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On-Demand: Impact of ESG on Employee Benefit Plans and Plan Sponsors

Jan 26, 2022

Join specialists from EisnerAmper, Newport Capital Group and Nixon Peabody as they discuss the evolving role of ESG in retirement plans and related U.S. Department of Labor (DOL) regulations.


Diane Wasser:Hello everybody. Welcome to the Impact of ESG on Employee Benefit Plans and Plan Sponsors. We have a great topic and a great team here today to address environmental, social, and governance related matters as they pertain to employee benefit plans.

We have about 35 minutes of content and 10 minutes left over for questions and answers. And as I can speak for the other presenters, we're always available even after here if you have any more follow-up concerns.

I'm happy to invite John Wibbelsman of Newport Capital Group, and Eric Paley of Nixon Peabody to give us a brief introduction of themselves. And first, who am I? I'm Diane Wasser. I'm the founder of the Pension Services Group at EisnerAmper. The Pension Services Group specializes in employee benefit plan audits. And we also counsel plan sponsors year after year, as they navigate through all the important responsibilities that they have as sponsors of qualified plans. As we all know, there are a lot.

John, I'll turn it over to you.

John Wibbelsman:Thanks Diane. Hello everybody. My name's John Wibbelsman. I work with Newport Capital and today I'm talking to you from our Red Bank, New Jersey office. I'll be focusing on the investing side and give you a little background about what we've been doing for our clients and talking to prospects about ESG investing. I lead the investment team here, a bunch of chartered financial analysts. And I look forward to speaking with everybody and getting your questions about ESG. Thanks. I'm going to turn it to Eric now.

Eric Paley:Thanks, John. And I'm Eric Paley, as Diane said. I'm a partner at Nixon Peabody, where I lead our National Employee Benefits and Executive Compensation Team. John's coming to you from his office. I'm coming to you from my home office where of course I sit around all day in a button-down shirt and a sport coat. Do all sorts of employee benefits related work in our practice. And me personally, I spend a fair amount of time counseling plan fiduciaries, plan sponsors on what their responsibilities are with regard to the plan, particularly DC plans, but also DB plans. So this is a great topic to kick off something of a new year and look forward to answering any questions you might have as we go along.

Diane Wasser:Great. Thanks guys. I'm in lovely Metropark, New Jersey. I forgot to tell you where I was. It's one of our offices and the traffic was pretty good coming in, although I don't want to jinx it.

I thought what we would start with kind of framing the topic for everyone. Most of you may know that ESG impacts far more than a company's operations and how they deliver their product or service. It's leaking into their benefit plans, foundations they might be involved in, their financial reporting, a whole slew of things. And EisnerAmper ESG-focused colleagues let me know that in order to attract and retain top talent, ESG matters and it's mattering more and more. College graduates are looking at the investment philosophy of the employers that they interview with, their banks, their vendors. And slowly this will move to what they offer as investment options in their employee benefit plans.

Investing in decision making is greater than financial metrics only as ESG has proven to us. 90% of S&P 500 index companies have already published sustainability or responsibility reports. I think about 70% of global investors feel companies should be held responsible for demonstrating their ESG performance when they're attracting investors. Currently B Corp certification is the only certification that measures a company's entire social and environmental performance. And actually our investor partner is a certified B Corp. It's very, very interesting area.

There's new ways of vetting and monitoring investments as these concerns emerge. They're very far, as you'll find today, much further along than financial field, just only looking at financial metrics when you're considering plan investments. Morningstar has a new term sustain analytics that they coined, where they have the ability now to rate the sustainability of listed companies based on their ESG performance and footprint.

The standard setters in accounting are rising to the need for consistent shared disclosure in financial statements and reporting standards. So from that, there will soon emerge a comprehensive actually global baseline of high quality sustainability disclosure standards with a name to meet investors needs in all facets beyond financial. Their considerations related to fees as investment providers absorb the cost of vetting and proving that their investments actually are what they say they are from a socially responsible perspective.

Lastly, plan committees are discussing ESG investments through the audit of our employee benefit plans, about 450 plans. We review the minutes of the committees, and we are seeing more and more each year that it's a topic within those minutes. And we'll definitely dig into that a little bit more.

Now I'm just going to move it over to John. I think you're muted. Let me see if I can remove it. Okay, yeah. Record.

