PLANSPONSOR - December 2021 - January 2022 - 18

2022 INNOVATION ISSUE | COVER STORY
investment option to a plan, whether it's an ESG fund or another
type of fund, it doesn't tend to get a lot of asset flows, unless you
are mapping assets [from an investment option being removed
from a plan menu], " he says. Participants tend to move slowly to
newer options, in general, he says.
The low current participant utilization rate likely can be
explained by both broader factors and ESG-fund-specific issues,
says Albert Lim, a New York City-based consultant at Russell
Investments. " With our clients, they have a QDIA [qualified
default investment alternative], and that's where most of the
money is going: That's often 60% to 80% of plan assets, " he says.
" Most plans don't have many assets in the core menu now, "
Education Required
FOR MOST PARTICIPANTS, environmental, social and governance (ESG)
investing is far from simple. " It's complex because 'ESG' means different things
to different people, " says Brian Vest of Portfolio Evaluations. To some it means
exclusionary investing-for example, investing in funds that prohibit oil company
stock. For some, it means having specific, themed ESG investments as a core
menu option, such as a fund investing in companies that aim to reduce carbon
emissions. And for others, he says, it means investing with managers that have
gained a deep understanding of ESG risks for particular companies and their stock
and have incorporated that with traditional metrics as part of their standard investment
analysis. " It can be daunting for investors to make a decision, " he says.
Sponsors should be mindful that the communication and education required
for their participants to invest knowledgeably in ESG " is doubled, at a minimum, "
says Albert Lim of Russell Investments. Sponsors will need to ensure that participants
are informed about what type of environmental, social or governance-focused
investing an ESG option does and does not do, so they can make an informed decision
about what they want. " There is more participant education necessary, and
that means there is added time and effort required for the sponsor. "
The industry has work to do to develop information for participants to educate
themselves on a very basic level about ESG, says David Montgomery of Fidelis.
" Investment funds that incorporate ESG will have to come up with some really
easily understandable material for participants. We need to find ways to simply
explain, 'Here is what ESG is, here's what factors the fund managers are considering,
and here's why or why not this might make sense as an investment for you,' "
he says. " The recordkeepers are going to be the method of distributing that information
easily. There needs to be a simple explanation on the website, with links to
more information if a participant wants to get more in-depth. "
Because this is still a fairly new area for DC plans, the industry has yet to
develop much education or many tools to build awareness or understanding of
ESG investments, says Deb Boyden of Schroders. The tools used by investment
managers such as Schroders to analyze ESG issues can be a starting point, she
says. " Those tools could be adapted to be end-user friendly, to demonstrate the
impact of ESG factors on a particular fund. And if all participants could get fund
fact sheets with information on that fund's ESG impact, it would be really helpful.
" Having better education and tools remains critical, " Boyden says. " Where
the investment products go, education must keep pace. " -JW
Lim continues. " And sponsors tell employees to avoid 'churning'
their assets much, so if employees are doing what their employer
says to do, they shouldn't be
switching their money into a
new fund often. It's a natural
effect of adding any option: You
don't see assets rush in unless
they are mapped. " The ESG
funds available now also tend to
have higher-than-average fees,
because of a lower asset base,
and shorter performance track
records compared with many
other mutual funds, he says.
Morningstar, too, in its
" 2020 U.S. Fund Fee Study, "
notes the strategy's higher
fees. The study found a higher
asset-weighted average expense
ratio for ESG funds (0.61%)
compared with their traditional
peers (0.41%).
Boyden has noticed some
particular patterns in ESG
interest. " The academic space[-
viz., university DC plans-]has
tended to be a leader in including
ESG investing, " she says. " From
the conversations we're having
with [those plan] sponsors, it is
driven by the participants and
the boards looking across all of
their investments to be consistent
in their approach to ESG.
They're wanting to replicate it
in their retirement plans. "
Geographically, Boyden
sees more interest among
East Coast and West Coast
employers such as high-tech
companies, which have many
young employees. " It goes back
to participants [being behind
the] demand and the younger
generation being really aware
of sustainability issues and
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