In Practice July 24, 2018

Small and Mid-Sized Plans Are the Sweet Spot

Twenty-nine percent say they are likely to switch retirement plan providers within the next year.

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While retirement plan providers typically aim to serve large and mega-sized plans, Cogent Reports attests that they would be better off going after small and mid-sized plans, those with $5 million to $100 million in assets. Thirty-nine percent of these plans say they are about to launch a 401(k) plan review, and 29% say they are likely to switch providers within the next year.

Asked why they are likely to switch providers, these sponsors say it is due to fees, investment choices and participant services. Asked what they are looking for in a new provider, they say it is trustworthiness, acting in the best interest of participants and being easy to do business with.

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“This year, a number of firms appear to have improved their brand perceptions in the important areas of being easy to do business with, choice and flexibility in investment options and value for the money,” says Sonia Sharigian, product director at Market Strategies-Morpace, which conducted the survey. The top five firms sponsors cite are: Fidelity Investment, Empower Retirement, OneAmerica, Vanguard and Ascensus.

In addition, 11 companies achieved year-over-year improvements in consideration: Charles Schwab, Principal, Prudential, Bank of America Merrill Lynch, ADP, Ameritas, John Hancock, Alliance Benefit Group, MassMutual, Nationwide and BB&T.

“In order to maximize their chances of winning new business, plan providers need to demonstrate an understanding of each plan sponsor’s challenge and tailor their sales efforts to meet the needs of each individual situation,” says Linda York, senior vice president at Market Strategies-Morpace.

The findings are based on an online survey of 1,421 sponsors conducted this past February and March.
The Markets July 23, 2018

DC Plans and Health Care Employers First Movers into ESG Investing

Of the 12% of institutional investor respondents to a recent survey who have incorporated ESG, most are DC plans, and more than half are healthcare-focused organizations.

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Investment consulting firm NEPC has published the results of its latest survey of corporate defined benefit (DB) and defined contribution (DC) plan sponsors, this one focused on the use of and attitude toward environmental, social and governance (ESG) investing.

As the results show, the majority (88%) of plan sponsors have not incorporated ESG into their DB or DC plans. Of the 12% of respondents who have incorporated ESG, most (70%) are DC plans, and more than half (62%) are healthcare-focused organizations.

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Brad Smith, partner in NEPC’s Corporate Practice, points out that nearly a third of respondents suggest they have not yet implemented ESG investments but are interested in doing so in the future.

“The survey findings solidify our belief that institutional investors can capitalize on opportunities created by ESG as long as it makes sense for them,” Smith says.

Smith further suggests one reason DC plans are outpacing DB plans in terms of ESG adoption has to do with a difference in pressing priorities, rather than doubts among DB plans of the viability or usefulness of ESG.

“Right now, for example, a big focus for DB plans is closing funding gaps, and while ESG may reduce risk over time, these plan sponsors often prioritize purely financial factors versus sustainability to drive excess returns,” he explains. “On the contrary, it was not surprising to see healthcare adopting ESG at higher rate than its corporate peers, given the nature of the industry and the fact that many of these organizations are mission-driven or faith-based.”

NEPC’s data shows many healthcare organizations have historically included ESG or socially responsible investment (SRI) option within their DC plan, which is the primary reason why the survey findings show more ESG adoption by DC plans than other plan types.

According to NEPC, the vast majority (94%) of the DB plans surveyed are not incorporating ESG today. Among this group, more than half (59%) state long-term risk and return factors are their most important consideration when evaluating a potential investment, followed by diversification (39%).

“Plan sponsors that want to consider incorporating ESG should remember that the concept is rooted in strategy and process, not investment products,” comments Kelly Regan, senior consultant at NEPC. “Incorporating ESG is a journey with a variety of implementation approaches, and interested parties should explore the best course of action to meet their specific goals and objectives.”

The NEPC experts suggest institutional investors that are considering ESG should start with education, as well as evaluation of whether or not ESG is already part of their current investment manager lineup.

“Plan sponsors may be surprised to find that managers who were selected for financial reasons also incorporate material ESG factors into their investment process,” Regan notes.

Notably, the majority (84%) of the plan sponsors surveyed that are not including ESG factors today said they haven’t been asked by DC plan participants to consider incorporating ESG.

“Millennials are emerging as a generation that favors ESG relative to others, so as they become a larger part of DC programs, it’s not unreasonable to expect more requests for ESG-related investment options,” Smith concludes. “However, there are many additional factors aside from participant demand that need to be considered when contemplating the addition of an ESG investment option to a DC plan – not the least of which is ERISA guidance on the topic.”

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