Investing August 27, 2020

The Future for ESG Investing in Retirement Plans

The DOL says ESG integration cannot propel financial advancement. Experts say the department is wrong; plan sponsors just need education on implementation.
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Art by Laila Ekboir

The Department of Labor (DOL)’s proposed rule on environmental, social and governance (ESG) investment practices, published in June, intended to add clarity to years of obscure regulatory guidance. Instead, it’s created a layer of complexity among fiduciaries and has fueled more than 1,000 critical comments.

The proposed regulation restates that plan sponsors in defined contribution (DC) plans may not disregard financial approaches in an effort to pursue ESG-related considerations without violating their fiduciary duties under the Employee Retirement Income Security Act (ERISA). In plain speak, the proposal claims that ESG practices fail to bring about financial gains—even as the coronavirus pandemic keeps generating interest in ESG among employers and participants alike. Months after COVID-19 was declared a pandemic, net inflows into ESG funds reached $21 billion, according to Morningstar. ESG investing has been booming.

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In fact, research has shown that large exchange-traded and mutual funds with a focus on ESG criteria have generally outperformed the broader market during the pandemic. An S&P Global Market Intelligence study analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management (AUM) that selected ESG-related stocks and found that 14 of those posted higher returns than the S&P 500, with outperformers rising between 1.8% to 20.1%.

“The growth of ESG investment has ongoing support of megatrends, including greater transparency via improved access to alternative data and ESG reporting, increased awareness of climate change and the risk it poses on investments, and the coming transfer of wealth to sustainability-minded Millennials,” says James Salo, head of data strategy and operations at Trucost, which is part of S&P Global.

A recent blog post by AllianceBernstein (AB) argues against the DOL’s proposed rule. ESG considerations are financial considerations, the blog contends, and employers are taking such considerations seriously. In an ongoing AB survey, two in three employers say they believe ESG integration, such as applying purpose-driven factors in fundamental investment analysis, is in fact their fiduciary duty.

“In its proposal, the DOL is reiterating that financial factors have to be the sole priority for DC plans to consider what funds to put on their plan menu,” says Jennifer DeLong, head of defined contribution at AB. “For many plan sponsors who have spent a little time thinking about ESG integration, to not do that is counterintuitive to how you would want an investment manager to run a fund. Many plan sponsors believe it is a fiduciary duty to consider those types of factors in the investments or lineup that they’re offering or allowing their participants to choose from.”

Michelle Dunstan, global head of responsible investing at AB, argues that real ESG integration isn’t, and shouldn’t be, decorative. “Think about an industrial company that builds widgets,” Dunstan says. “It has a factory and emits carbon. Ask yourself, is carbon taxed on the jurisdiction in which it’s currently operating? Could that become taxed at some point in the future? If so, include that in cash flows and take that into account when considering investment decisions. Even if it’s not to become taxed, ask yourself whether new potential regulations could require a company to upgrade its equipment and thereby cost money.

“In this example, if a company is going to have to spend $2 billion on upgrading their equipment, that is actually material to a portfolio manager making an investment decision,” Dunstan adds.

Among other concerns posed over the DOL’s proposed rule are concerns relating to qualified default investment alternative (QDIA) practices, and, more specifically, wahether plan sponsors may implement an ESG-themed QDIA. DeLong recommends that plan sponsors refer to a consultant, adviser or ERISA counsel to gain clarity.

According to an AB survey, plan sponsors say one of their biggest obstacles with ESG funds is knowing how to implement them. DeLong says a continued educational effort within the retirement industry is necessary.

Melanie Adams, vice president and head of corporate governance and responsible investment for RBC Global Asset Management (RBC GAM) emphasizes the importance of active stewardship among investment groups. “Meeting with companies in which we’re engaged, asking them questions about their ESG risks and opportunities and voicing concerns that we may have back to the company,” are ideas she lists to engage in ESG.

Until the DOL adds further guidance, DeLong says she believes choosing any investment strategy that integrates ESG factors—whether that be a QDIA, core menu option or self-directed brokerage window—should be sufficient.

Administration August 25, 2020

Retirement Plan Providers Opening Up to Serving Cannabis and Other Companies

A few financial firms have entered the cannabis, hemp and CBD market, being careful to manage any legal risks for their clients and themselves.
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Despite being able to legally sponsor 401(k) plans, cannabis, hemp and CBD—or cannabidiol—companies have found it difficult to find plan providers willing to take them on as clients.

One reason, according to Jewell Lim Esposito, an attorney with FisherBroyles in Washington, D.C., is plan providers are nervous and jittery about dealing with “traffickers.” Add nervousness to the confusion over dealing with the tax code, the Employee Retirement Income Security Act (ERISA) and “single employer” concepts, she says. “Companies that produce proper hemp are legal under the federal Controlled Substances Act (CSA). Yet, if those hemp companies are treated as related, under common control, or as a single employer with the companies that produce cannabis (illegal under the same federal CSA), plan providers have difficulty reconciling the intersection of tax, ERISA, and cannabis rules,” she explains.

