics and need [and] go through the whole educational process.”

Given nonprofit entities’ greater experience with guaranteed lifetime income products, annuities have tended to be more prevalent in nonprofit and education employer-sponsored plans, as compared to corporate defined contribution plans, and nonprofits have added annuities sooner, adds Doyle.

“What I’m hearing from them is that 10 years from now, it’s going to be very common to have a guaranteed lifetime income solution in the plan, more likely as an opt-in not as part of the default,” he said. 

Achieving greater guaranteed income inclusion among plan sponsors will largely rely on one thing: simplicity, said Deana Calvelli, partner and managing director, at Creative Planning Retirement Services.

“[Employers want] simplicity, simplicity, and we’ve learned that lesson through many other areas of the retirement industry,” she said. “What’s interesting about what’s evolving [in corporate 401(k) plans] is that we often talk about 401(k)s for private sector being more progressive than nonprofit and this is something where it’s really the opposite. We’re really in the very early stages, as it relates to the for-profit sector in terms of embracing this.”

Employer reluctance to use annuities in-plan has also been driven by conversations about guaranteed income with participants that are starting nearer to the end of a worker’s career rather than at the outset of an individual’s working years, Calvelli added.  

“If [the retirement industry] changes that conversation and doesn’t wait until you’ve accumulated the assets but start it at the very beginning … we’re going to get a lot more employees that are going to buy in by starting the conversation early, not at the end,” she said.

Jeff Cullen, managing partner at Strategic Retirement Partners, noted that TIAA has used guaranteed income products in higher education employer’s plans for many years, allowing the plan sponsors greater comfort with the products. 

“These are not unsophisticated committees: this is Harvard, Yale, Princeton. these are some of the smartest investment committees in the country, and they’re doing it, but they have an advantage,” said Cullen. “They had a level of comfort because they’ve had the traditional annuity [and] they’ve had an annuity inside their plan for over 100 years.”

Tamiko Toland, managing director, head of lifetime income strategy and market intelligence, at TIAA provided hard figures with regards to the state of annuities as the qualified default investment alternative.

Incorporating annuities in the corporate plan-market, particularly as a default, “is seen as a very controversial thing, yet it’s actually something that we’ve been doing at TIAA as a default on our own recordkeeping platform,” she said.  “We are expanding out from there into other spaces, but I think it’s really helpful to put into context the fact that we are doing it actively and we have a significant number of plans that have adopted it and a significant number of participants.”

More than 250 corporate plan sponsors, comprised of 250,000 participants, are using guaranteed income as a default, Toland said.

Historically, TIAA distributed guaranteed income offerings in 403(b) plans, but has added headcount to grow its market share in the corporate retirement plan space.  

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