Products June 28, 2018

Investment Products and Services Launches

Transamerica Launches Stable Value Account for Retirement Plans; TD Ameritrade to Provide CLS Fund Models on Market Center Platform; Fidelity Offers Third ESG Investing Option; and more.

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Transamerica Launches Stable Value Account for Retirement Plans

Transamerica announced the availability of a new stable value general account option for retirement plans. The option empowers employers by offering flexibility to develop a stable value solution for their defined contribution (DC) retirement plan participants based on their goals and objectives for the plan and stable value option. For example, the new solution allows plan sponsors to customize the contract termination provision. 

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The Transamerica Guaranteed Investment Option is backed by the general account holdings of Transamerica Life Insurance Company. Crediting rates are set based on current economic and market conditions and by the contract provisions selected by the plan sponsor at contract issuance. 

The Transamerica Guaranteed Investment Option is available to most large market retirement plans administered by Transamerica, including 401(k), 403(b), and 457 plans. There are no minimum deposit requirements.

“As retirement plan participants approach retirement, many look to cash equivalents because this asset class does not have the same risk factors associated with stocks or bonds. The Transamerica Guaranteed Investment Option is unique because it allows plan sponsors to pre-select certain provisions that can elevate the stated return rate,” says Joe Boan, senior vice president, executive director, Workplace and Individual Market Distribution at Transamerica. “The periodic change in rates give people confidence that they are receiving a competitive rate as markets change.”

TD Ameritrade to Provide CLS Fund Models on Market Center Platform

CLS Investments (CLS) announced that its CLS-managed American Funds and AdvisorOne Funds models are available on TD Ameritrade Institutional’s Model Market Center.

TD Ameritrade InstitutionaI’s Model Market Center, officially launched earlier this year, provides independent registered investment advisers (RIAs) with access to third-party investment models in one central location. 

Its model offerings, available on Model Market Center, offers Risk-Budgeted, globally diversified active management through either the Capital Group’s American Funds, CLS-managed AdvisorOne Funds, or a combination of the two. The models cover a range of risk tolerance levels for those seeking to accumulate wealth or protect their assets from severe market declines.

“Capital Group’s offering of American Funds results from a collaboration that has spanned with CLS for more than two decades,” says Capital Group Head of RIA Distribution Eric Grey. “We’re thrilled that thousands of RIAs on TD Ameritrade’s Model Market Center now have access to American Fund portfolios. We look forward to our continued partnership with CLS and TD Ameritrade to offer advisers with the resources to maximize their clients’ portfolio potential.”

Fidelity Offers Third ESG Investing Option

Fidelity Investments has extended its suite of sustainability-focused index funds with a new fixed income offering: Fidelity Sustainability Bond Index Fund. The launch of this third environmental, social and governance (ESG) offering, the others being Fidelity U.S. Sustainability Index Fund (FENSX) and Fidelity International Sustainability Index Fund (FNIYX), makes Fidelity the only firm to offer ESG index mutual funds in every major asset class, the firm says.

The sustainability bond index fund is available directly to individual investors, as well as through third-party advisers (TPAs) and workplace retirement plans. The share classes are offered with total net expense ratios of .20% for the Investor Class (FNASX), .13% for the Premium Class (FNBSX), and .10% for the Institutional Class (FNDSX). In addition to the firm’s three sustainability index funds, Fidelity’s ESG investment offerings include an actively managed mutual fund—Fidelity Select Environment & Alternative Energy Portfolio—and Fidelity’s FundsNetwork program.

Colby Penzone, senior vice president for Fidelity’s Investment Product Group, says an emphasis among ESG investing will sprout in the impending future, as waves of younger investors hit the market looking for socially conscious options.

“We know from speaking with clients, advisers and employers that interest in ESG investing continues to grow,” she says. “The market is expected to continue to grow in the coming years as 86% of Millennials are interested in sustainable investing, and 90% are interested in pursuing sustainable investments if an option in their 401(k) plans.”

Vanguard ESG ETFs to Commence Trading in September

Vanguard has filed a preliminary registration statement with the Securities and Exchange Commission (SEC) for Vanguard environmental, social and governance (ESG) U.S. Stock exchange-traded fund (ETF) and Vanguard ESG International Stock ETF. The latest ETFs will complement Vanguard’s existing FTSE Social Index Fund and are expected to begin trading in September.

Vanguard ESG U.S. Stock ETF will seek to track the FTSE U.S. All Cap Choice Index, a market-cap weighted benchmark comprising large-, mid-, and small-cap U.S. stocks screened on specific environmental, social, and governance criteria. Vanguard ESG International Stock ETF’s target benchmark will be the FTSE Global All Cap ex U.S. Choice Index, a market-cap weighted benchmark comprising large-, mid-, and small-cap stocks in developed and emerging international markets (excluding the U.S.) screened on specific ESG criteria. The estimated expense ratios for the new ETFs are 0.12% and 0.15%, respectively, making them among the lowest-cost ESG offerings available to investors.

“The adoption of ESG investing has accelerated in recent years, and more investors are looking for opportunities to align their investment choices with their values,” says Jon Cleborne, head of Vanguard’s Portfolio Review Group. “Our new ETFs marry Vanguard’s characteristic low-cost, diversified investment approach with a rigorous ESG screening process.”

