PSNC 2020: Time to Get Serious About ESG?

Environmental, social and governance investing is slowing becoming pervasive in DC plans, particularly as Millennials are poised to become the majority of the workforce.

The important thing for retirement plan sponsors to consider when deciding whether to include environmental, social and governance (ESG) funds in their plans’ investment lineups is if it will improve their participants’ performance—not whether it is making a difference in the world, said Ed Farrington, executive vice president, institutional and retirement, Natixis Investment Managers—U.S. Distribution, at the virtual 2020 PLANSONSOR National Conference.

“There is growing evidence that ESG can help plan sponsors and advisers identify and manage risks,” Farrington said. “Demand will increasingly grow. By 2025, 75% of the workforce will be Millennials, and, as such, they will wield influence over the workforce, and, therefore, the benefits world. The important thing for plan sponsors is to meet this demand while also meeting their fiduciary duties.”

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Cammack Retirement’s client base includes many universities and public sector plans, including a leading organization in wildlife conservation, and “these clients have taken a keen interest in ESG investing,” said Michael Volo, senior partner at the advisory practice. “There has been a lot of growing momentum in the past 12 months.”

“Investor interest is running years ahead of regulation, if not decades,” said Hernando Cortina, head of index strategy, at ISS* ESG. “There has been massive growth in ESG investing in the past 12 months. ESG now comprises 10% of ETF [exchange-traded fund] assets, totaling $6.2 billion. Net flows into ESG ETFs are 10% of the market, which is quite meaningful.”

Farrington noted that the Department of Labor (DOL) first issued guidance on ESG investing in 2008, under the George W. Bush administration. “Every presidential administration since has had some opinion on incorporating ESG into a retirement plan menu,” he said. “It is critical that plan sponsors understand that and ensure they are meeting their fiduciary duty while also innovating by including ESG to offer a better investment process.”

There are several ways plan sponsors can include ESG strategies in their investment lineups, Farrington said. They can find standalone ESG funds, he said. However, it is more common for them to find target-date funds (TDFs), balanced funds or managed accounts that include ESG principles in their investments, he said. What sponsors may not realize, Farrington said, is that “90% of the companies in the S&P 500 issue data on how they behave in terms of ESG policies. For the past decade, research analysts have had access to data to see how ESG impacts performance.” Many funds that do not explicitly say that they are ESG focused actually incorporate these principles, so sponsors can ask their retirement plan advisers to find out what the ESG exposure in their investment lineup is, he suggested.

As to how ESG affects performance, “there are plenty of studies that emphasize that integrating ESG into the fund selection process can lead to similar, if not better, returns,” Farrington said. “Managers who can integrate this will have an information advantage.”

Again, however, Farrington said it is critical that when considering ESG investments, sponsors look to ensure that they are adding to the “economic benefit of the participant, not the collateral benefit. This is really critical when it comes to the role of a plan sponsor serving the needs of a plan participant.”

The DOL’s proposed rule on ESG investments, which it issued this summer, emphasized that including such investments in a retirement plan lineup “has to be for the economic benefit of the plan,” Volo said. “Most read the proposal as pushing back against ESG, but, at the end of the day, the DOL was reiterating that fiduciaries have to do what is in the best interests of participants and that ESG investment returns have to be at least on par with non-ESG investments.”

Of the 1,500 comments the DOL received in the condensed, 30-day comment period it gave the public, most of the remarks were negative, asking the DOL to alter its guidance, Volo noted.

“DOL’s proposed rule may slow down ESG momentarily, but not in the long term,” Volo said. “There is a lot of momentum and data behind ESG investments. I believe we are reaching an inflection point,” he said. “But I still think we are in the early innings for ESG in retirement plans.”

*Editor’s note: PLANSPONSOR Magazine is owned by Institutional Shareholder Services (ISS).

Employees Taking a Greater Interest in Specific Benefits

Life insurance, dental insurance, health and flexible spending accounts, and financial planning tools are on workers’ radar, according to MetLife.

Workers say getting benefits right this year is more important than it was in the past, citing the coronavirus pandemic, according to a MetLife survey on open enrollment. Forty-eight percent of respondents say open enrollment is more important this year than it was last year.

Of particular note is workers’ interest in specific benefits, namely life insurance, dental insurance, health and flexible spending accounts, and financial planning tools. Roughly one in four are more interested in life insurance and dental insurance, and one in five are more interested in pre-tax health and flexible savings accounts, i.e., health savings accounts (HSAs) and flexible savings accounts (FSAs), as well as financial planning and educational tools.

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A similar survey by Aflac found that 63% of workers are looking for at least one benefit, such as supplemental insurance or telemedicine, to be expanded. Forty-five percent expressed great interest in insurance that helps offset financial costs related to COVID-19 or other pandemics.

The Aflac survey also found that 33% of employees are either not confident or are unsure it their health benefits will protect them if they are affected by COVID-19.

Forty percent in the MetLife survey say they intend to invest more time this year selecting employer benefits this year, and 57% have already spent a few hours researching and choosing their benefits.

Sixty-seven percent say the reason why they are paying more attention to their benefits this year is the pandemic. However, they say they also have other concerns, including personal finance issues (34%). These include worries over financial security and potentially losing income due to COVID-19. Thirty-one percent are worried about rising health care costs.

“The pandemic has caused a serious disruption to employees’ lives, fundamentally changing the way they approach nearly every aspect of their short- and long-term decisionmaking—including their benefits selections,” says Meredith Ryan-Reid, head of financial wellness and engagement at MetLife. “Workers understand that benefits play a vital role in achieving financial security and will use this year’s enrollment to be more deliberate in how they use these offerings moving forward.”

Sixty-nine percent of workers say improving their financial health is one of their most important goals this year, with 45% saying they feel insecure about some aspect of their finances. This includes feeling behind compared with their peers and lacking experience with personal finance.

One in eight employees say they feel insecure about making a benefits decision, and 51% say discussing benefits with their loved ones makes them more anxious than discussing fitness and nutrition goals. MetLife suggests that sponsors can assuage these concerns by providing their workers with benefits tools.

“In this tough environment, it’s important that employers demonstrate an understanding of employee stress, anxiety and insecurities,” Ryan-Reid says. “People have an overwhelming amount of information to digest, so benefits education and enrollment should be easy and accessible. The goal is to give workers a sense of ownership even when the rest of their lives are filled with uncertainty.”

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