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Providers will be hesitant to engage with hemp businesses that are part of a controlled group with cannabis businesses. Providers are reluctant to do business with cannabis companies even though those businesses are legally able to adopt 401(k) plans, and U.S. Attorney General William Barr is on record saying he intends to refrain from pursuing trafficking prosecutions against otherwise legally operating cannabis companies, according to Esposito.

Recognizing that cannabis companies didn’t have access to traditional services, including 401(k) administration and recordkeeping, in 2015, Keegan Peterson founded Würk in Denver, a full human resources (HR) and payroll services firm for the industry.

Heather Smyth, director of marketing at Würk, says many financial services firms aren’t willing to support these businesses because cannabis is still illegal on a federal level and moving money and funds can be risky if not done within the boundaries of the Bank Secrecy Act (BSA), which provides rules for financial institutions to assist government agencies in detecting and preventing money laundering.

“We’ve established relationships with cannabis-compliant financial partners and identified ways to be compliant,” Smyth says. “We’re still very much aware of the risks we’re taking, but we are extremely diligent. We go through a rigorous process in vetting clients because we want to be able to support them in the long run without putting other clients, financial partners and ourselves at risk.”

“Vetting customers in the cannabis industry is extremely difficult. In order to operate in this industry, Würk built a proprietary Compliance Cloud in partnership with financial institutions and banking regulators. This Compliance Cloud enables Würk to facilitate payments to 401(k) and benefits providers so they are ensured the cannabis companies they are supporting are compliant,” Peterson says.

One of Würk’s partners is ABG Rocky Mountain (ABGRM), which provides Würk’s employees with a 401(k) plan. “We were the guinea pigs,” Smyth says. “It is a great relationship, so we expanded it to our clients.” Würk and ABGRM officially announced their partnership on the MJ 401K BY ABG product in the spring. “We recently finalized a full 360-degree integration that allows data to seamlessly flow between our system and ABG’s system, simplifying things for clients,” Smyth says.

Erica Bonser, director of marketing at ABGRM, says it also provides 401(k) plans for hemp and CBD companies. “ABG does not discriminate in providing retirement benefit plans for any legally organized company or industry,” she says. The firm has between 50 and 60 hemp, CBD or cannabis company clients.

The number of Würk clients signing on to the 401(k) program has grown, but Smyth says she feels the COVID-19 pandemic may have stalled adoption of plans. A survey conducted in April by the LIMRA Secure Retirement Institute (SRI) and the Retirement Leadership Forum confirmed that many retirement plan contracts were delayed by COVID-19.

The only difference between plans offered by cannabis companies and those offered by other corporations is that not many offer an employer match, Smyth says. But, she says, she thinks that will come. Bonser says if the company is set up with a Cannabis Tax ID, there may be issues regarding the tax deductibility of employer contributions. “We recommend that each plan sponsor contact its CPA [certified public accountant] or other tax professional for directed tax advice,” she says.

Cannabis companies have another choice for a 401(k) provider. Leading Retirement Solutions offers the Leading Cannabis 401(k), which its website says was developed by a group of financial, legal and retirement industry veterans who are already serving the cannabis industry with tax and employee benefits solutions. Kirsten Curry, the founder and president of Leading Retirement Solutions in Seattle, Washington, says cannabis companies may claim a cost-of-goods adjustment for indirect production-related business expenses, including employer contributions to a 401(k).

“As a consequence of being vastly underrepresented by financial institutions over the years, many cannabis companies do not currently offer any retirement benefit options to their employees,” Curry says. “In numerous cases, cannabis owners and executives are simply unaware that these services exist for their industry. “

Curry notes that cannabis companies have traditionally struggled when it comes to employee retention, with nearly 60% of workers lasting less than two months. She says a company-sponsored retirement plan is one of the best methods to reduce these high turnover levels and attract employees who are interested in building a long-term career with the company. She cites a Glassdoor survey that found around 40% of employees working for small businesses said they would leave their current company to work for a company that offers a 401(k) plan.

“Over the past five years, several retirement plan providers that already specialize in non-traditional investments and innovative plan setups have worked side-by-side with cannabis organizations to create a solution,” Curry says. “Through collaboration with financial, legal and retirement industry experts, cannabis companies can now legally offer employees retirement plans like a 401(k) or cash balance plan.”

The United Food and Commercial Workers Local 27 union offers a retirement plan for companies with union employees, and it recently signed a health benefits contract for cannabis company union members; however, a question about whether employees of cannabis companies are covered by its retirement plan was unanswered.

Smyth says it’s important to streamline workforce management and offer solutions that cannabis, hemp and CBD companies can trust, as well as be transparent about providing services for the industry. She adds that, slowly, more and more financial institutions are entering the market.

“We truly believe that every person has the right to retire with dignity. Part of that is the ability to save money in a 401(k) plan. Under ERISA, it is legal for these companies to sponsor a retirement plan, therefore we sought out partners who were willing to service them,” MJ 401K said in a statement.

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