Additional ESG Poll Comments

ESG investing is a new fad. Its track record is not necessarily validated. Does it really comport with MPT???? Should a plan sponsor be making this opinionated decision for ALL employees--especially with respect to QDIA? Isn’t it just a sign of the times and reactionary?

Of course as a California firm we are getting lots of inquiries. 67% of millennials want this in their plan.

Of course, investment fund selection and monitoring for ERISA plans should be solely in the best interest of Participants and their beneficiaries.

I believe that ESG options are very respectable options. As with any other investing advice, my belief systems may not always be a client’s belief system, a participant’s belief system, Plan Sponsor’s belief system. That stated, the investment options to be offered are to be diversified and not let to any one genre. That in and of itself would not be within my fiduciary responsibility. It isn’t just about what the leaders think, but to accommodate as many beliefs and risks without overwhelming a plan’s options.

You cannot serve two masters: if participant outcomes are ERISA’s paramount purpose, which I think is proper, then adding ESG as an equal-to mandate would be wrong and take away from the prior. To the extent ESG is economically viable towards better participant outcomes, plans will move this way, and ESG guidelines will not be necessary.

It is politically motivated and disappointing.

Plans shouldn’t get a pass for poor performance.

I believe the DOL should allow for Plan Sponsors to include 1-2 ESG options that are allowed to be measured differently than the rest of the investment lineup. I agree they should not be the QDIA.

I am for a specific system that would allow a fund to be held out as an ESG offering based on a screening or scoring system, but believe that good money managers are already taking steps to screen their offerings and understand the underlying issues/risks that companies may carry in the way of ESG factors. Our screens do not look for a certain ESG factor but will highlight those underlying approaches that the fund or the money manager may embody when making a final decision on an offering. Our criteria screens are primarily tied to Performance and expense as compared to the peer class and stated investment objective. Not sure how the proposal will help this or add a negative feel to ESG investing.

I use Morningstar to screen funds. They include a sustainability rating under the portfolio tab. My industry contacts and I are already aware of ESG ratings, perhaps other advisors are not. Would it make sense to adopt a definition or process that is the same, probably. Personally I believe the industry will come together on this one.

Handle this investment like another other, with a prudent process in place. Consider the same criteria as you would any other option.

Historically, ESG options have been over priced and underperforming. I believe this will encourage ESG managers to be more creative in portfolio construction. I agree that an employer sponsored retirement plan is for the retirement saving goals of participants and as such ERISA plan Fiduciaries have the obligation to act with prudence on their behalf - personal or social objectives of the committee or organization may adversely effect performance and should be evaluated with care.

I think the investments must warrant the performance to be in the plan. I have included a balanced fund and it is a top quartile performer.

I think the intent is there to ensure that plan fiduciaries are still maintaining their first priority of providing benefits to participants. There is an uptick of participants looking for socially responsibleinvestments so if there are prudent options to add, then it makes sense. As noted, there really aren’t a lot (if any) of true ESG funds out there so it’s a balancing act.

Placing emphasis on ESG investments is a noble initiative, as long as the pursuit does not compromise the imperative associated with following the guidelines of the investment policy statement and the fundamental foundation of acting as a Fiduciary.

ESG to me is just another investment. We help client’s select balanced fund line ups and so far no one has ever asked about ESG investments. Even when I bring it up, no one seems to care. I sure there are those who do care and, for them, they should use an ESG investment. It’s just like someone who is aggressive should use an aggressive fund - what’s the big deal?

I think it is another way for fund companies, and advisors to try to provide value, and differentiate themselves from others. A bit of a marketing tool.

They echoed our policy on it: if they prefer investments that have that overlay, that’s fine but they must pass criteria on their own against standard benchmarks. We don’t use participant dollars for any other purposes as outlined in ERISA’s prohibited transaction rules.

I think ESG is too broad to quickly categorize. I also know some non-ESG managers claim that ESG is already an integral part of their screening process. My fear is that the latter could be used against a plan sponsor for unknowingly picking a “closet ESG.”

A clear IPS will define the criteria used for selecting and monitoring all DIAs. If an ESG investment satisfies the criteria and continues to perform up to the standards set forth in the IPS, why is there an issue? Why is this asset class specifically being examined? Maybe I’m just hyper skeptical of anything coming out of DC these days, but this seems purely political and a way to deter people from investing in ESG options.

