Products September 7, 2021

US SIF Releases Tips to Implement Sustainable Funds

As more participants express an interest in ESG investing, US SIF recommends steps plan sponsors can take to add the investments to retirement plans.

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The US SIF Foundation has released a step-by-step guide for plan sponsors to consult when they’re considering adding sustainable funds to their defined contribution (DC) plans.

Over the past few years, the finance and retirement industries have placed an increased focus on sustainability, and especially environmental, social and governance (ESG) funds. As stated in US SIF’s guide, a 2019 Morningstar report found 72% of surveyed adults had at least a moderate interest in sustainable investing, and 21% said they could be classified as “sustainability-driven.”

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Another report by Natixis Global Asset Management found 75% of the 1,000 U.S. employees surveyed said they believed it is “important to make the world a better place while growing their wealth,” and 61% said including sustainable funds would increase their likelihood of contributing to a retirement plan. 

However, US SIF says plan sponsors of private-sector DC retirement plans are just now beginning to meet the demand for sustainable funds. A 2020 analysis for the US SIF Foundation by ISS Market Intelligence’s BrightScope platform of 58,590 401(k) plans found that only 11,488 participants—or fewer than one-fifth—had assets in funds that BrightScope considered “socially conscious.”

Other surveys find that many employers are still concerned about risking their fiduciary status, should they decide to add ESG options into their retirement plans.

With these facts in mind, US SIF suggests that as a first step, employers should increase their knowledge of sustainable investing and related performance and fiduciary questions.

Addressing the issue of fiduciary duty, the analysis highlights a 2005 study by law firm Freshfields Bruckhaus Deringer which examined fiduciary law in nine developed markets, including the United States, and found that “links between ESG factors and financial performance are increasingly being recognized. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”

A 2020 follow-up report to the Freshfields study, which included interviews with policymakers, lawyers and senior investment professionals, states that “the integration of ESG issues into investment practice and decisionmaking is an increasingly standard part of the regulatory and legal requirements for institutional investors, along with requirements to consider the sustainability-related preferences of their clients and beneficiaries, and to report on how these obligations have been implemented.”

The next step in the guide to implementing ESG investments is gauging participants’ interests. US SIF recommends employers survey their plan participants on the matter. Employers can also include explanatory information about sustainable investing at the beginning of each survey to clear up any confusion. The survey could ask whether participants are satisfied with their retirement fund options, what changes or improvements they would like to see in their retirement plan, any issues they would like the fund manager to address, etc.

The third step is to discuss implementation with a consultant and/or a plan administrator. Additionally, US SIF says it is prudent for plan sponsors to research any existing plan administrator platform and external advisers, as they may have information about sustainable funds.

When working with a consultant, US SIF recommends plan sponsors ask the following questions: What is your level of knowledge and experience with sustainable investing? What is your view of sustainable funds as part of a DC lineup? Have you conducted successful sustainable investing searches for DC plans?

Plan sponsors should also inquire if there are significant fees and/or administrative issues associated with adding a new fund to the investment lineup.

Advisers who work with plan sponsors should also have a “clearly articulated plan and method for adding a sustainable fund with appropriate due diligence,” as US SIF says this is key to supporting the plan’s fiduciary duty. External consultants and advisers can also assist with procedural and reporting aspects of the process, especially as more consultants are developing expertise in sustainable investing, US SIF writes.

As a fourth step, the guide says plan sponsors must choose a fund or funds and monitor performance. Among the list of possible sustainable investment funds are domestic equity funds, exchange-traded funds (ETFs), passively managed funds, lifestyle funds and target-date funds (TDFs).

Evaluating the retirement plan and its participants can help sponsors narrow their list of fund candidates. For example, US SIF asks employers to question whether participants have specific values or beliefs that will affect their choice of a sustainable fund.

When monitoring sustainable funds, US SIF says to ask the investment fund manager or consultant, when evaluating the fund’s financial performance, to include whether the fund is meeting return expectations, net of fees, in relation to its benchmark and peers; if the fund is maintaining its stated investment style, including its sustainability approach; and whether the fund manager’s fees are reasonable when compared with the fund’s peer group.

Lastly, step five is to educate participants about ESG investments and the employer’s decision. US SIF says plan sponsors should ask themselves whether the information provided to participants enables them to compare a sustainable fund with a non-sustainable fund based on financial performance and fees; whether the information explains specific ESG criteria the fund uses; if the information explains active ownership aspects of the fund; and more.

