PSNC 2023: Unique Issues for 403(b) Plan Sponsors

Backlash to sustainable investments in retirement plans is causing nonprofit plan sponsors to remove and reconsider incorporating environmental, social and governance investments among their plans’ investment offerings, according to 403(b)-retirement plan expert panelists at the PLANSPONSOR National Conference last week in Orlando, Florida.

Historically, nonprofits more readily embraced ESG investment offerings than did corporate plans, said Kellie Desrosiers, head of retention strategy at Voya Financial. However, given the intensified response and emotions around the topic of sustainable investments, Desrosiers said retirement plan managers are debating whether to incorporate ESG funds. 

“I feel like we’ve gone from one spectrum to the other,” Desrosiers said.

Plan sponsors must always account for the fiduciary liability and litigation risk, causing them to “question, from a fiduciary perspective, does [ESG] bring you [added] risk?” Desrosiers theorized. “I think, probably the question is still out there as to whether or not that’s the case.”

Despite some criticism and instances of litigation aimed at a few retirement plans, ESG funds remain available in nonprofit retirement plans, Desrosiers explained.  

“We are seeing [ESG] in the 403(b) much more [than 401(k)],” she says. “I have a client [who] about a year and a half ago had one ESG fund and took steps to put an ESG fund in every asset class, so [that plan could] have an employee that was 100% in ESG funds, but fully diversified. A year and a half later, [the plan is] taking steps to remove those ESG funds and looking at lower-cost investment options.”

Kristi Baker, managing partner at CSi Advisory Services, a division of Hub International, explained that, given the backlash and possible added fiduciary risk from adding or including ESG investments, nonprofit clients are asking Baker how to proceed with addressing sustainable investments and the their potential inclusion in-plan.

“It’s a topic in most of our committee meetings about what is ESG investing, training the committee, reviewing what an ESG investment might look like and whether it would be appropriate or not and then simply documenting that,” she said. “The spirit of it is making sure that you have investments that appeal to your population, and if ESG is appropriate for your employees among a diverse set of investment options, I think it makes a lot of sense.”

She has advised clients to explore incorporating ESG investments.

“We’ve been asked by a number of our nonprofits around their investments, specifically around ESG investing, that maybe aligns with the policies of the organization,” she said. “The question is: Should we be adopting or offering these investments in our plan to our employees?”

As with Desrosiers’ experience, some of Baker’s plan sponsor clients have embraced, then recanted, ESG options available in-plan to participants, she said.

“We’ve added ESG investments to several of our 403(b) plans, and a year later [or] two years later, we noticed that there’s not a lot of utilization on the investments,” she said. “I have one client that has no money in one of the funds that we’ve had in the plan for two years. [ESG] aligned very much with the spirit of their organization, but it clearly wasn’t of high interest to the employees, and so now we’re having conversations about: Do we leave this in the investment lineup, since it has not received utilization among the employees in the plan?”