ESG, What's That and Why is Everyone Talking about it?

 Environmental, Social and Governance (as in Corporate Governance).  This is only the newest acronym in a very acronym heavy industry.  In the context of retirement plans, this is referring to factors that are being deployed within specific investments, such as mutual funds, in order to restrict those investments from putting money towards certain areas that are deemed to be negatively contributing to society in some way.  As with anything new, clear lines as to what constitutes the criteria to be broadly categorized in this way are about as clear as mud.  So, without a clear definition, but WITH a clear demand, what is the best way to incorporate these (or not) into retirement plans?  As with anything retirement, this is actually a complicated subject.  

The industry has been debating this topic for quite some time, I can recall being offered the Calvert Socially Responsible Fund WAY back in the mid 1990's in my own very first 401(k) plan.  However, only recently (mid 2020 DOL Proposes New Rules Regulating ESG Investments) has the Department of Labor (DOL) opined on this topic, and in typical DOL form, they were fairly vague in the language they used and caused everyone to google search what the definition of the word pecuniary means, lol.  

In short, the simplest way I can interpret what was said is that the DOL said that social attitudes should not factor into ERISA-driven decision making, but rather only consider the statistical metrics and follow the fundamental fiduciary rules when choosing funds for a plan.  Namely, the Exclusive Purpose Rule (always acting solely in best interest of participants and their beneficiaries) and Duties of Loyalty, Prudence, Due Care, etc.  Candidly, I agree that these principals should be applied.  However, it's a bit more complex and I will tackle what I mean in a moment.  Quick note; these proposed rules came out in mid-2020 under the Trump administration, and in March of 2021, the Biden administration announced (Biden DOL Announces Non-enforcement Policy on ESG) non-enforcement until the rule could be studied, and presumably changed to be more socially friendly.  None of this is surprising given current partisan politics.  

Here's why this is complicated in my opinion.  

It's Supposed to be about the Participants!

For the sake of this part, lets assume that ESG factors are neutral when it comes to benefiting investment returns OR being detrimental to them.  If this is the case, then the stance of only looking at the normal evaluation metrics based on asset class should be the driving factor and much of what the DOL said is moot.  However, a natural conclusion is that applying any restriction to a money manager would have the impact of reducing return opportunity which can only be viewed as detrimental, and so the DOL opinion has some controversy to it.  

The one area that I keep thinking about is the participant and their perspective on this, of which, I've seen almost nothing written about.  More pointedly, I'm thinking about how individuals who are concerned about ESG tend to invest.  In my 25+ years of experience, it's been my observation that individuals fall into one of three camps regarding ESG;

1.) Those where it's not important 

2.) Those who are blissfully ignorant of the issue altogether AND 

3.) Those where it is extremely important and a moral issue.  

For this third group, the moral aspect of it leads them to think about investing in the same way they think about other decisions, like where to eat and where to buy groceries or clothes.  Where they get these things, and what those companies ideals are is important to them.  And for these people, the decision on investing ESG or not is a binary one, and tends to be All-OR-None.  Because of this, plan fiduciaries, in applying the principal of doing what's in the best interest of the participant should first consider which of the three groups their employees fit into.  If it's solely the first two, then ESG is a non-issue.  However if a modest or even a large amount of participants fall into the third category, there are additional considerations that need factoring in.

What I'm positing is that if having ESG will cause category 3 participants, to go from not participating in to fully saving in their 401(k) plan, then regardless of pecuniary factors, it is better to have the ESG investments in the plan then to not include them.  In other words, it's generally better for participants to save and invest in the plan then to not save at all, even if the investments are potentially slightly worse then they could be.  

If this is a true conclusion, the question becomes how does an investment manager or committee go about choosing ESG funds for a plan in light of the current rules.  Here are my two ideas;

1.) Create a Second line-up that mirrors the first but for ESG.  This is going to be a challenge for a variety of reasons, here are a few;

• Recordkeeper constraints, either on fund availability or quantity of funds system can handle
• Quality of ESG menu OR availability of ESG funds in specific asset classes
• QDIA issue or Target Date fund issue....same issue, are there viable options?
• Enrollment and other Communication materials.....how does playing field become level?  
• ......there are more
  

2.) Incorporate an ESG fund selection process as part of the Investment Policy, identifying that the ESG investment in the plan will be a single investment, that would otherwise qualify as a QDIA.  It would be diversified, incorporating stock and bond investments. Perhaps it is part of a TDF series OR not.  Think Asset Allocation fund OR a specifically designed Asset Allocation Model comprised of multiple ESG funds, that are separate and distinct from the core menu, but screened by the Investment Manager for quality.  

