Data & Research June 20, 2023

Vanguard’s ESG Support Half That of BlackRock, State Street

Of a sample of shareholder proposals linked to ESG, Vanguard opposed almost three-quarters.

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Investors who prefer to work with managers that support a majority of important environmental, social and governance resolutions would find BlackRock Inc. and State Street Corp.’s shareholder proxy voting decisions more favorable than those of the Vanguard Group Inc.’s, according to a new report by Morningstar Inc.

Morningstar’s research split 100 resolutions into six topics, both environmental and social. The research considered two environmental topics: climate change and “other” environment-related issues, such as water risk, use of plastics and deforestation. The four social topics were: civil rights and racial equity; human rights and ethical use of technology; political influence and activity; and workplace equity. Votes considered in the dataset occurred from March 2021 through March 2023.

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According to the research, BlackRock and State Street supported a slight majority of 100 proposals, with 55 and 60 approvals, respectively. On the other hand, Vanguard opposed nearly three-quarters of the proposals, with 72 rejections.

Vanguard voted “Against” all 11 resolutions requesting civil rights audits or racial equity audits, as well as all against six environment-related resolutions addressing non-climate issues. Both BlackRock and State Street supported more than two-thirds of resolutions covering these topics.

Regarding human rights and the ethical use of technology, State Street demonstrated a significantly higher level of support, with 92% approval for the 13 resolutions. In comparison, BlackRock and Vanguard showed lower levels of support, at 31% and 7%, respectively.

BlackRock exhibited the highest support among the three firms for civil rights and racial equity resolutions, with a 73% approval rate, as well as for workplace equity resolutions, with 69% approval.

Morningstar noted that the reasons behind firms’ choices to support or reject specific resolutions are often more nuanced than a “For” or “Against” vote can convey.

“Although the [Vanguard’s] record of support for key ESG shareholder resolutions continues to be lower than comparable peers, its disclosure of the rationale behind such voting decisions is strong,” Mahi Roy, associate manager research analyst, said in a statement.

Vanguard frequently advocated for increased diversity at the board level and often supported shareholder requests for more detailed reporting on diversity, equity and inclusion efforts. On resolutions seeking racial equity and civil rights audits, Vanguard often expressed satisfaction with the ongoing efforts of the companies in question to reform DEI practices.

Overall, the voting practices of BlackRock, State Street and Vanguard on ESG resolutions exhibited varying degrees of support. Morningstar suggested investors should consider these differences and the firms’ rationales to align their investment preferences with managers that best reflect their ESG priorities.

In Practice June 20, 2023

Know Your GLWBs: Assessing Annuity Vehicles as In-Plan Income Options

In-plan guaranteed retirement income options are much discussed, but less often implemented. Here are resources for evaluating and implementing the insured in-plan option.

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The U.S. Department of Labor’s Employee Benefits Security Administration guidance notes in its “Meeting Your Fiduciary Responsibilities” publication that the “duty to act prudently is one of a fiduciary’s central responsibilities under ERISA. It requires expertise in a variety of areas, such as investments.” Furthermore, “Prudence focuses on the process for making fiduciary decisions.”

Plan advisers and defined contribution  plan sponsors are likely to have an established process for evaluating investments as candidates for a plan’s lineup. But the relative rarity of in-plan annuities that include a guaranteed lifetime withdrawal benefit, or GLWB, option makes it less likely that fiduciaries will have an evaluation process in place for those products. GLWBs’ complexity adds another challenge, because the products continue to evolve with new variations.

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Fortunately, there are resources available online from the Institutional Retirement Income Council and from Morningstar Center for Retirement & Policy Studies to help develop a prudent evaluation process. Additionally, a recently launched consulting service is offering to help advisers and sponsors deal with in-plan annuities and insured lifetime income options.

A Preliminary Screen

Before deep-diving into insured in-plan options, it’s worthwhile for sponsors to consider if participants will benefit from an annuity; Morningstar’s research has found that annuities did not benefit all participants. Higher-wealth participants could “more or less self-insure against longevity risk,” and “annuities are also not that beneficial for participants for whom Social Security or an inflation-adjusted pension provides a high level of income relative to their expenses,” according to the Chicago-based financial services firm. For these participants, the “existing guaranteed income stream already provides protection against market risk and longevity risk.”

