Products August 16, 2017

US SIF Offers Guide to Including Sustainable Investments in DC Plans

Along with practical tips and suggestions, the guide provides links to additional resources plan sponsors can leverage.
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The US SIF Foundation released a resource for plan sponsors, “Adding Sustainable and Responsible Investing Options to Defined Contribution Plans.”

The five-step guide assists plan sponsors considering the addition of a sustainable and responsible investment (SRI) option to their defined contribution (DC) retirement plans. Along with practical tips and suggestions, the guide provides links to additional resources plan sponsors can leverage.

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A 2011 joint study by the US SIF Foundation and Mercer found that the number of defined contribution plans in the U.S. offering an SRI choice was expected to double in the following two to three years.

“We created this report to assist plan sponsors in meeting the demand for sustainable and responsible investment options. Additionally, plan sponsors are aware that recent ERISA [Employee Retirement Income Security Act] guidance changes clarified their ability to offer such [investments]. We believe that private-sector plan sponsors may be looking for ways to better engage their Millennial employees and others who want their investments to reflect their concerns and priorities,” says Lisa Woll, CEO of US SIF.

Millennials are almost universally interested (90%) in pursuing sustainable investments as part of their 401(k)s, according to a study by the Morgan Stanley Institute for Sustainable Investing.

Previous US SIF Foundation research has revealed several reasons for the lack of uptake among plan sponsors. These include plan sponsors’ lack of knowledge about performance and about the SRI options available. For some plan sponsors, there may be structural barriers if they are part of third-party platforms where the universe of funds is limited.

With a growing body of data indicating that companies with strong environmental, social and governance (ESG) standards have stronger financial performance, as well as the competitive financial performance of SRI funds, defined contribution plans are well placed to enter this marketplace. Additionally, US SIF says plans can build on the 2015 ERISA guidance which clearly enables fiduciaries to consider ESG factors as part of their investment analysis.

US SIF’s guide is here.

Administration August 16, 2017

Cost Concerns Driving Pension Risk Transfer Decisions

Even the plan sponsors that have not implemented a pension risk transfer say costs from changing mortality assumptions and rising PBGC premiums would make them more likely to do so.

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A study confirms that cost is the main factor driving corporations to implement a pension risk transfer by purchasing an annuity from an insurance company.

One-third of respondent to a survey conducted by CFO Research in cooperation with Prudential Financial chose each of the following factors: Desire to manage the total costs of the organization’s pension plan; desire to mitigate the impact of changing actuarial mortality assumptions, including potential future changes; and desire to mitigate the impact of rising Pension Benefit Guaranty Corporation (PBGC) premiums, including potential future increases.

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“Desire to reduce the pension plan’s asset-related volatility” was chosen by 31% of respondents, while “desire to focus the organization on its core business (rather than on pension issues)” and “desire to reduce the number of smaller-benefit payments being made” were each chosen by 25% of respondents.

Seventy-two percent of organizations that have already shifted some defined benefit (DB) plan liability to an insurer via a group annuity purchase indicated they were likely to shift additional liabilities in the future.

Eighty-five percent believe their decision to engage in a pension risk transfer helps them keep their benefits promise to employees and offers employees greater retirement security in the long run. Eighty one percent either agreed or strongly agreed to the statement, “I believe that my organization’s pension beneficiaries who have been affected by a group annuity purchase are content to receive their pension payments from an insurance company.”

Among those who have not completed a pension risk transfer, only 20% said it is likely they will do so in the next two years. However, 28% say the increase in interest rates from a year ago (and the prospect of further increases) make it much more likely to implement a pension risk transfer, while 35% said the same about the recent rise in PBGC premiums (and the prospect of further increases) and 33% said the same about the recent change in actuarial mortality assumptions (and the prospect of further changes).

The study also shows how tax and regulatory proposals from the current administration and Congress could serve as additional motivators for considering such a move. Among respondents who have not yet completed a group annuity purchase, 55% agreed that lowering the corporate tax rate in 2017 would “very likely” motivate their companies to increase pension plan funding—often a precursor to purchasing a group annuity, according to Prudential—in the next year, while 40% agreed that lower taxes would lead them to execute a full or partial pension liability transfer.

Full results of the survey of 80 senior finance executives at companies with traditional pensions can be viewed here.

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