In conclusion, this topic is likely to continue to be an open discussion point until clearly defined rules are decided and finalized.  Until then, I like Option 2 above.  It provides a viable, well thought out, higher quality ESG alternative to offer in the plan, with minimal confusion and high consideration to the All-Or-None characteristic of ESG investors while not losing the need for investment diversification.

As always, would love to hear what people think about the above ideas.   Feel free to comment or reach out to me directly.

- Jason Grantz, QPA, QKC, QKA, AIFA

  

If You're the Smartest Person in the Room, You're in the Wrong Room!

This title is one of my favorite quotes that is so very wise.  It was originally said by a noted academic, Dr. David Weinberger.  By applying this adage to my professional life, I've almost universally been the better for it.  If it weren't for this philosophy, I never would have tried to write papers, blogs and the like, and thus would never have decided to create this blog.  I've recently realized, that this blog is really the only independent place where I can document all of the work I've done in my career.  So, here are a few of my notable papers in one place, the better ones co-written by someone who is most definitely the smartest person in my two person rooms, HA!  Hope you enjoy these.

Retirement Success: A Surprising look into the Factors that Drive Positive Outcomes - This is the very first paper I published in my professional career, originally published in the Summer edition of the ASPPA Journal in 2011.  Interestingly, this piece has been a weight baring beam in my career, a foundational notion for everything I've done since.  The smart co-author on this gem is David Blanchett (now head of Retirement Research at Morningstar) who took my original question and did 100% of the math! - September 1, 2011

Deconstructing the Fiduciary Models: 3(38) vs. Discretionary Trustee - In this piece, my very smart associate, Mike Samford and I try to tackle a highly nuanced area of ERISA fiduciary service, taking discretion over plan investments.  While I would change some of what I've written here nearly ten years later, most of this still holds.   - July 11, 2012

Third Party Fiduciaries; Myth and Reality- Occasionally, I managed enough nerve to write solo, and invariably the result never as good as when I've written with a partner.  This is my first ever solo piece, originally self published but picked up by Retirementsolutionsnow.com. - June - 2013 (Orig. Jan. 17, 2013)

Retirement Income—In-Plan vs. Out-of-Plan Solutions, Which Is Better?

Retirement Income - In Plan vs Out-of-Plan Solutions, Which Is Better?  - This is still today (in 2021) a hot topic, annuities in retirement plans.  We had this published in the Journal of Pension Benefits and it explores Retirement Income solutions, as they exist within 401(k) plans, whether individuals would be served better with those solutions or out-of-plan solutions and provides ideas for how to adequately deliver retirement income for retired Americans.  The 'smart' on this one was my co-author, Dr. Greg Kasten. - Feb. 1, 2013.

How 401k Advisors can Effectively Offer 316 Services - Here's a piece I authored in 401(k) Specialist which discusses the 'at the time' new spate of administrative fiduciary services and a model for retirement plan advisors to gain a competitive advantage.  No co-author on this one, AND you can tell! - June 14, 2016

- Jason Grantz, QPA, QKC, QKA, AIFA

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SECURE ACT 2.0, The 'Pay For', Part 3

 

In the previous 2 posts on this subject, we discussed SECURE 2.0 and highlighted some of my favorite parts.  We're going to wrap up this series with my last two favorite provisions, which interestingly fall on the side of revenue generators.  As a reminder, this is a new piece of proposed bipartisan legislation seeking to improve retirement plans.  While there are more steps to this Act becoming a law, I feel pretty confident that this one has legs, and candidly, that's GREAT news for the retirement plan community and our clients.  I think this will get done in 2021 with implementation of many of the provisions in 2022. 

For a an amazing summary of all of the new provisions contained within the final mark-up, here's a link What's in SECURE 2.0?.