John Wibbelsman:Thanks, Diane. I'm going to focus on the investing side. We prepared a bunch of slides just to get the dialogue going, give you some food for thought. This first slide talks about how ESG is investing the definition of it by an investment bank, Deutsche Bank, DWS. And that's on the next slide if we can move ahead. One more. Great. Thank you.

And just notice under the environment section, you'll see a bunch of factors or issues related to the environment, in the middle of the page, social and governance. And then really for comparison purposes, I put the next slide to show a definition, which is quite different, a little more comprehensive. This one by Fidelity, a very large asset manager, a record keeper. As you know, they manage over $11 trillion.

The point here is that ESG investing has come from a lot of different names. You may have heard impact investing, responsible investing, socially responsible investing. There's just a lot of definitions out there. So be a bit careful when you're considering ESG products. If you sit on your investment committee for your 401k plan or maybe 403b plan, you want to make sure that you're talking apples to apples, that you're not getting caught in this conundrum of an ESG product which is very narrow versus say an ESG product which is very broad. So just realize a lot of definitions out there for what encompasses ESG and we'll try to help with some answers along the way about what we're seeing out there in the marketplace.

There is no doubt though that ESG is a growing trend. Investors are demanding ESG products out there. I think part of the reason is because of the internet. Being able to share information literally instantaneously in real time has given investors a lot of additional data on potential investments that they would be making. And they're realizing that they can help fear those investments now, as opposed to maybe 30, 40 years ago, when an investor didn't have great data and they didn't have the power in essence to go ahead and demand that their investment managers or their portfolio managers invest according to any type of theme, let alone ESG themes.

The next bullet point talks about asset managers responding to investor demand. These asset managers are at the forefront of creating products. And they want to be responsive to that demand. And so you've seen a plethora of new products come in the last five years or so that are responding to that demand. And it's not just stock investing. Consider mutual funds. It's also bond investing. So now you have ESG bonds out there in the marketplace. And I think the breadth and depth of offerings of investment products will continue to grow within ESG.

So consultants are being forced to respond to this demand, advisors like us, the same. Our clients are coming to us and asking about ESG. How do they get their arms around it? What investment products should we be considering as investment committees? And so we're helping with that process.

Years ago, ESG was not a mainstream topic at industry conferences, and now it's all the rage. And so it can fill up literally an entire conference agenda. Whereas in the old days, it might have just been one topic amongst many other topics.

The index providers that are out there that of course sell investment product, but also sell a lot of data, have been responding to that demand. And they're creating tons of new indexes in the last three to four years so that investors, consultants, and advisors would consider buying investment products related to the new indexes that they've come up with. And I think we'll see a lot of additional work by those index providers in the next few years.

The next slide just tells you a little bit more about that growing demand. The first bullet point is really to get the point across that in the old days, that responsible investing theme, which has kind of morphed into ESG investment theme these days, the focus was really on that first point, avoiding screens. It was all about avoiding investments in say controversial type of companies, a company that maybe produced weapons or somebody who produced alcohol.

Now that has really matured into going beyond avoiding screens. And now the second point is you see companies, you see investors, consultants, advisors like us, portfolio managers across the landscape embracing supportive screens. And that is firms that for example, try to use renewable energy so that they don't have a carbon footprint. So that would be considered a positive screen. You'd screen in a company like a Google that gets all of their energy from clean, renewable sources, as opposed to just avoiding a utility that may be a polluter that uses say coal for developing energy.

The next bullet point, just talking about those investible indexes. It's one thing to create an index, but you have to make it investible. And so the main index providers out there like MSCI, FTSE and others like Standard & Poors have come out with over 1500 different indexes. They want to carve up the universe of potential investments as many ways as there is possible to try to create product around that. And eventually they'll hit upon demand from investors and maybe kind of their indexes really take off and then they can push those as being their flagship ESG indexes.

A few years ago, Morningstar added scores to their mutual fund universe. And as you know, for the 401k and 403b universe, most of your investments are mutual funds. So now investors, investment committees, portfolio managers can go and look at these funds and see what their score is on Morningstar's view of the theme and the definition for ESG. Diane was mentioning upfront sustain analytics. It's become a huge part of what Morningstar does because a year after March of 2016, they made an investment in a Netherland based firm called Sustain analytics. In 2020, right after the pandemic hit, they actually fully purchased that firm. And now they've fully embraced everything that Sustain analytics does with their analysis. And that team is responsible for adding that ESG score to every security and universe out there of mutual funds, where they can get good data. And we're talking about over 20,000 securities and mutual funds.