As long as the plan offers a competitively priced alternative in the same asset class and the fund is regularly monitored using the plan’s scoring criteria and removed if not passing, there should be no concerns. This is typically prompted by a socially conscious employee base that is more motivated to participate in a 401(k) and invest their assets if they are doing so in funds that are invested in socially and environmentally conscious companies. Generation Zoom is even more socially conscious than the millennials now in the workforce and this will be a feature that will continue to be a driving force for getting younger generations to care about saving and investing for their future.

We utilize ESG in our lin ups when it is appropriate to the investment committee. We are in a very heavy NON PROFIT market and look for ways to engage the millennial generation. All ESG funds must pass our investment criteria with other funds also available.

We developed an ESG system for ERISA plans a few years ago. Process and documentation.

ESG has become the new buzzword for the investment industry, but without much definition. Ask the average advisor (not even investor) what it means, and I don’t think you get much past the definition - which is the problem. Try to go past that get detail on process and it gets murky. What is their actual goal? If it’s for a manager to identify companies with a sustainable future (for various reasons) - how does that differ from the traditional goal of an equity manager? Hasn’t that always been their goal? What about the more important aspect of governance? Fund analysts and managers have ALWAYS looked at governance (or they should have) as a key factor in whether to invest. To the average participant, an ESG fund means something different than what it really is - and that is not necessarily a fund with multi-national oil companies in the top holdings, which they can be under an ESG screen. This does not even get into the potential problem that ESG screens can (or could) lead to an overconcentration in certain sectors that meet the screens or in companies that, seeing the focus from the investor community, tailor their needs and initiatives to meet those screens (which many are). That final point presents an undiscussed fiduciary concern for plan sponsors. Finally - there is the question of expenses, which may be lower, but with studies in performance showing mixed results of ESG that are more correlated sector concentration rather than the actual ESG process, are the funds worth the additional potential expense?

The DOL’s fiduciary rule requires plan fiduciaries (including plan advisors) act in the best interest of the plan participant and to set all other factors aside. The plan fiduciaries requirement must: “reflect the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, and does not place the financial or other interests of the Investment Professional, Financial Institution or any affiliate, related entity, or other party ahead of the interests of the Retirement Investor, or subordinate the Retirement Investor’s interests to their own.” This DOL language does not appear to allow other interests to override the fiduciary’s obligation to put the participant’s best financial interest in a subordinate position to a social goal or outcome.

Makes sense that they’d want to clarify the parameters and criteria that should apply to select and monitor an ESG fund- insofar as they’re gaining popularity and may involve compromise (emphasis on “may”).

I think it has a place, as self-directed plans a ppt should be able to invest wherever they want, regardless of cost implication, it’s their money!!

I need evidence that they in fact have merit from an investment category standpoint And are not a fad. In other words, if we believe they will be a category that has distinct characteristics from other already acceptable categories and prove to have investment value then we will discuss it with each plan sponsor.

I believe there could be a middle ground if sound fiduciary processes are followed with consideration of ESG funds (as already occurs with consideration of any fund offered in the plan).

WE are seeing minimal adoption when ESG funds are included in the fund line up. Very few ESG funds outperform their benchmarks

I read it but would like to hear some ERISA attorneys comment before forming a solid opinion.

With regard to ESG investments in the social justice issues of the environment and race being promulgated by activist fund managers or sponsors, I don’t believe any of these funds belong in an ERISA fund line-up, let alone a QDIA. Any funds have to be offered to function in the best interest of plan participants… ESG Investments in the ERISA environment should be verboten and sponsors should stay clear of all this zeitgeist.

On one hand, they are correct to reinforce the notion that investment selection should always be designed to ensure that participants have sufficient retirement income rather than take a back seat to other goals such as saving the planet, but the guidance also smacks of politics and appears to be a solution in search of a problem,

I’m honestly floored this is an issue they are discussing.

I generally agree with the concept - plan performance should not be sacrificed - but I am also concerned that the risk to the plan sponsor may be out of line. One of my retirement plans is a small church-based group; several participants (not the sponsor) have asked for options that meet their ethical standards. Another client of mine is an architectural firm which specifically works to revitalize old buildings, using existing materials, rather than tearing them down; their participants are asking for environmentally friendly options. We have made one or two investment options available that come as close as we can find to meeting these objectives, and they are offered in addition to, not instead of, a similar option without these considerations. With the appropriate education, will this be acceptable under the new rule? How should this be reflected in the IPS?

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