The What:

Committee Chairman Richard Neal (D-MA), along with the Committee’s ranking Republican, Rep. Kevin Brady (R-TX), first introduced the bill, Securing a Strong Retirement Act (SSRA), last October as a sequel to the 2019 SECURE Act. While that version of the bill included some 36 provisions, the new Securing a Strong Retirement Act of 2021 (H.R. 2954) now contains about 45 provisions, including new revenue offsets to pay for the bill. 

My Favorite Few Provisions continued, part 3: 

These final two provisions we're looking at in the series work together in my opinion as they're engineered to create more tax based flexibility for individuals while at the same time allowing immediate tax revenue to be generated to help pay for all of the new benefits.  They are estimating that these provisions could raise as much as $27 billion in new revenue over a 10-year period.  This 10-year period is important because while retirement plan benefits can spread over lifetimes, congress only looks at tax over ten year periods.  One way to think of this is that it's the 'Rothification of Retirement' as is discussed in this excellent piece in Think Advisor. 

SIMPLE and SEP Roth IRAs: Most employers and individuals have heard of the most famous Internal Revenue Code, Section 401(k).  However, many small employers opt not to install a 401(k) because of the costs, risks and compliance requirements.  Back in late 1990's this was addressed by creating a hybrid type employer sponsored retirement plan that took on the characteristics of both IRAs and 401(k)s called a SIMPLE IRA.  While these are lesser known, they can be very valuable benefits and also "starter" retirement plans for business'.  

Under current law a SIMPLE IRAs and Simplified Employee Pensions (SEPS) are solely tax deferred vehicles.  SECURE 2.0 changes this so that they could be designated as Roth.  Like other ROTHs, contributions made in this manner would be subject to current year taxes, but the growth on such contributions would be tax free.  ERISA qualified DC plans (401(k), 403(b), etc.) currently allow for such contributions and this closes the door on that distinction between the two structures.  This proposal applies to tax years beginning after Dec. 31, 2021.  

EMPLOYER MATCH as ROTH too??!!!

Just like the previous provision in reference to SIMPLE IRAs and SEPs, the proposal allows for a new contribution source in 401(a), 401(k), 403(b) and 457(b) plans.  The ROTH EMPLOYER MATCH!  Similarly, just like other ROTH structures, the taxation of this works the same way, the contribution is immediately taxable, and the growth grows tax free and is tax free upon distribution from the plan.  This one is interesting to me not because of the ROTH part, but because these are employer dollars being contributed to an employees plan, BUT will need to be included in the gross income of that employee today.  I suspect the payroll providers are going to have a little programming to do in order to accommodate this on pay stubs and W-2s.  That said, I like it.  My view on ROTH has never been ROTH (After-Tax grows tax free) is necessarily better than traditional deferral (Pre-Tax grows Tax deferred) or vice versa, but rather it allows for strategic tax diversification at retirement which can be highly beneficial during someone's decumulation phase when they're taking distributions.  

This concludes the series on SECURE 2.0.  Please be sure to subscribe to the feed for more blog content in the future.

- Jason Grantz, QPA, QKC, QKA, AIFA

 

 

 

 

 

 

ARE YOU FEELING SECURE? SECURE 2.0, PART 2

In my previous post, I mentioned that it was the start of a three-part series discussing SECURE 2.0 highlighting some of my favorite parts.  As a reminder, this is a new piece of proposed bipartisan legislation seeking to improve retirement plans.  While there are more steps to this Act becoming a law, I feel pretty confident that this one has legs, and candidly, that's GREAT news for the retirement plan community and our clients.  I think this will get done in 2021 with implementation of many of the provisions in 2022. 

For a an amazing summary of all of the new provisions contained within the final mark-up, here's a link What's in SECURE 2.0?.

The What:

Committee Chairman Richard Neal (D-MA), along with the Committee’s ranking Republican, Rep. Kevin Brady (R-TX), first introduced the bill, Securing a Strong Retirement Act (SSRA), last October as a sequel to the 2019 SECURE Act. While that version of the bill included some 36 provisions, the new Securing a Strong Retirement Act of 2021 (H.R. 2954) now contains about 45 provisions, including new revenue offsets to pay for the bill. 

My Favorite Few Provisions continued:

These next two provisions I think work together as they're adjustments to the existing provisions.  Specifically, we're moving back the ages on certain rules allowing greater savings and potentially delaying when taxes need to be recouped which aligns with trends towards working longer and increases in life expectancy over the last several decades.