In the development of the benchmarks, FTSE screens its broad domestic and international stock indexes and excludes stocks of companies in the following industries: adult entertainment, alcohol, tobacco, weapons, fossil fuels, gambling, and nuclear power. The construction methodology also screens the stocks of companies that do not meet certain diversity criteria as well as labor, human rights, anti-corruption and environmental standards defined by the U.N. global compact principles.

 

WBCSD Creates ESG-Centered Alignment with Investment Companies

The World Business Council for Sustainable Development (WBCSD) has launched “Aligning Retirement Assets” (ARA), an initiative enabling companies to better align retirement assets, including defined benefit (DB) and defined contribution (DC) plans, with their overall sustainability goals by integrating environmental, social and governance (ESG) considerations.

As an aspirational goal, the project envisions that 1% ($10 billion) of WBCSD member companies’ total retirement assets (estimated at $1 trillion) will be invested in ESG-themed funds by 2020.

Allianz Global Investors, BlackRock, Legal & General Investment Management (LGIM), Mercer and Natixis have joined the initiative’s steering committee to contribute best practices on ESG, helping to  educate member companies on incorporating sustainable strategies in their retirement plans.

Through advancements in sustainable investing, initial data indicates it may be possible to create total portfolio solutions that enhance risk-adjusted returns in the long run without compromising short-term return goals. This long-term outlook matches well with the long duration of retirement investments.  Additionally, companies who have high ESG characteristics may also be more resilient through a downturn. 

Moreover, a clear majority of all employees who work at Fortune 1000 companies expect their 401(k) plans to offer funds aligned with their own companies’ sustainability commitments, with this expectation rising to 66% with Millennials and 67% among women, according to a soon-to-be-released study by Povaddo. Such interest has the potential to increase participant engagement and savings rates.

“With low interest rates and increased longevity, companies need to motivate more people to participate in pension plans and 401(k)s to keep the system healthy,” says Irshaad Ahmad, head of Institutional Europe at Allianz Global Investors. “Sustainability helps build the context to influence the behavior of plan participants, especially with Millennials who are keenly focused on values.”

Compliance June 28, 2018

Second Amended ERISA Complaint Targeting Xerox HR Solutions Tossed by District Court

Considering a second amended complaint much broader than the original, a district court has once again rejected allegations by participants in a Ford Motor Company retirement plan that Xerox HR Solutions, the recordkeeper, violated the Employee Retirement Income Security Act.

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Xerox HR Solutions has won dismissal of a complicated Employee Retirement Income Security Act (ERISA) lawsuit filed by participants in a Ford Motor Company retirement plan in the U.S. District Court for the Eastern District of Michigan, Southern Division.

In the original complaint, Xerox was accused of collecting excessive fees and engaging in a type of pay-to-play arrangement with Financial Engines Inc., which was not actually named as a defendant but still factored significantly into the allegations of wrongdoing.

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To say that the litigation has gone through some twists and turns is a definite understatement. The original complaint was amended once and failed, with the court soundly rejecting the plaintiffs’ allegations. However, the court allowed limited leave for repleading of certain allegations. This brought before the court the plaintiffs’ second—and significantly broader—bite at the apple. As the text of the new decision states, the second amended complaint included new allegations and new defendants not contemplated in the original complaint, and plaintiffs accordingly had sought leave to include these new items in the second amended complaint.

For their part, the Xerox defendants opposed the amendments and moved once again to dismiss the lawsuit, leading to the current decision, for which the court determined that a hearing was unnecessary. In short, because the plaintiffs’ second amended complaint fails to address the deficiencies identified in the court’s prior order, and because the proposed amendments are therefore deemed futile, the court has denied further leave to amend the complaint and has granted the Xerox defendant’s second motion to dismiss.

The text of the new decision says the amended complaint has failed because “it is an attempt to replead dismissed counts,” and because it includes an entirely new cause of action, violation of the Racketeer Influence Corrupt Organizations Act. Also problematic, it includes new parties, Xerox Corporation and Conduent, Inc.

“Having duly considered plaintiffs’ three bases to impute fiduciary status on defendant, the court rejected each,” the decision explains. “But it granted leave to replead as to one: whether defendant acted as a fiduciary by exercising de facto control over the election of Financial Engines as a fiduciary for the plans, per Hecker v. Deere & Co. The court explained that it was possible for a party to act as a functional fiduciary to the extent that the party exercised control over the means in which another fiduciary would act in a fiduciary capacity. In so doing, the court provided some caution—it noted its doubt that anything short of an allegation that defendant was directly involved in the Ford-Financial Engines negotiations would rise to the level of de facto control sufficient to impose liability.”

Plaintiffs’ second attempt has fared no better on this score.

“The second amended complaint essentially alleges that defendant used its influence as the Ford plans’ record keeper to encourage the Ford Plans to hire Financial Engines,” the decision states. “They claim that defendant said it would work with no other automated investment service provider on its platform, thereby requiring the Ford Plans to switch record keepers—a difficult and complex undertaking—if they wanted to use a different provider. And, according to plaintiffs, defendant marketed Financial Engines to the Ford plans, declined to market any of Financial Engine’s competitors, and encouraged the Ford plans to use Financial Engines. But these terms, chosen by plaintiffs, belie the sort of influence that defendant wielded here.”

The text of the decision further states that the defendant “did not choose Financial Engines for the Ford plans; the Ford plans did. … And Plaintiffs have alleged nothing to suggest that the decision was not ultimately up to the Ford plans to make.”

The full text of the lawsuit, which includes much more detailed discussion of the fiduciary breach claims and the rejected RICO allegations, is available here.

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