Compliance July 15, 2020

Democratic Senators Challenge DOL’s Proposed ESG Restrictions

The lawmakers say environmental, social and governance-focused investing allows retirement savers to support long-term change by building a system that rewards and values inclusion and diversity in corporate culture, from the board to the workforce.

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More than a dozen Democratic members of the U.S. Senate have filed and openly published a comment letter addressed to Department of Labor (DOL) Secretary Eugene Scalia, calling on the regulator to dial back its proposed rule seeking to restrict the use of environmental, social and governance (ESG)-themed investments within tax qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA).

The comment letter was published exactly halfway through the 30 day comment period allowed by the DOL, which ends on July 30. Any other interested parties may file their formal comments here.

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Senator Patty Murray, D-Washington, ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, penned the letter, alongside her colleague, Senator Tina Smith, D-Minnesota. Ten other Democratic senators signed the letter, including Ohio’s Sherrod Brown, New York’s Kirsten Gillibrand, Virginia’s Tim Kaine, Massachusetts’ Elizabeth Warren, Wisconsin’s Tammy Baldwin, Pennsylvania’s Bob Casey, Illinois’ Dick Durbin, Minnesota’s Amy Klobuchar, New Jersey’s Cory Booker and California’s Dianne Feinstein. Vermont’s Bernie Sanders, an independent, also signed the letter.

In the comment letter, the Democratic lawmakers say the rule as proposed will unduly discourage financial advisers from considering ESG criteria as they go about their business serving retirement plan investors. They urge the DOL to wholly withdraw its proposed rule, emphasizing how ESG investing can be important in considering practices that can impact a company’s performance. The letter points to factors such as greater diversity, and discusses how it can serve as a tool for long-term change in the fight against problems such as racial and economic inequality.

“We are at pivotal moment in the fight against systemic racism in our country,” the letter states. “Yet, while people across the country demand accountability and reach for available tools to fight for racial and economic equity—from advocating for sweeping federal reforms to address systemic racism to taking smaller personal steps like supporting Black-owned businesses—the [DOL] is moving in the opposite direction. … By restricting ESG investing, the [DOL’s] proposal would undermine a powerful tool that leverages trillions of dollars a year to drive positive social change.”

Simply put, the senators believe plan sponsors and fiduciaries “should be able to consider whether or not companies have established diverse leadership teams, whether they foster inclusive or discriminatory workplaces, and whether they engage in a variety of other practices that may impact a company’s performance.”

“ESG-based investing is a key way to grow a plan’s assets in a manner consistent with its corporate principles without sacrificing investment returns,” the letter states. “Racial justice, corporate diversity and other ESG factors are increasingly a consideration in investment decisions. Further, contrary to the skepticism and assumptions underlying the department’s proposed rule, ESG investments often outperform traditional investments and the overall financial markets, including over the past several years, showing investors can both achieve strong returns while driving positive change.”

In filing their comments, the Democratic senators join in a chorus of concerned stakeholders.

In a statement about the proposed rule shared shortly after its publication, Robert Smith, president and chief investment officer (CIO) of Sage Advisory Services in Austin, Texas, said, “The language is written in such a way that ESG-oriented funds are given second-class status when considering investment alternatives for a plan.” Smith pointed out that Millennial investors and defined contribution (DC) plan participants in general “would prefer a choice architecture that better reflects their investment attitudes and goals.” He concluded, “We are not sure this statement truly reflects those well-supported long-term demographic trends that will continue to affect the DC plan world in the future.”

Striking a similar tone, Lisa Woll, CEO of the U.S. Forum for Sustainable and Responsible Investment (US SIF) in Washington, D.C., shared the following statement: “The proposed rule suggests, but without evidence, that the growing emphasis on ESG investing may be prompting plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan. However, the DOL proposal is out of step with professional investment managers, who increasingly analyze ESG factors precisely because of risk, return and fiduciary considerations.”

Woll noted that three-quarters of asset managers polled by US SIF in 2018 cited the desire to improve returns and to minimize risk over time as motivations for incorporating ESG criteria into their investment process. Fifty-eight percent of asset managers cited their fiduciary duty obligations as a motivation.

Compliance July 15, 2020

Latest 401(k) Excessive Fee Suit Targets Matthews International

Though similar to other lawsuits, arguments about excessive recordkeeping fees are featured early and prominently in the complaint and strongly criticize the recordkeeper, even though it is not a defendant in the case.

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Reading through the latest spate of lawsuits alleging excessive fees in retirement plans can seem like déjà vu—identical wording with different defendant and fund names plugged in.

The latest suit against Matthews International Corp., its board of directors and its retirement plan board in many ways is no exception. However, rather than including just a small section about excessive recordkeeping fees toward the end of the complaint—which is the normal course for most of these lawsuits—such arguments are featured early and prominently in this matter, and the complaint strongly criticizes the recordkeeper Wells Fargo by name, even though it is not a defendant in the case.

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Similarly to other recently filed lawsuits,  the complaint alleges that the defendants breached the Employee Retirement Income Security Act (ERISA) fiduciary duties they owed to the plan and its participants by, among other things, authorizing the plan to pay unreasonably high fees for recordkeeping; failing to objectively and adequately review the plan’s investment portfolio with due care to ensure that each investment option was prudent, in terms of cost; and maintaining certain funds in the plan despite the availability of identical or similar investment options with lower costs and/or better performance histories.

In addition, it says the defendants failed to use share classes for mutual funds offered by the plan that charged lower fees and consistently achieved higher returns. The complaint also says the defendants generally chose for the plan “more costly ‘actively managed funds’ rather than ‘index funds’ that offered equal or better performance as substantially lower cost.”

The complaint notes that the plaintiff did not individually select funds for her 401(k) plan, but instead selected an approach based on risk and then had her portfolio constructed by the defendants, with the help of the recordkeeper and/or consultants.

The complaint lists a range of services provided by recordkeepers to defined contribution (DC) plans and claims that, “Many of these services can be provided by recordkeepers at very little cost. In fact, several of these services, such as managed account services, self-directed brokerage and loan processing, are often a profit center for recordkeepers.” The lawsuit alleges that the defendants failed to prudently manage and control the plan’s recordkeeping costs by failing to track the recordkeeper’s expenses; identify all fees, including direct compensation and revenue sharing; and perform a request for proposals (RFP) process at regular intervals.

The complaint says Matthews International paid higher recordkeeping fees to both Wells Fargo, the recordkeeper for its 401(k) plan since 2017, and former recordkeeper PNC in the years 2014 through 2016. After that is when the lawsuit diverges into a negative discussion about Wells Fargo.

“Recordkeeping costs are almost certainly higher due to undisclosed revenue sharing arrangements,” the complaint says. It then says that Wells Fargo, on its Form 5500s, checked the box that it charges fees in addition to disclosed recordkeeping fees that it chose not to disclose.

The complaint pointed to fines Wells Fargo has paid unrelated to its recordkeeping business before noting that the recordkeeper has been sued by its own 401(k) plan participants.

Once the lawsuit refocuses on the allegations against the named defendants, it specifically calls out the use of a Wells Fargo stable value fund in the plan, saying “there are other almost identical products from other vendors” with lower fees.

“Defendants had the opportunity and duty to evaluate this investment in advance; this is not a case of judging an investment with the benefit of hindsight. As an ERISA fiduciary, defendants had an obligation to monitor the fees and performance of the insurance companies’ stable value fund and to remove or replace it where a substantially identical investment option could be obtained from the same provider at a lower cost,” the complaint states.

Wells Fargo declined to comment about the lawsuit. At the time of publication, Matthews International had not yet responded to a request for comment.

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