And then the last point I alluded to a little earlier, which was just creating new investment strategies and new funds. The first approach is to create an index based investment around a new ESG benchmark. So that would try to track that benchmark. And I'll show you an example or two in a minute. And then secondly, more active strategies, trying to outperform and create some alpha, some extra return above any given benchmark that is chosen. So that continues today. We're going to see a ton more from these asset managers because this ESG trend is so large.

A couple caveats on the next slide or two. This one, just getting the point across. We pulled the slide from Barron's to show you a whole bunch of ESG funds that are listed in that Barron's weekly. And notice here the top 20 funds with some very good returns for ESG products. You'd have to get down to number 17 in the list before you saw the word sustainable in the title of the fund.

So part of the challenge out there in the marketplace for investors is the complexity and the misunderstanding about investment strategies. All of these strategies embrace ESG in the way that they implement their investment strategy, but you wouldn't be able to tell by looking at their title and none of them even have ESG within the name. That's going to change.

The marketing folks who work at these asset managers are going to drive the point home for all the asset manager top management that they need to get in touch with this investor demand, put ESG in the title, and make it crystal clear about what the investor is getting. And you're going to see all sorts of shoot offs or very specific like ESG non-weapons or ESG non-alcohol. You'll see all these very niche products as a result of the creativity of the product engineers at these asset management firms. And that can help you fill in the blanks in your lineups if that's needed.

The next stage shows you fund performance. We've highlighted a whole bunch of those, sustainability or ESG funds at the top. You can see the rankings in parentheses. The rankings are from one to a hundred. One is best, a hundred is worse. And really the picture here is if you look at the track records of these ESG funds, the caveat is it's a very mixed bag on performance. So you can't just go out and buy an ESG fund and think that you're going to do okay. You still have to do the work, to do the analysis, to screen out funds that have struggled, perhaps don't have a good prudent strategy and try to avoid some of the weaker funds that are out there.

So just again, a caveat that it's a very mixed bag. The track records are relatively new. It's not like ESG has been around for 50 years and you have a ton of long-term track records. So just being a bit cautious out there when you do decide to embrace ESG.

Our focus on the next stage with our clients has been in the large blend category. This is where most of the money is invested amongst your investment lineups. There's just not a lot of ESG money invested say in the small cap sector, because no one's really paying attention to that. A small cap firm out there in the marketplace. If you consider say a Russell 2000 firm, a small company, they're focused on growing and staying alive, really staying in business. It's those large cap firms where investors have embraced companies that have been around for years, the fastest growers, the ones that are not going out of business anytime soon. So that's where most of the attention has been from consultants, from index providers, from advisors, and from investment committees, trying to figure out can they add an ESG product within say the large blend category and maybe even large growth or large value.

We put some numbers there for the annual cost of net expense ratios to give you a sense of what we found. ESG tends to be a little more expensive than another traditional non ESG product. Something that's been around forever. The marketing folks at these asset manager firms know that this is a big demand product. And so they, at the margin, try to make it a little more expensive. So be careful when you're looking around at different options that you're not over paying for a strategy. You want it to be nicely priced within the ESG products, but then also within the category that you're considering adding. In this case, we've mentioned large blend.

We've done a fair amount of work on the index side with our clients. We have not embraced the active side because of those short-term track records. There's a couple funds out there from Fidelity and Vanguard, I mentioned them here, and their costs, very reasonable since their index funds. Definitely more expensive though than a strict non ESG index product. These days you can get, for example, an S&P 500 index fund for one or two basis points, depending on how much money you come with. So these tend to be about 10 or so basis points more expensive to get an ESG type of fund.

Now, next page, also a little bit of a caveat. This is the MSCI index. And in this case, it gives you a little bit in terms of how that scoring is done. In other words, trying to add funds into this particular index based on a better score, meaning they do better, for example, at that company on their environmental management. They do better on social issues. They do better on governance. Then all those scores are tallied up and that index becomes a set of holdings for the best scoring funds.