New Required Beginning Dates for RMDs: What's an RMD?  RMD's or Required Minimum Distributions are the requirements placed on retirees to codify the oldest age they can attain before they MUST start taking distributions from their tax advantaged accounts and start paying taxes.  For many years, really decades, the age was set to 70 1/2.  In the first SECURE ACT it was moved back to age 72.  In this new rule, it piggy back's on this to expand the age ultimately back to age 75.  My take is that I think it's going to be a bit confusing to implement, but I like what they're trying to do.  Essentially, what the rule says is that for those who want to delay tapping their IRAs or retirement plans for as long as possible, they'll have more time depending on what age bracket they fall in.  While I like this idea, I'm not a fan of the 'how' on this as I think it's going to cause confusion and will need care and attention paid to it instead of making it simple.  Here's how it will work.

The Phase-In: The new rules will require a phase in of the required beginning date from the calendar year in which the employee or IRA owner attains age 72 to the calendar year in which the employee or IRA owner attains age 73.  This is ONLY for individuals who attain age 72 after Dec. 31, 2021, and who attain age 73 before Jan. 1, 2029. But if you're not in that window, there's a second and third tier as follows;

The proposal changes such age from 73 to 74 for individuals who attain age 73 after Dec. 31, 2028, and who attain age 74 before Jan. 1, 2032.  With the third tier further increasing the RMD age to 75 for individuals who attain age 74 after Dec. 31, 2031. T

In short, GREAT idea, but this is going to require some attention to detail for practitioners.

Higher Catch-up Limit to Apply at Age 62, 63 and 64: What's Catch-up?  The current rule stipulates that if you a participant has attained age 50, that they can defer more than the statutory limit to their 401(k) plan (and certain other plans).  The deferral limit in 2021 is $19,500 and those over 50 can do an additional $6500 for a total of $26,000. The idea is to help aid workers in "catching up" for the earlier years in their careers where they weren't able to contribute to the maximum.  

In this new legislation it raises the amount of the catch-up contributions to $10,000 for those who have attained age 62, 63 or 64, but interestingly ONLY for those three ages and NOT for those older than 64.  This would apply to those in employer-sponsored 401(k) and 403(b) plans. Similar provisions with different amounts would apply to SIMPLE IRAs. For those aged 50-61, the provision retains the existing catch-up contribution limits. In addition, these changes would also be indexed for inflation like current limits, starting in calendar year 2023. The provision applies to tax years beginning after Dec. 31, 2022.

My take, I very much like the idea here, people are woefully behind on saving for retirement, so anything that allows more money to get put away I'm in favor of.  However, just like the RMD provision, this one is going to require someone to pay attention to ensure that the increase happens precisely in the three-year age window.  I'd like this one to be fixed to basically increase it starting at 62 and not stopping it at 64.  

On our final installment of SECURE 2.0, we're going to address two of the provisions that are categorized as Revenue Generators to help pay for this and keep it as Revenue Neutral as possible. 

- Jason Grantz, QPA, QKC, QKA, AIFA

 

FEELING SECURE? I know I am a little more with SECURE 2.0! Part 1

Greetings all!  Hopefully this new entry into the blog will be the start of a renewed interest in blogging AND, candidly in response to the overwhelmingly positive response I received from many of my clients and colleagues to "blog, blog, blog".  

For my first attempt, I thought I'd tackle the new SECURE 2.0 legislation that went to and came out of committee (House Ways & Means) this week as a multi part series. While there are more steps to this Act becoming a law, I feel pretty confident that this one has legs, and candidly, that's GREAT news for the retirement plan community and our clients.  I think this will get done in 2021 with implementation of many of the provisions in 2022. 

For a an amazing summary of all of the new provisions contained within the final mark-up, here's a link What's in SECURE 2.0?.

The What:

Committee Chairman Richard Neal (D-MA), along with the Committee’s ranking Republican, Rep. Kevin Brady (R-TX), first introduced the bill, Securing a Strong Retirement Act (SSRA), last October as a sequel to the 2019 SECURE Act. While that version of the bill included some 36 provisions, the new Securing a Strong Retirement Act of 2021 (H.R. 2954) now contains about 45 provisions, including new revenue offsets to pay for the bill. 