US SIF says plan administrators, sustainable fund managers and/or consultants should be able to provide information about sustainable funds within the lineup.

More information and resources from the US SIF Foundation’s guide can be found here.

*BrightScope is an ISS Market Intelligence business and is part of Institutional Shareholder Services (ISS), which owns and operates PLANSPONSOR and PLANADVISER.

Compliance September 7, 2021

District Court Roundly Rejects Oshkosh ERISA Challenge

The court said that a plan’s mere underperformance, absent any specific allegations of imprudence, is not actionable.

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Following oral testimony and arguments in December, the U.S. District Court for the Eastern District of Wisconsin has ruled against the plaintiffs in an Employee Retirement Income Security Act (ERSIA) fiduciary breach lawsuit filed against Oshkosh Corp., its board of directors, its retirement plan administration committee and some 30 individuals alleged to be fiduciaries.

The lawsuit has been dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6), with prejudice, based on the court’s conclusion that the amended complaint fails to state a claim upon which relief can be granted. As the ruling states, in such a circumstance, a federal court may dismiss a case with prejudice when there is “no doubt that there exists no set of facts from which a plaintiff can prove he is entitled to relief.”

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By way of background, in June 2020, the lead plaintiff filed the proposed class action lawsuit on behalf of the company’s $1.1 billion defined contribution (DC) plan and its thousands of participants. He alleged that, from June 16, 2014, through the date of judgment, the defendants breached their fiduciary duties by authorizing the plan to pay unreasonably high fees for recordkeeping, by failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, and by maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and better performance histories.

In addition, the complaint alleged the plan generally chose more costly actively managed funds rather than index funds that offered equal or better performance at substantially lower cost. Finally, the suit claimed the administrative fees charged to plan participants were consistently greater than the fees of most comparable 401(k) plans, when fees are calculated as cost per participant or when fees are calculated as a percent of total assets.

Much of the text of the new ruling deals with the explanation and application of the Federal Rule of Civil Procedure 12(b)(6), which is often cited and debated within the context of ERISA lawsuits, and which requires a civil complaint to include “a short and plain statement of the claim showing that the pleader is entitled to relief.” Broadly speaking, the ruling sides with the defense’s arguments that dismissal is warranted.

“It is important to note … that an employer who offers a defined contribution plan with a wide variety of investments from which employees can choose based on their individual circumstances and retirement goals is not thereby transformed into a personal investment adviser for each employee/participant,” the ruling states. “Employers, such as Oshkosh, have neither the desire, nor the ability, to serve as personal investment advisers to their employees. They do not have enough information about an employee’s other assets, family circumstances, risk tolerance and so on to provide such individual advice. Instead, the plan provided by Oshkosh gives participants the control by design, and it gives employees the responsibility and freedom to choose how to invest their funds.”

From here, the ruling highlights that ERISA’s prudence standards are “processed-based, not outcome based,” and that a plan’s mere underperformance, absent any specific allegations of imprudence, is not actionable.

“In other words,” the ruling states, “the allegations must support more than the mere possibility that a breach of fiduciary duty occurred; to unlock the doors of discovery, the allegations must make the claim plausible.”

In this case, according to the ruling, the plaintiff does not allege any facts as to what would constitute a reasonable fee or any facts suggesting that the fee charged by the recordkeeper is excessive in relation to the services provided.

“Although the plaintiff alleges that the recordkeeping fee is twice the amount of other fees, the plaintiff fails to state why the fee is unreasonable,” the ruling states. “The mere existence of purportedly lower fees paid by other plans says nothing about the reasonableness of the plan’s fee, and it does not make it plausible that another recordkeeper would have offered to provide the plan with services at a lower cost. … Without plausible allegations about the defendants’ process, the court cannot infer imprudence merely because the plan’s recordkeeping fees were at the amounts alleged.”

The plaintiff’s arguments regarding the provision of inappropriate share classes and the offering of actively managed investments were met with similar skepticism by the court.

“The total fee, not the internal post-collection distribution of the fee, is the critical figure for someone interested in the cost of including a certain investment in her portfolio and the net value of that investment,” the ruling states. “The plaintiff’s preference for different share classes of certain investments is not enough to state a plausible claim for breach of fiduciary duty.”

The full text of the ruling is available here.

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