You may think that, "Okay, all of a sudden, now we don't have any utilities in our fund because we're screening out all of those utilities, because for example, they only produce energy in a dirty fashion. They're only coal miners." That might not be the case. So you have to be a little careful. You can see some of the energy firms still could come in. If you look under environmental, you see Schlumberberg's actually in and Chevron would be excluded. Well, Schlumberger might actually be in the index because they are less dirty for example than Chevron, and they still get into the index. So it may not be pure, clean energy exposure. Again, just to caveat, know what you're purchasing, ask questions of the portfolio managers and the fund managers, and make sure you know what you're getting when you embrace one particular benchmark index or one particular fund to the other.

To give you a sense of the holdings in this Fidelity sustainability fund, notice the sectors in the middle of the page. Information technology turns out to be very high weighting. That is the case with most index providers, giving you an ESG index. And no surprise. Look down at the bottom of the page. Energy, a super low weight in. Well, just be careful. If you put ESG into a large blend investment lineup and all of a sudden technology gets banged up, think January of 2022. Technology's really been taking it on the chin because of the Federal Reserve announcing potential interest rate increases and inflation being way up. Those technology holdings can really dramatically underperform. And all of a sudden you have this investment in the lineup that looks horrible versus the other large blend investments that you might have.

So just realize those weightings in an ESG product may look very different from the traditional products you have. And therefore there is some risk if, in this case, any of those overweight industries suffer.

I'm going to skip the next page in terms of investment process. It talks a little bit about what Newport does and our approach. Happy to follow up with anyone who's interested about that. In the interest of time, I do want to summarize. What we found across our investment work, call it in the last three years when ESGs really become a much bigger topic and discussion point for investment committees. You'll see, on the left-hand side of the page, a whole bunch of positives that we know about from looking at ESG products.

I think the last one is probably one of the biggest points that I wanted to make today, and that is ESG products and the demand from investors it's bigger than just the 401k and 403b marketplace. And that's why we believe the trend is not going away. It's not a fashion or a fad that's going to just disappear in a year or two. And so as committee members, you're going to have to get on board if you haven't done work with that and really get some expert information, get the debate going with your committees and especially get those in the meeting minutes.

On the right-hand side of the page, a whole bunch of cons. Think of ESG as really being the wild west. It's still new territory with not great and long track records. All the research is still very new. Although definitely, as we say on the left-hand side positive.

Our recommendation is to keep in mind for what we've done for our clients may not be applicable to you, but at least for our clients, we do think it's still too early to embrace active ESG funds. But we have added a number of index based products into our client lineups. Nice, low-cost index-based funds like the Fidelity and the Vanguard one I quickly brought you through a minute ago.

And then also consider direct brokerage if that is not an option within your plans these days. Because if you're getting demands from your participants coming to HR and they want to embrace ESG, and you're not going to put an ESG product in your lineup, a direct brokerage is a nice way to get some exposure for your participants so that they can get some ESG funds into their accounts.

I'm going to pause there. There's a whole bunch on the legal landscape around the US Department of Labor and ESG. And Eric is going to bring you through that over the next couple of minutes. Thank you.

Eric Paley:Thanks, John. And happy to pick that up and talk about the regulatory landscape. Before I do, I want to remind everybody again. We've got the Q&A function at the bottom of your screen. Feel free to send us any questions, and we'll try to address as many as we can at the end. I also wanted to point out. I appreciate that several of you have been emailing me during the program. The one that sticks out says, "Eric, relax your shoulders. You look like you ate a bad burrito." So I will try to adjust accordingly, but apologies. There's not much I can do about that.

Let me walk you through how we're viewing it from a legal perspective. This whole concept of ESG in retirement plans is not new from our perspective. Dating back to the early '90s when ESG was an unknown acronym, and it was just known as socially responsible investing, you would occasionally get a question here or there about ESG and retirement plans. It's only really taken on, I would say, more acute relevance in the last couple of years from a retirement plan perspective because of what the prior administration had done as far as regulatory approach and what the current administration has done in response to that.

But if you look back at the history, every administration has tried to put its own imprimatur on this area dating back to early 1990s. So this is nothing new in terms of regulatory approach. And what it's left us with as plan advisors and you as plan sponsors is a real shifting landscape and sometimes an inability to decide how best to approach it.

And I think that's certainly been true over the last several years. It's created kind of a chill. And that's not directed at the fact that I've got snow falling outside the window here. But in any case, let me bring you up to speed as to what's gone on in just the last couple of years.