My Favorite Few Provisions:

As mentioned, while this has 45 provisions, I thought I'd cherry pick out a few of my favorites. These will be discussed one part at a time as part of a series of posts.

Student Loan Payments: In the original version submitted in October it contained a provision that would use the retirement plan ecosystem to encourage younger workers to pay off student loans, a novel and candidly, very good idea.  The original bill however didn't account for a potential negative impact on compliance testing (ADP test).  This new version addresses this problem, clearing the path for employers to adopt this provision effective for 2022. 

So what is this?  Simply, it's a matching program where the employer could create a formula where they would match some/all of what the employee pays off of their student loan. This allows employees with student loan debt to not have to fully choose between saving for retirement OR paying down debt, both important for their short and long term financial well being.  Personally, I love this idea.  Savings rate is by far the most important factor in a successful retirement (Quantifying the Drivers of Retirement Success), and the earlier years are the most important.  One big inhibitor to younger workers participating in plans is the skyrocketing costs of higher education that has occurred over the past few decades leaving many with a huge loan to deal with right at the beginning of their careers.  This new provision can allow many of these employees who are new to the workforce to pay down debt whilst simultaneously not missing out on the employer match and thus being able to get some money saved for retirement. 

The big question, which we'll learn the answer to soon, is whether employers will want to altruistically adopt this OR if they will take the position that participants personal finances are not 'their problem'.  Frankly, the more astute employers will grab this idea and tout it loudly because this is the exact type of benefit that breeds employee loyalty.  I'd be curious as to what others think about this.

Stay tuned for Part 2 of this Series.

- Jason Grantz, QPA, QKC, QKA, AIFA

      

 

It's been a minute.....Terrible Plan Sponsor Behavior Still Persists

Okay folks, I know it's been a while since the last time I wrote on this blog.  Most of the content that I've created over the last 3-4 years ended up published on my employer, Unified Trust's blog and candidly, I'm not sure if this will be a one and done post or if this kick starts a new period of creativity.  But today, something happened that fired me up and I don't believe that the content following would fit over on that blog.  So here goes; 

Terrible Plan Sponsor Behavior Still Persists

Within the Retirement Plan industry we're always trying to coach practitioners and their Plan Sponsor clients on best practices.  Those practices can be practical, i.e. how do we make it easier to run a retirement plan, compliance related; how do we follow the rules OR they can be of the fiduciary nature, procedural and in the best interest of the participants. 

So, what I want to know is HOW in the year 2020 is the following scenario STILL happening????!!!

Earlier today, I received the news that a client who we've had for 7+ years was leaving.  Naturally I was disappointed to learn of this.  They were a good client, never complained and to our knowledge, generally happy.  We were even told as they left that they loved working with us.  This made sense to me, I remember when we first took this client over, they were in the middle of a very painful IRS audit and came pretty close to disqualification.  We helped them through that and were rewarded with a good, somewhat long term client.

Given that background, we asked, why are you leaving?  And the answer was frustrating, a little surprising (but not very), very sad to me as a 25 year industry veteran and fiduciary practitioner.  The client was taking the plan to another vendor (who will not be named here) along with a broker who is most definitely not a retirement plan specialist. The broker happens to reside inside of a large national bank, and while we don't have written evidence of this, we've been told that moving the 401(k) plan was a CONDITION of the employer receiving a bank loan.  That's right, those are the words used, a CONDITION!  In other words, "move us your 401(k) plan OR you don't get the money you need to run your business".  Well, what's the employer to do?

I'm probably writing to an audience of no one but myself, but 'Self' I say, this here is a prohibited transaction and it's not even a new or creative one.  It's as old as 401(k) plans and yet in 2020 it STILL happens.  This is happening in a time when fees have been and continue to be compressed, fiduciary rule making to "protect participants" comes and goes and new structures like Multiple Employer Plans are being constructed to help provide new and better benefit mousetraps.  Yet, the lowest practice of twisting, and leveraging still happens and goes unchecked.

So, I write about it, it's off my chest and I hope that someone reads it knowing that this situation is wrong, yet still common. After all, it's already a practice that violates the ERISA, so what it to be done?  I ask..........

- Jason Grantz, QPA, QKC, QKA, AIFA