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As Environmental, Social, and Governance (ESG) investing becomes more popular, the wealth management and 401(k) industry is taking notice.
In fact, more than $1 of every $5 invested in the U.S., a total of $8.72 trillion, goes to socially-responsible investing (SRI). And in 2017, 75% of investors — and a whopping 86% of millennials — were interested in sustainable investing.
While the opportunity to invest in companies that align with an investor’s ethical standards, beliefs, and values sounds appealing, the ultimate question is whether ESG is good for the investors and funds involved.
We believe it is, and here’s why.
Good for investors: ESG investments perform competitively
ESG-screened investments perform as well as their non-screened peers 90% of the time, according to more than 2,000 academic studies of ESG performance.
These investments can reflect the values of those who are passionate toward issues such as environmental conservation, gender equality, gun control, and social justice.
A 2015 study also found that over a 10-year period, companies with the highest ESG scores (those that focused on ESG issues most important to their businesses) more than doubled the performance of those with lower ESG scores.
With results such as these, investors can be optimistic about the positive impact such investments may have not only toward their supported causes and companies, but also toward their financial portfolios.
Source: Khan, Mozaffer, and Serafeim. “The Accounting Review.”
Good for the industry: Attract more investors and business
SRI funds may also offer advisors and plan sponsors an advantage in competitive markets.
In fact, advisors in a 2017 study reported a 32% increase in interest in ESG investing than in the prior year.
Fifty-three percent of millennials, 42% of Gen Xers, 41% of baby boomers, and 39% of seniors also made investment decisions based on social responsibility factors.
A survey of Fortune 1,000 employees revealed that 74% of 401(k) plan participants would like their companies to offer socially-responsible funds in their plan investment menus.
Plan sponsors who offer such options can appeal to an increasing number of socially-engaged employees.
The DOL looks well upon SRI in retirement portfolios
In its latest Field Assistance Bulletin, the Department of Labor (DOL) confirmed that defined contribution plans can include SRI options, as long as they perform as well as and cost no more than traditional unscreened investment options.
Plans can even include ESG-screened target date funds as qualified default investment assets (QDIAs), as long as they don’t have lower-return or higher-risk potential than comparable non-ESG alternatives.
The tipping point
Increasing demand, competitive performance, and the DOL support combine to make SRI funds more attractive than ever for plan sponsors and participants. It’s time for fund managers to consider offering ESG target date funds and ESG exclusive retirement plan options and platforms.
As ESG funds grow in popularity among firms, institutions, and individual investors, fund managers, providers, and platforms are taking notice.
Widespread resources on impact investing are enabling investors large and small to invest in companies that share their beliefs and values on any number of geopolitical, social, and environmental issues.
But can ESG investing be good for investors as well as the funds involved? We say yes, and here’s why.
· The DOL recently released a field assistance bulletin which generally supported the consideration and financial merits of ESG investing.
· ESG investing: benefit for investors
· Returns and performance data
· ESG investing: benefit for advisors, fund providers, and platforms
· Quotes, additional data/research
It’s time to for fund managers to consider offering ESG target date funds and ESG exclusive retirement plan options and platforms.
Written by Allison Brecher, Vestwell’s General Counsel
The recent barrage of litigation and emerging regulations about retirement plan fees have put plan sponsors on heightened alert to make sure the fees incurred by the plan are reasonable and that they are paid properly. It’s a difficult assessment to make, complicated by the broad array of administrative expenses, with confusing terms like back-end load fees, revenue sharing, and 12b-1 fees. It’s hard enough for plan sponsors to understand what fees service providers are charging, much less whether the plan or plan sponsor should pay for them. However, it doesn’t have to be and there are plenty of opportunities for advisors to assist in making things more clear.
Depending on the plan sponsor client’s philosophy, sponsors may want to shift as much of the plan’s costs, like recordkeeping expenses, legal fees, and mutual fund expenses, to the plan and participants. Unfortunately, a plan sponsor can significantly harm the plan, and itself, by doing so without careful analysis.
Where to start?
The plan document may specify whether administrative expenses can be paid by the retirement plan assets. If the document says only the plan sponsor can pay, then the plan must reflect that. Some plans require the plan sponsor to advance the payment and get reimbursed by the plan later, in which case the payment and reimbursement should be made within 60 days in order to avoid a Department of Labor requirement for a loan agreement between the plan and sponsor. If the plan is silent, then analyze DOL regulations to determine if payment by the plan is permissible. Costs relating to plan formation, termination, and design are typically paid by the plan sponsor whereas recordkeeping and investment consulting expenses can be paid by the plan.
The plan can only pay for reasonable expenses – but what is “reasonable”?
This is the central issue in dozens of lawsuits. Participants rely on their plan sponsor to negotiate the best deal with service providers and it therefore becomes the sponsor’s fiduciary duty to make sure the plan is only paying reasonable fees.