It was in 2020 that the prior administration actually issued final regulations governing the space. And even though they didn't call out ESG factors by name, it was absolutely directed at this space. And we knew that because there had been a prior pronouncement where the administration had basically directed everybody to review regulations, et cetera, and tried to limit the ability of using fiduciary directed investments for these purposes.

So the prior administration, the Trump administration issued final regulations on what a fiduciary's obligations were when they were selecting investments for a retirement plan lineup, and also how they should exercise shareholder rights by virtue of voting proxies and the like. When the Biden administration came in, very soon after they took office, the president issued an executive order basically. And this is no surprise. This happens with every administration. But directing their agencies to review regulations adopted within the end of the prior administration and make sure that they're consistent with whichever way the administration itself wants to go, the new administration. And that was specific here by Biden directed toward any agency regulations that might be directed to climate change and environmental issues.

Then it was in March that the administration announced it was absolutely re-examining the Trump administration's fiduciary regulations and would not enforce them. And then in October they issued a proposed rule.

Let's jump to the next slide. And while we do, I'll give you just a background of why these two are so vastly different. Under the Trump rules, and this is not on the screen, basically it was putting a very narrow focus on the ability of a fiduciary to select ESG related investments under a retirement plan. Specifically, if I can cast it in a very broad way, they said, when you're selecting investments for a plan, you have to do so almost entirely based on the pecuniary factors associated with that investment. In other words, this is all about making money for participants. If you are looking at factors that do not relate to how a particular investment will do from a pecuniary perspective, basically as a fiduciary you're shut down except in very limited circumstances.

So right out of the gate took a very narrow approach. And like I said, it didn't specify ESG factors specifically, but everybody knew from the code, what exactly was being talked about. The only instance in which ESG factors could possibly be considered is where you had two investments that basically had the exact same characteristics and the exact same level of returns. If one of those particular funds had an ESG positive profile, you could, in theory, as a fiduciary select that particular investment for your plan, however, you had to jump through a number of hoops to do that. Specifically, you had to lay out in gory detail as a plan committee or as a plan fiduciary why you were selecting that particular investment fund. Clearly again, the intent there seemed to be to put a chill on it. And I'm trying to depoliticize this as much as possible, because again, this has gone back and forth.

And so as a practical matter, what I was hearing from my clients when they were asking about this was, "We don't want to take a step in that direction because it seems particularly dangerous to move in that space now when essentially ESG is off the table." And I think that was probably a fair approach.

Before we jump now into how the Biden administration has countered that, let me just remind you of two of the basic fiduciary principles that all plan fiduciaries have to abide by, those being the duty of loyalty and the duty of prudence. The duty of loyalty basically says that when you're in the room wearing your retirement plan committee hat, you're doing so exclusively for the interests of participants and beneficiaries. You may be the CFO outside of that room. You may be the general council, whomever it might be. But sitting in that room, any actions that you take must be exclusively for the interest of the participants and beneficiaries. That's been a bedrock principle under ERISA since 1974. And that truly still drives all fiduciary decisions that are made.

Likewise, the duty of prudence, which basically says when you are selecting investments, the expectations that you will be doing so as an investment expert, which is why we always preach to retirement plan committees, that you need to go through regular training and education and stay up on what it means to be a prudent fiduciary. Because in the unfortunate likelihood that you are dragged into court, the expectation is that you will have acted as an expert investment advisor and reviewer when you choose those investments.

And so as a practical matter, one of the better practices we've always recommended is that you select an investment advisor, a third party to accompany you and help you make those decisions. Because this is generally not the day job of people who sit on a retirement plan committee.

If we move to the next slide, we see that in October, the Biden administration issued a proposed regulation. And as of this moment, unless something has changed in the last five minutes that I've been talking, that regulation has not been finalized. The industry was allowed to submit comments to it. That comment period closed in early December. So we would expect potentially to see a final regulation issued in the coming month or two. It's really difficult to guess.

Generally speaking, the comments from industry trade associations were urging the Biden administration to please hard wire into the regulation, something that's very even handed that didn't necessarily speak to just ESG principles, but with something that could be almost timeless, that regardless of the ebb and flow of different administrations would allow industry and US plan sponsors, to be able to make decisions that aren't going to change potentially every four years.

At least in terms of the opening salvo from the Biden administration, that's not necessarily the case. Basically they approached this in a way that basically is virtuous signaling, if you will, about ESG and making sure that it's clear and it's permissible for planned fiduciaries to at least account for ESG factors when they're judging whether a particular investment should go in their plan or not.

