ESG and generational methods for retirement advisors

From Steve Bogner

Over the next three decades, Gen Xers, Millennials, and Gen Zers will be the beneficiaries of around $ 70 trillion that will be passed on to them from their parents and grandparents.

Retirement plan advisors should understand what makes these next-generation investors different from the generations before them.

One such differentiator is the growing importance of socially conscious investors in balancing their core beliefs with their investments in assessing a company’s sustainability commitments.

We are of course talking about environmental, social and governance criteria (ESG):

  • environment. Is the company a good steward of nature?
  • Social. Does the company treat its community, suppliers, customers and employees with respect?
  • guide. Do leadership, executive compensation, shareholder rights, internal controls and audits of the company meet the highest expectations?

Although a mutual fund that claims to meet ESG standards may be offered to a participant in retirement plans, an investment in the fund may not be in line with a participant’s overall investment strategy. And as trustees, we have a responsibility to encourage plan participants to weigh a number of factors, including performance.

As a result, it is our responsibility to clearly communicate to participants the impact of adding ESG-related investments to their portfolios.

Under the previous administration, the Department of Labor issued a decision that focused on the “financial” impact of an ESG investment. However, under the current government, this language is unlikely to be promoted.

And as David Levine of Groom Law Group, a leader in social benefits, health and retirement with headquarters in Washington, DC, says, “The (DOL) guidelines will continue to go back and forth as administrations change.”

Regardless, as trustees, we should identify the risks to the plans we advise in order to protect the plan sponsor, as we also offer facilities for participants who may be subject to the whims of Washington.

The central theses:

  • The failure of the Qualified Default Investment Alternative (QDIA) in an ESG investment can expose the plan sponsor to an increased risk.
  • A traditional fund structure with a robust range of products in various asset classes has traditionally been prudent.
  • One strategy to consider is to spice up the current offerings with a select number of ESG options. The planning advisor should also consider why the investments are viable. It is also a good idea to compare the ESG funds in terms of costs and performance.

Finally, educate the plan sponsor / committee and participants about why it is important to see these options as a complement to the existing portfolio and the potential risks associated with investing solely in the context of ESG criteria.

We don’t know if this ESG trend will continue, but for now we should try to balance market demands with our responsibility to protect plan sponsors and participants.

About the author: Steve Bogner joined Treasury Partners in 2011 after 11 years with Morgan Stanley Smith Barney. He is responsible for the retirement planning of Treasury Partners, with a focus on reducing overall plan risk and fiduciary liability. His areas of expertise include defined contribution / defined benefit plans and unqualified deferred compensation plans. He is a certified 401 (k) professional and holds Series 7, 31 and 63 securities licenses, a Series 65 investment advisor license, and a life and health insurance license. He was named “Top 401 Retirement Plan Advisors” by the Financial Times in 2016, 2017, 2018, 2019 and 2020.

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