NeuGroup members in charge of DC plans discuss implications for ESG investment options and record-keeping.
NeuGroup members who oversee corporate 401(k) plans are weighing the fiduciary implications of a recent Supreme Court ruling in favor of employees of Northwestern University who claimed their defined contribution (DC) plan charged excessive fees and offered confusing investment options. The unanimous decision said a lower court erred in ruling that because Northwestern’s plan included diverse investments, the workers could not sue over fees tied to some of the options.
- At a recent meeting of NeuGroup for Pensions and Benefits sponsored by Insight Investment, members mentioned the Northwestern case as a possible factor in deciding whether to offer ESG investment options in their DC plans, and as additional motivation to do new request for proposals (RFPs) for record-keepers.
- Members also discussed another area where fiduciary concerns have been constraining the interest of some companies to innovate: offering so-called retirement income solutions within 401(k) plans.
The litigation explosion. One member doing an RFP for his company’s pension and 401(k) plans said the Northwestern case and others underscore the need to “make sure our governance is very tight—all you have to do is open the news and see so many litigations going on over plan administration and record-keeper fees.”
- More than 150 proposed class actions challenging retirement plan fees have been filed over the past two years, according to Bloomberg Law. The majority remain active, with about 20 cases put on pause while the Supreme Court deliberated the Northwestern case, Bloomberg reported.
- Another member said the Northwestern decision also raises “interesting” questions about ESG investments companies might offer in DC plans that may not provide returns as high as other options or may have higher expense ratios. “As a fiduciary, do we violate some of those requirements, especially when we look at the Northwestern judgment?” he asked.
- Roger Heine, senior executive advisor at NeuGroup, noted that a recent Department of Labor proposed rule attempting to provide plan providers a legal safe harbor to offer ESG-oriented funds seemed to fall short. The ruling implies that ESG funds are okay only because they offer superior long-term returns and hence meet existing fiduciary standards. “But what happens if a company offers employees an ESG fund that subsequently underperforms the market?” he asked.
Retirement income solutions: no rush. Discussion at the recent meeting returned to a topic that has also raised regulatory concerns for members: offering retirement income solutions including annuities within DC plans. In the past, many companies feared that if the insurance company providing an annuity failed, the company might be liable.
- The SECURE Act, passed at the end of 2019, included provisions to create an ERISA fiduciary safe harbor in case the annuity carrier did in fact fail. Nonetheless, nearly three-quarters of members surveyed last June said that the act did not make them comfortable enough to offer annuities in their DC plans.
- Another member said her company is not looking to put something in place in the next 12 months and is doing more of a product study to “get to a place where we might be able to offer something to participants at some point in the future.”
- She added, “There have been a lot of different products hitting the market over the last couple years. There are some different approaches out there now in terms of what’s in plan, what’s out of plan, how the products are structured.”
- A third member, returning to the theme of record-keeping, said, “Even though I don’t think there are a lot of great retirement income options available right now, we’re at least having conversations with our current and prospective record-keepers so we would be prepared [to offer] retirement income or maybe a retirement tier.”
Communication and inflation. Mr. Heine of NeuGroupnoted that members also have indicated that adopting a retirement income solution would be a major undertaking including employee communications exercises, while limited corporate DC staffs are already occupied just making sure current, simpler offering of funds remain appropriate and at competitive costs.
- “Some members have said that other specialized 401(k) offerings such as ESG-oriented funds and managed accounts have seen surprisingly little uptake from their employees, so the effort and cost have gone wasted,” he said.
- “Perhaps companies sense this is an inopportune time to offer annuity products to their employees,” he added. “Fixed annuities are highly vulnerable to inflation and their pricing now is calculated off of today’s very low interest rates, which remain well below inflation. Perhaps, if eventually rates rise enough and inflation abates, interest in expanding into retirement income products will pick up.”