So initially with this regulation to satisfy the standard, it lays out this broad principle and says you can give appropriate consideration to the facts and circumstances relevant to a particular investment. Okay, well that sounds pretty plain vanilla. So where do we go from there? And they go on to say appropriate consideration includes. And if you'll notice at the bottom bullet, one of the factors that you may consider, not must consider is the projected return of the portfolio relevant to the funding objective to the plan, which may include an evaluation of the economic effects of ESG factors.

So right out of the gate with the prudence requirement, which again is all about making sure that you're acting as an expert in the field, they're signaling to you that yes, you may consider ESG factors, and go to the next slide, please, moving on. They talk about which particular factors could be material to your risk return analysis. And they're very specific here by saying it include factors such as climate change, such as governance factors and workforce practices like your relation to labor. So again, what this has done very differently from the prior administration's rule is say that you can be a prudent fiduciary when selecting these investments by taking into account ESG factors.

Now let's go on to the next slide. Likewise, with the duty of loyalty, the concern is that they don't want fiduciaries on a retirement plan committee to have any sort of agenda that transcends what their primary duty is. Again, to be faithful to the best interests of participants and beneficiaries. So how can you serve two masters? If you go into that room, and the idea is, well, we have a corporate mission that we want to pursue ESG objectives, how can we do that while still making paramount the interest of plan participants and beneficiaries? And that's clearly what it says in the rule here. It says the fiduciary can't subordinate the financial interest of participants and can't sacrifice investment returns or take into account anything beyond those pecuniary interests that were referred to in the prior regulation.

However, then it goes on and says your evaluation of investment must be based, again, emphasis on must, be based on risk and return factors. Well, we already saw from the prior slide regarding the duty of prudence that they've defined risk and return factors to include ESG. So it gives license now for a fiduciary to work those ESG factors into the consideration of whether it's appropriate to bring ESG funds into the plan.

Let's go to the next slide. There was, again, as I alluded to a few minutes ago, under the Trump rules, a tiebreaker test that basically said, in order to choose an ESG investment, you had to basically have two exclusively the same types of investments. Let's figure out if you could actually ever come up with something like that. And assuming all of the things were equal, if one of them had an ESG focus, you could in theory choose that provided you defended the rule.

The way the new regulation is written, it's a little broader than what it was previously. If you "prudently conclude that two competing investments," and here's the language that's kind of befuddling. It says equally serve the financial interest of the plan. So they don't have to be exactly alike as long as they equally serve the financial interest of the plan. As a fiduciary, you can select that, provided however, and here's something of a rub, that you disclose the collateral benefit characteristic. You disclose the ESG character of the investment, and you prominently display that in any disclosure materials.

That opens a whole Pandora's box of how you would go about doing that, particularly since investment providers often have canned prospects and the like. You would probably have to wrap something around any sort of material that's going out the door. But at least in theory, the way this proposed regulation is written, there is opportunity for planned fiduciaries to pursue this.

Likewise, if we go to the next slide, this whole issue about exercising stock rights, if you recall, again, under the Trump rules, basically there was a chill on a fiduciary's ability to vote stock rights. In fact, it was explicitly said that there were instances where as fiduciaries you were not supposed to vote. You were supposed to abstain entirely. The only time you were supposed to vote was when it impacted the pecuniary interest of the underlying investments.

Here we go back to the rule that existed before the Trump administration, which basically said, as planned fiduciaries, you have a fiduciary responsibility to vote in the interest of participants and beneficiaries, and you can consider any factors that may impact the value of those investments for plan participants.

If we jump to the next slide, just to sum up my portion of this show here, there are definitely differences between the two, but the bedrock principles of prudence and loyalty remain the same. Again, those are grounded, hardwired in the law, and you can't stray from those regardless. However, the second bullet, on the margins the new regulations clearly are signaling to fiduciaries that there's a new sheriff in town, and it will be easier to defend decisions about ESG factors when selecting investments for your plan.

And finally, it tends to provide greater leeway to consider those factors as a tie breaker than just insisting that two investments be exactly the same. If you've got two relatively similar investments that both serve the same ends and one happens to have ESG factors, there is a path now, a more realistic path for getting that into your plan.