Unfortunately, it can be hard to understand all of the direct and indirect compensation paid to plan providers. Sponsors need advisors’ help to ask the right questions. Some expenses, like sales commissions and back-end load fees on mutual funds, are paid out of the assets’ investment returns and therefore charged indirectly to participants. Those charges may not be apparent on participants’ benefit statements. Worse yet, there is no single benchmark for retirement plans to use as a baseline comparison. For this reason, some sponsors prefer to pay for expenses themselves since only plan assets, not corporate assets, are within a regulator’s purview.
Advisors can help sponsors by reviewing the expenses paid by similar plans. All ERISA plans file Form 5500s annually, which are public and should disclose all fees paid by the plan. Making an apples-to-apples comparison can be difficult because some sponsors do not know, and therefore cannot disclose, all indirect compensation. Advisors can also help clients prepare requests for proposals to understand available pricing options, such as flat fees or per participant fees that are more transparent and easier to understand. They can also help evaluate the quality of services, since the DOL acknowledges that cost alone should not be the only determinative factor.
Monitor, monitor, monitor
Sponsors should periodically reevaluate the plan’s fees. Even though a sponsor hires consultants to assist, they remain a fiduciary and must regularly evaluate the changing marketplace. As always, documenting their decision making process is critical. Sponsors must also remember to check whether services are being provided by a party-in-interest and satisfy the prohibited transactions rules.
NEW YORK, June 5, 2018 /PRNewswire/ — Vestwell, a digital retirement platform, announced today a strategic partnership with Allianz Life Ventures, part of Allianz Life Insurance Company of North America (Allianz Life), to offer its end-to-end retirement planning solution to Allianz Life’s extended network of advisors.
Vestwell enables financial advisors to more effectively service companies looking to launch or convert their 401(k) or 403(b) employee retirement programs. Allianz Life Ventures and affiliated businesses, entrenched in the independent broker dealer space, provide access to a strong network of top advisors who embrace modernization. Through this partnership, Vestwell will offer their technology services to more easily bring retirement plans to thousands of advisors across the Allianz Life network.
“Together, Vestwell and Allianz Life are redefining how the industry creates efficiencies around retirement program management,” said Aaron Schumm, Founder and CEO, Vestwell. “By leveraging Allianz Life’s advisor relationships and our unique value proposition, we can fulfill both of our promises to guide people towards a comfortable retirement.”
Through an open architecture investment solution, the partnership allows Allianz Life advisors to access a state of the art retirement platform and select retirement planning options that best suit client needs.
“Allianz Life Ventures is committed to identifying and working with the industry’s leading financial technology and services companies,” said Emily Reitan, Vice President of Business Development and Strategy, Allianz Life Ventures. “We are excited to bring Vestwell into the Allianz Life family and to work together to help bring additional innovation to the retirement industry.”
For more information on the partnership please visit www.vestwell.com.
About Vestwell Holdings, Inc.
Vestwell is a digital platform that makes it easier to offer and administer 401(k) plans. Vestwell removes traditional friction points through a seamless plan design, automated onboarding, streamlined administration, and flexible investment strategies, all at competitive pricing. By acting as a single point of contact, Vestwell has modernized the retirement offering while keeping the plan sponsor’s and plan participant’s best interests in mind. Learn more at Vestwell.com and on Twitter @Vestwell.
About Allianz Life Ventures
Allianz Life Ventures, part of Allianz Life Insurance Company of North America (Allianz Life), makes investments in North American companies with potential market traction and a demonstrated ability to drive innovation. Allianz Life Ventures is uniquely positioned to leverage the financial strength and in-house expertise of Allianz Life to help our partners succeed. Active in all investment stages from seed and early stage to growth, current partners include: Vestwell, Core Innovation Capital, blooom, tomorrow, LifeYield, Ladder and Gainfully. Learn more at Allianz Life Ventures.
SOURCE Vestwell Holdings, Inc.
UPCOMING WEBINAR JUNE 19, 2:00 – 2:45 PM ET
Join the conversation: Hot topics for retirement plan advisors
Hear from Josh Brown of Ritholtz and Aaron Schumm of Vestwell as they address hot topics and controversial questions (including yours!). We’ll be covering:
• managing scale
• fee compression
• avoiding regulatory pitfalls
• YOUR questions
“It’s never enough to invent software. You also have to make it fit into the business world and win accounts for its users that pay the freight… which is why [this] Vestwell startup keeps making news in the [investment advisory] business” via @RIABiz
We are proud to be growing our team with top talent! Check out some of the new talent on our team here.
Join Josh Brown (Ritholtz) and Aaron Schumm (Vestwell) to learn about common mistakes employers make when it comes to retirement plans and how you can step in to help.
Want to hear more? Join our webinar June 19, 2:00 – 2:45 PM ET as we address hot topics and controversial Qs (including yours!).