Investing October 9, 2018

U.S. Institutional Investors Changing Views of ESG Investing

A global survey of institutional investors found more in the U.S. said ESG factors can be a source of alpha and risk mitigation, and more institutional investors overall said incorporating ESG factors into their investment approach is part of their fiduciary duty.

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Institutional investors in the U.S. continue to view the application of environmental, social and governance (ESG) principles in investing more cautiously than other countries, but the percentage that reject ESG outright shrank dramatically year over year, from 51% to 34%, according to RBC Global Asset Management’s third annual Responsible Investing Survey.

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Forty-three percent of institutional investors incorporate environmental, social and governance (ESG) factors into their investing, up from 22% in 2013, according to a report from Callan.

RBC’s global survey found a dramatic shift in attitudes toward ESG analysis is visible among U.S. institutional investors, as 24% said they believe an ESG-integrated portfolio would outperform its counterpart, nearly five times the percentage in last year’s survey. About 18% of U.S. respondents still said they believe the ESG-integrated portfolio would perform worse, but that negative sentiment is down from 26% in the 2017 survey.

One of the key issues in the responsible investing debate is whether ESG analysis should be considered a source of alpha, and U.S. investors reported sharply higher confidence in 2018, with 39% now saying ESG analysis generates alpha, more than double last year’s 17%. As the U.S. has been one of the biggest holdouts against wider adoption of ESG principles, this increase is a meaningful indication that opposition is eroding, RBC contends.

In 2017, just 28% of respondents said they thought ESG could be a risk mitigator; this year, that number climbed to 54%. The number of U.S. respondents who said otherwise nearly halved: to 24% this year from 50% last year.

The 2018 survey also shows a turnaround regarding the question of fiduciary duty. More than half of all respondents that incorporate ESG factors into their investment approach now say that doing so is part of their fiduciary duty, double last year’s level.

Equities have long been the primary focus of ESG analysis and investing and that remains true among many institutional investors according to this year’s survey: However, ESG analysis is moving beyond equities. Alternatives, which ranked fifth overall in ESG integration, came in third in the U.S. behind equity and fixed income and ahead of infrastructure and real estate. Thirty-percent in the U.S. said it is important to incorporate ESG into fixed-income. Asked directly whether they incorporate ESG into fixed-income management, 52% of U.S. investors that use ESG said yes.

As responsible investing has developed, the discussion about how to apply the principles in a portfolio has evolved from negative screens (often excluding so-called ‘sin’ stocks such as alcohol, tobacco and firearms companies) to a range of approaches that are more nuanced and more multifaceted. Discussions about exclusion have in many cases evolved and now encompass a range of different approaches to responsible investing. When RBC asked if respondents required asset managers to apply socially responsible screens to portfolios, 76% of all respondents said no. Resistance to such screens was higher in North America and the UK, where no more than 20% of respondents use screens.

“As industry acceptance of ESG integration has accelerated and becomes mainstream, there will be greater focus on ESG-related investment research and its application in the portfolio management process,” says Habib Subjally, senior portfolio manager and head global equities at RBC Global Asset Management (UK) Limited. “And as the demand for responsible investment solutions grows, asset managers and consultants will increasingly be called upon to offer guidance to their clients about responsible investing options that support their long-term financial goals.”
Products October 9, 2018

DOL Pressure on Missing Participants Propels New Solution

“As a plan sponsor, if you have an opportunity to deal with lost participants and do something with uncashed checks, why wouldn’t you do that?” asks Mark Koeppen at FPS Trust.

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According to Mark Koeppen, senior vice president in charge of strategic rollovers for FPS Trust, disproportionate cost-shifting to accounts with higher balances and increased liability are just some of the issues fiduciaries face when employees move on to other opportunities and leave their qualified retirement plan balances behind.

“It is a big challenge for the plan sponsor community, deciding how to deal with growing plan fees from employees who go off to other jobs, leaving the employer to deal with the cost and paperwork of the retirement account they leave behind,” Koeppen says.

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Sensing an opportunity to better serve plan sponsors facing this challenge, FPS Trust has designed a fully automated rollover program that will establish individual retirement accounts (IRAs) for former, non-responsive employees with qualifying balances below $5,000. The solution is also tailored for terminating plans with non-responsive participants.

“We have been focusing a lot on the auto-IRA rollover market in recent years, given how much of a challenge it is for the industry,” Koeppen tells PLANSPONSOR. “We have been working with plan sponsors, consultants and advisers to try to find solutions to retirement plan leakage. We have learned there are some key points where these stakeholders can come together and create powerful solutions to help protect the assets of retirement plans and participants.”

Among its other initiatives in this area, FPS Trust has moved away from offering a solely FDIC-insured money market-based product set to expand into stable asset funds that can provide a higher crediting rate to the individual account owner after the auto-rollover. Koeppen says the company has also “stripped down fees at the sponsor and participant levels to make this a very straightforward solution.”

“Within our auto-rollover program, the participant simply pays one fee in of $20, and one fee out of $20,” Koeppen says. “There are no other ancillary fees to participants related to statements or searches, and we do not charge trading fees or anything like that. One you get into the higher rollover balances of say $2,500 and up, with our stable asset fund, these participants are actually seeing some real growth with our crediting rate. This shows how the market has matured and how the service providers are seeing more pressure to innovate and to charge a reasonable fee.”

According to Koeppen, his firm is having success promoting the new auto-rollover program in part because plan sponsors are feeling real pressure from the Department of Labor (DOL) on missing participants.

“I have had several clients who have been targeted by full-blown DOL audits on this issue, and the DOL is not backing down from some very stringent demands,” Koeppen says. “In many cases, the DOL auditors have an expectation that a plan sponsor should be able to find every single individual with a balance in their plan, and they won’t leave until you find all of them.”

As Koeppen testifies and others corroborate, plan sponsors are being ordered by DOL auditors to do such things as cold-call potential former colleagues of a missing employee—in other words, plan sponsors are being asked to randomly contact individuals with no direct connection whatsoever to the employer being audited.

“I had one client that went through an audit and had 19 people that she just really couldn’t find, even after a major series of searches,” Koeppen says. “An interesting anecdote, the auditor was pushing the sponsor to sweep these people out of the plan if they truly couldn’t be found, but the plan sponsor had to explain that their plan document wouldn’t allow for that. So this led to some tension with the auditor suggesting the plan document would have to be amended.”

FPS Trust, according to Koeppen, can also help plan sponsors deal with the related and equally frustrating issue of uncashed checks.

“We encourage plan sponsors to be prepared for this issue to become even more important for the DOL, which has already publicly stated that is will be looking closer at the issue of uncashed checks,” Koeppen says. “As a plan sponsor, if you have an opportunity to get out in front of this and deal with these lost people and do something with the uncashed checks, why wouldn’t you do that? Our firm and our competitors will tell you, it is not enough to just blindly rely on your recordkeeper and assume they are taking care of this stuff.”

In Koeppen’s experience, in many cases recordkeepers or third-party administrators may not be properly accounting for the value of uncashed checks as they are calculating figures to report on the Form 5500.

“We see evidence the DOL is taking notice of this discrepancy,” Koeppen concludes. “Fortunately, the leakage question resonates with plan sponsors right now, and there is an organic push for solving these issues. This is a great time to be talking about it because many plan sponsors are thinking about the changes they will have to make in their plan documents for 2019. So, this is the right time to be pushing for a deeper conversation about uncashed checks, missing participants and orphaned small balances.”

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