The Markets August 10, 2018

GAO Says Changes in DOL Guidance on ESG Prevent Retirement Plans from Embracing It

In addition, data on ESG investing is also inconsistent, assessing ESG could increase plan costs, and many investors incorrectly perceive that ESG investing can lower returns.

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In a report, the Government Accountability Office (GAO) points out that whether or not retirement plans consider the projected impacts from climate change and other environmental, social and governance (ESG) risk factors could affect investment returns and, in turn, the financial health of retirees. GAO notes that some investors believe that companies with good corporate governance practices are better managed and will perform better financially over time.

GAO says that examples of environmental factors are climate change impacts, energy efficiency and waste management. Social issues include labor standards, human rights, and gender and diversity. Governance includes board composition, executive compensation, whistleblower programs, and accident and safety management.

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Citing a report from US SIF: The Forum for Sustainable and Responsible Investment, investors in the United States are increasingly incorporating ESG factors into their investment management. According to US SIF, assets in the U.S. that considered ESG factors in 2016 were $4.7 trillion, a 14% increase from 2014, when they were $4.1 trillion. Globally, the amount of assets using ESG factors was $22.9 trillion in 2016, up 26% from $18.3 trillion in 2014.

However, few retirement plans in the United States incorporate ESG factors into how they manage investments, GAO says. Asset managers told GAO that retirement plans face several challenges, including a lack of consistent and comparable data on ESG factors and regulatory uncertainly.  According to the Plan Sponsor Council of America’s (PSCA) 2016 survey of 600 defined contribution (DC) plans, only 2% offered an ESG investment option to participants. The asset managers told GAO that if companies were required to standardize reporting of ESG factors, that would help retirement plan sponsors to be able to assess funds that use ESG factors.

GAO also notes that while finding incorporating ESG factors has a positive or neutral impact on financial performance, the perception that it could negatively impact performance persists, and this is another impediment to retirement plans incorporating ESG investing. Yet another problem the asset managers told GAO about is that incorporating ESG factors in investment management may increase costs to retirement plans because of the additional resources needed to assess the ESG factors.

Several asset managers told GAO that incorporating ESG in retirement plans could increase the complexity of plans for participants, and plans have been, instead, looking to reduce the number of funds in their lineup.

And perhaps most notably, asset managers also said that the Department of Labor’s (DOL’s) guidance on ESG investing has changed with different administrations, making retirement plans very wary of relying on that guidance. Additionally, in April, the DOL issued a Field Assistance Bulletin on ESG investing that—given some of the strong language used to warn retirement plan fiduciaries against placing other interests ahead of the financial benefit of their participants—has created some confusion.

The few asset managers with retirement plan clients using ESG said the plans are not using them as the qualified default investment option (QDIA) but as an option in the fund lineup. Asked what benefits incorporating ESG factors into investment management brings to retirement plans, the asset managers said it enhances risk management, improves long-term performance and increased participation.

GAO notes that while the DOL has said that retirement plans may incorporate ESG factors in investment analysis, the DOL has not addressed whether plans can incorporate ESG in the plan’s default option or qualify for legal protections. GAO says that in other cases where plans may face complexity, such as selecting a target-date fund or monitoring pension consultants, the DOL has provided general information, including items to consider and questions to ask. GAO suggests that the DOL do the same with ESG investing.

GAO’s full report can be downloaded here.

The Markets August 10, 2018

SSGA Merging TDF Series A Shares With I Shares

Greg Porteous, head of defined contribution intermediary distribution at SSGA based in Boston, says he sees the lowering of target-date fund (TDF) investment fees as a way to attract more 403(b) plan clients for two reasons.

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In a prospectus supplement filed with the Securities and Exchange Commission (SEC), State Street Global Advisors (SSGA) announced that effective upon the close of business on September 4, Class A shares of the State Street Target Retirement Funds will be closed to purchases by new shareholders; however, Class A shares of the funds may continue to be offered through financial intermediaries that currently have relationships with the funds and to current shareholders having accounts directly with the funds.

Effective upon the close of business on October 5, the funds will no longer accept orders from existing shareholders, including Intermediaries, to purchase additional Class A shares. According to the filing, effective on or about October 12, all existing Class A shares of each fund will be combined with Class I shares of the same fund by converting Class A shares to a number of Class I shares having a net asset value equal to the net asset value of the Class A shares subject to the conversion.

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In a previous filing, the firm also announced waivers for A, I and K share classes of its Target Retirement fund series. The series included funds in 11 vintages as well as a Retirement Income fund.

Greg Porteous, head of defined contribution intermediary distribution at SSGA based in Boston, explains for PLANADVISER that for the K share class, which has no sub-TA fees or 12b-1 fees, the total expense ratio will be 9 basis points (bps) as of September 4, down from 13 bps. For the I shares, which have no 12-b1 fees but do have sub-TA fees, which are paid to recordkeepers to offset expenses, the total expense ratio as of September 4 will be 29 bps.

Another difference between K shares and I shares is the investment minimum. The K shares have an investment minimum of $10,000, while the I shares have an investment minimum of $1 million. But Porteous says these minimums can be waived for many recordkeeping partners based on way they trade.

Porteous notes that, in the defined contribution (DC) retirement plan market, there is a trend in providers lowering investment fees, offering no- or low-fee share classes. Fees are becoming more transparent to retirement plan participants. This is one impetus for SSGA’s move.

In addition, he says, in the four years since the State Street Target Retirement fund series has been available, they have generated $5.8 billion in assets, only $10 million of which are in A shares. He cites a Cerulli Associates report that found in 2017, A shares accounted for only 11% of assets in the institutional space in 2017, while I shares accounted for 84%.

Porteous agrees that most of State Street’s Target Retirement fund users are DC plan investors, but that is not to say some are not in individual retirement account (IRA) taxable account investors.

He sees all this as a way to attract more 403(b) plan clients for two reasons. “Up to four years ago, we couldn’t play in that market because we only used collective investment trusts, or CITs, which 403(b)s are not allowed to invest in, but in the past four years, since we’ve been using mutual funds in our Target Retirement fund lineup, we have been working in that market,” he says. “Also these plans struggle with having more expensive funds, and we can be super competitive on fees in that marketplace. Spending more time in [the 403(b) plan] market is a focus for us.”

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