Also, GLWBs are not the only in-plan lifetime income options available, and they might not be the best solution for every situation. Morningstar’s September 2022 report, “The Retirement Plan Lifetime Income Strategies Assessment,” compared the performance of seven lifetime income strategies, including GLWBs, against four metrics using simulated plan participants’ lifetime retirement outcomes:

  • Protection against market risk;
  • Protection against longevity risk;
  • Protection against high inflation; and
  • Performance under favorable market conditions and shorter retirements.

GLWBs received a medium performance ranking for protection against longevity risk and high rankings for inflation protection and performance under favorable market conditions and shorter retirements. However, they earned a low ranking for protection against market risk, which is surprising, given insurers’ emphasis on that aspect of GLWBs’ benefits.

For plans that decide to review GLWBs, an IRIC website white paper, “Fiduciary Considerations for Insured Retirement Income Products: Focus on Guaranteed Withdrawal Benefits,” by Fred Reish and Bruce Ashton, attorneys with Faegre Drinker Biddle & Reath LLP and Alta Trust, respectively, is a good starting point. The authors focused on guaranteed minimum withdrawal benefits, GMWBs, which have a review process that also applies to GLWBs.

Reish and Ashton discuss six factors to consider:

  • Insurer’s financial strength: Is it reasonable to believe the insurer will be able to make the future payments it guarantees?;
  • Premium cost and other fees and expenses of the underlying investment option;
  • Product features, generally;
  • Portability for participant to another plan or IRA; and
  • Product education provided by insurer for participants.

Getting Into Details

The IRIC provides several additional resources for in-depth comparisons and evaluations of retirement income options. The Selected DC Income Products and Services table, updated in August 2021, compares 17 lifetime income options, including four with GLWBs, across dozens of attributes. Although the table does not include the newest products, it is still an extensive and valuable due diligence template.

Another IRIC resource comes in product fact sheets for 14 specific income products. The NCIT American Funds Lifetime Income Builder Target-Date Series Fact Sheet, for instance, includes details on product description, distribution channels, income benefits, liquidity and education for participants. 

Working With the Data

A product’s specific details are essential for due diligence, but advisers should not rely solely on the numbers, says Martin Schmidt, principal of MAS Advisors in Chicago. He cites advisers’ and sponsors’ focus on fees as an example. Schmidt understands the need to consider fees, but he emphasizes other features, such as the benefit amount to be paid for a given fee and the participants’ control of their assets. Participant education is also important, because participants need to understand that they will reap a GLWB’s full benefit only if they stay with the product: “If you get out of the product, you lose all of your accrued benefits,” he says.

Wade Pfau, Dallas-based co-founder of RISA LLC and author of “Retirement Planning Guidebook,” agrees that simply comparing GLWBs’ fees is insufficient. A better approach is to determine how much guaranteed income the contract will provide for the fees it charges, starting with the worst-case scenario in which the participant earns only the guaranteed minimum. Also, there may be a trade-off between lower downside return guarantees and more upside potential, he adds.

Michelle Richter-Gordon, IRIC’s executive director, stresses that the evaluation process should not begin with the product and then be traced back to the needs of the plan.

“Are the needs of the plan to serve the near-retiree population, the already in-retirement population or the population that is saving towards an income?” she asks. The plan’s objectives and participant composition will “impact what types of solutions the adviser considers or plan sponsor considers.”

The IRIC’s product comparison worksheets illustrate the large number of details that go into a GLWB review. For advisers and sponsors who want to outsource that level of detail, Richter-Gordon and Mark Chamberlain, founder of the Open Architecture 2020 Group, recently launched a new registered investment adviser, Annuity Research & Consulting, to help advisers and sponsors get through the annuity selection process. The firm will charge hourly and project-based fees, and it can serve as fiduciaries in a 3(21) or 3(38) capacity or as a non-fiduciary resource.

GLWBs or GMWBs?

The GMWB and GLWB acronyms are sometimes used interchangeably, but their benefits differ. Both options provide a minimum level of income or withdrawal amounts, regardless of an account’s investment performance. A GLWB provides a guaranteed income for life, even if the participant’s account value is depleted. A GMWB guarantees a return of invested principal through annual withdrawals until the account’s invested amount is depleted.

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