This Plan Sponsor Is All-In on ESG TDFs

Art by Andrea D’Aquino

Very quickly in a conversation with Victoria Mora, Ph.D., president of United World College (UWC)-USA, one gets the sense that she has a clear passion for her work and her employees—as well as a belief that UWC-USA is a values-driven educational organization, which defines its raison d’être as more than to financially succeed.  

Similar to other trendsetting retirement plan sponsors, the employer’s enthusiasm for institutional excellence bleeds directly into the domain of employee benefits and financial wellness. As a result, United World College-USA has become one of the first plan sponsors to embrace environmental, social and governance (ESG) investing principles within its defined contribution (DC) retirement plan’s default investment option. And if that weren’t innovative enough, the plan’s automatic features also include a guaranteed retirement income component, made possible via TIAA’s custom model portfolio services, and glide path consulting from LongView Asset Management.

“Our core belief as an institution is that education is an incredible force that can work beyond itself to create broad social change and improvement,” Mora told PLANADVISER. “Education can often be seen or talked about as a personal accomplishment, but we know that the value of a good education goes far beyond the individual person to impact the whole community. Education is a force for change for the better, for global peace and a sustainable future.”

According to Mora, UWC-USA makes all of its decisions and policies with its broader mission in mind. This includes decisions and policies to do with employee compensation and retirement benefits.

“People already know that, throughout the education space, hardworking educators are often not valued or compensated at the level [many] think they deserve, given the crucial role they play as the conveyors of knowledge from the older generation to the next,” Mora said. “In the last few years, we started to talk a lot about what it really means to live your mission and live your values, especially where the rubber hits the road with financial matters.”

So, as the ESG topic has gained momentum, Mora and UWC-USA saw “a wonderful opportunity to align what we’re doing for employees’ retirements with what we are helping our students to learn every day.” In basic terms, the default investment product UWC-USA offers to retirement plan participants is a custom target-date solution that weighs ESG factors directly as part of its asset-allocation process and includes an automatic in-plan retirement income component for educators that reach and enter retirement.

How a Custom ESG TDF Came Together

Mora credits TIAA and LongView Asset Management for helping her and her colleagues—in particular, the plan’s fiduciaries and finance staffers—see the opportunity that ESG investing presents.

Douglas Lynam, director of educator retirement services at LongView Asset Management, credits Mora and her colleagues for being willing to try something new. In fact, he and Mora have a strong rapport that has inspired stakeholders to embrace an innovative strategy for the plan’s default investment scheme.

“When we were looking at this plan as a potential client, we saw a big opportunity to help UWC-USA understand its fiduciary duty and how it could implement its mission while also improving retirement outcomes for employees,” Lynam said. “We naturally had a lot of discussions about the Department of Labor [DOL]’s fiduciary duty requirements under ERISA [Employee Retirement Income Security Act] and what the law says and doesn’t say about the use of ESG investing programs.”

Using language adopted by a growing number of institutional asset managers that have enthusiastically embraced ESG, Lynam said LongView “knows that ESG-thinking is a benefit to performance, lowering risk as it helps to improve diversification.”

“Sustainability and environmental issues are absolutely material to long-term investment decisions being made today, and those include decisions about the qualified default investment alternative [QDIA] in retirement plans,” Lynam said. “The data and research is clear that ESG can give you a performance edge, when implemented effectively.”

As to why the custom model portfolio approach was best in this case, Lynam suggested there are “still only a pretty limited number of options out there now for an off-the-shelf ESG TDF [target-date fund].”

“Especially when it comes to the price of the prepackaged options, we felt that was more expensive than what we would normally recommend as a default investment,” Lynam said. “When we looked closely at the TIAA model portfolio approach, the light went on. We realized we could create a custom portfolio that incorporated ESG and retirement income at the same time, while, from the user perspective, appearing to be essentially a low-cost TDF.”

There are other recordkeepers that can do this, of course, but Lyman said TIAA was “very helpful in creating this solution.”

“We are proud to be partnering with them on this solution, especially because the cost we achieve with this model is less than half of what you might pay for a prepackaged ESG target-date fund,” Lynam said. “The price is down to 27 basis points [bps], which we feel is pretty spectacular for the value the client is getting, especially considering this is a $1.8 million plan. It’s a small plan sponsor taking the lead here.”

The Recordkeeper’s Perspective

In a separate interview, Mark Foley, managing director for institutional financial services at TIAA, commended the work done by LongView and UWC-USA, calling their custom ESG solution a clear trendsetter.

“Clients come to us wanting to directly address lifetime income a lot more, these days, but the industry is only now reaching the point where we can operationalize this type of solution,” he said. “When we can get lifetime income solutions linked up with the default options in a plan, we think that can be a really powerful combination for improving participant outcomes and confidence about retirement.”

Foley said other clients have taken their own innovative approaches using this type of adviser-supported custom model portfolio arrangement as the default retirement plan investment.

“Some clients make ESG the focus of their custom solution, while others take other approaches,” Foley observed. “Each institution now has the ability to design its own structure and allocations—and not just the mega-sized investors. As the recordkeeper, we are striving to offer a very flexible platform, which will allow our asset management partners and our plan sponsors to take a variety of approaches.

“From the outset,” he continued, “we could see that ESG was really important to UWC-USA and its adviser. They believe that ESG brings the best combination of risk and return, and we are happy to operationalize that for them.”

Mora emphasized that this was a long-term effort to get an ESG-focused custom default investment up and running.

“Working with Doug and TIAA, we really had some eye-opening conversations about the potential alignment between financial decisions and the alignment of values and principles,” she said. “There was this moment where it really crystalized. Doug helped us see that ESG is absolutely material right now by asking, what does it mean to invest in an individual’s future while ignoring the future of the whole society or the planet? It’s a hard thing to un-think. At UWC, our employees believe in education as a force for good, so it was not very difficult to generate conviction around this new approach.”

Asked if she was nervous about being a trendsetter and trying something new in a space with strict regulations and an all-too-eager plaintiff’s bar, Mora said, “It’s always a bit scary to be out front. But, when you feel like you’re doing something that is right, then you set your fear aside and do it. A significant part of the work in the first year was demonstrating to all of our stakeholders that it’s a good thing to be a trendsetter.”