Morningstar, PAi Follow DOL Rule with ESG-Driven Pooled Employer Plan

Third-party administrator PAi has teamed up with Morningstar to offer small and medium-sized businesses an employer retirement plan with an ESG overlay.

Plan Administrators Inc. and Morningstar Inc.’s retirement investing division have launched a pooled employer plan comprised of funds that limit exposure to environment, social and governance risks.

The two firms announced that the PEP became available to firms on January 30, after first introducing the concept in October 2021. Chicago-based Morningstar will be the 3(38) investment manager of the plan—responsible for selecting, managing and monitoring the funds—and PAi, which is an Ascensus company, will be the pooled plan provider.

Morningstar and PAi are launching the PEP on the heels of the U.S. Department of Labor finalizing a rule in November 2022 that retirement plan fiduciaries can consider ESG factors when selecting investment for defined contribution retirement plans. It also comes, however, shortly after 25 Republican states filed a challenge to the rule in a Texas federal court, continuing the debate and discussion of ESG investing’s future in retirement savings.

“The Department of Labor ruling is a great win for employers and advisers, as it gives them options to choose investments that not only provide an appropriate diversification and return profile, but also gets employees engaged with their retirement savings and comfortable that their investments are being mitigated against long-term ESG risk,” Brock Johnson, president of global retirement and workplace solutions at Morningstar, said in a statement.

Flying with ESG

The PEP will be offered on PAi’s CoPilot recordkeeping platform, which seeks participant engagement through event-based alert messages, and a separate tool that shows participants how long their savings are expected to last, De Pere, Wisconsin-based PAi said in the announcement.

There are no employers signed up yet for the PEP, but the firms have received a number of interested parties in the option since introducing the idea in late 2021, according to a spokesperson.

Morningstar Investment Management will select and manage the investment lineup for the PEP using the same qualitative and quantitative processes it uses to oversee the investments in 21,756 plan lineups—as of the third quarter of 2022—as part of its 3(38) and 3(21) fiduciary service, according to the firm. Morningstar has also designed a custom target-date model for the PEP that will use the underlying investment lineup to provide a default investment option and a glide path to retirement for participants.

The ESG analysis includes manager interviews and a review of each fund’s Morningstar Sustainability Rating, the firm said. Within its ESG retirement plan methodology, Morningstar notes that it will “focus on selecting funds that work to mitigate material environmental, social, and governance risks that could impact the risk and return of an investment. We do this while also meeting our rigorous selection criteria for retirement investments, including the consideration of the risk of loss and opportunity for gain of a fund in alignment with the plan’s purpose, and assessing how those selections compare to available alternatives.”

PEP 2.0

PEPs were originally introduced in late 2019 with the passage of the Setting Every Community Up for Retirement Act. The retirement plan vehicle was designed with input from the retirement industry as a way to offer retirement plans to small businesses at lower cost and with less administration and fiduciary burden.

In December 2022, the passage of the SECURE 2.0 Act of 2022  made PEPs available for non-profit 403(b) plans as well, extending them to a sector that has previously been familiar with shared-employer benefits through multiple employer plans.

“Working with Morningstar Investment Management will help employers meet the needs of their employees with a lineup that would otherwise be difficult for a plan sponsor or advisor to recreate and manage themselves,” Amy Hermann, director of sales and marketing at PAi, said in the statement.