I'll leave it back there to you, Diane, to continue us on. And again, happy to answer any questions that might arise.

Diane Wasser:Awesome. Thank you, Eric. I was taking notes during both of those. We were going to get some best practices from each of our two speakers there and myself included. I think maybe what we'll do is take some of the questions. If you guys saw the Q&A. Maybe since the people on the line have asked them real time, we can do that first. And if we have time, we'll do some best practices. But we can always create an email if we don't get to them, to send out to all the participants about some of the best practices that we had.

John, were you able to see the one about the percentage of plans that have added ESG investments to their plans?

John Wibbelsman:Yes, thanks Diane.

John Wibbelsman:So, we serve both DC clients and DB. And the DC space it's 401k and 403b. Only about 10% of our clients have embraced adding an ESG product into their lineup. So it's still relatively new in terms of additions to an existing lineup. But more than 50% have debated the ESG topic and explored it with us over multiple investment meetings with committees and us then documenting that discussion for the meeting minutes.

Diane Wasser:Excellent. Excellent. That's interesting that we're going to see probably a lot more in the committee minutes this year when we start our audits for 2021.

Another one is, is a fossil free fuel fund, say that 10 times fast, an actual category, or typically combined with other environmental attributes? Any thoughts on that?

John Wibbelsman:Sure. I can give you an answer from our perspective and then Eric, feel free if you've seen anything on your end. That wouldn't be a specific category. When you think about categories, think about very broad exposures, like a large blend fund. So that's just investing in large companies or a small cap investment. That's another category, just investing in small cap funds.

So what you would find for example is maybe an asset manager comes out with a fossil free fuel fund that is in that large blend category, trying to outperform those other funds in the large category. I think if you fast forward 10 years from now, you might have fossil free fuel funds be their own category, but we're still very early in the process. And so the asset managers, the consultants, the advisors, the data providers, they're going to take a fund, like the one you're asking about, and fit it into existing categories. Somebody that's just focusing on small companies may have a fossil free fuel fund, but it's trying to outperform that small cap investment. So it's going to be in that small cap category.

Diane Wasser:Excellent. Thanks. Eric, how about do the regs differentiate between plans for nonprofit and for-profit entities where it's mission driven?

Eric Paley:Yeah. I thought it was a really great question, and we get this a lot. I mean, certainly in my practice, we see a lot more of nonprofits, charitables in particular who are asking about trying to align the retirement plan offerings with the mission of the overall organization. And again, under the prior administration's rule, that was going to be a real tall order.

Hopefully when the ink dries on the new regulation, when it's finalized, we'll have a little more clarity, but at least as written, there's no distinction drawn between nonprofit plans and plans that are sponsored by for-profits. So you really have to get back to those core fiduciary principles, which are, you have to work through your fiduciary process, you have to assure yourself that what you're doing is the best interest of plan participants and beneficiaries, making sure you can consider ESG factors as part of that. If you can't generate the sorts of returns that you'd like in other funds you're going to be a bit hamstrung.

I know we passed over sort of best practices for committees, but one of the things I would absolutely say there, and I think John alluded to this as well, we're still in early days. I mean, putting aside that we have to wait for the ink to dry on the regulation, resist the temptation to be a pioneer. I get it. Particularly as a nonprofit that there's this tendency and desire to go out and align everything in your organization. But this is one area where you got to stick to those fiduciary principles first and wait to see how the regulators approach it. Because I think you could get a little bit over your skis, and that, you don't want to be a test case for litigation, for sure.

Diane Wasser:Yeah. Very true. And even if you get down to really over documenting your decisions, that's a lot. Plan sponsors have a lot on them. It'll definitely take some time in a diligent process like you're mentioning.

Well, we are right at time. There's some questions we can answer when we do the follow-up. We'll do some best practices. Reach out to any of us with any questions. It's been a real pleasure. And I hope everybody enjoys the rest of the day and has a safe weekend if you're in a place where it might snow. Thank you.

Eric Paley:Okay. Thank you.

John Wibbelsman:Thanks everybody.

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Diane Wasser

Diane Wasser is the Partner-in-Charge of New Jersey at Eisner Advisory Group and Managing Partner of Regions at Eisner Advisory Group as well as a member of the Eisner Advisory Group Executive Committee. She has over 30 years of experience providing employee benefit plan audit and consulting services to publicly and privately owned entities across the United States.

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