Morningstar - Q2 2022 - 16

Dispatches
we discussed in detail in a 2020 paper,3
Does Investing in ESG
Hurt Pension Plans?
In March, I testified in front of a U.S. House
subcommittee that was convened to clarify
regulations on how 401(k) plans (among other
Erisa-covered plans) should consider ESG in
selecting their investments.
Members of Congress skeptical of ESG investing
repeatedly cited a study from the Center for
Retirement Research at Boston College to
bolster their view that ESG investing would hurt
401(k) plan participants. The paper claims that
" state mandates and ESG policies reduce returns
by 70 to 90 basis points " in public pension plans.
While interesting, the paper does not offer the
kind of evidence that critics of ESG investing
suggest it does. In large part, this is because
public pension plans have a variety of
investment mandates that do not reflect the
type of the ESG analysis that private plans might
wish to use if given more regulatory clarity.
The paper also treats state mandates (such as
divesting from tobacco companies) and
approaches that incorporate ESG analysis to
maximize risk-adjusted returns as the same.
Further, the study does not provide evidence
that retirement plans deliberately incorporating
ESG information and analysis have in fact
performed worse than plans that do not.
The authors do try to draw a distinction between
ESG policy and ESG mandates at times, but even
then, they concede that " ESG policies for public
plans run the gamut, " meaning they capture a
variety of approaches. They also find that only
8.5% of plans (out of a sample of just 176 plans)
offer ESG-only policies, so they may not have
had enough variation to draw their conclusions.
In sum, the evidence that skeptics provide to
show that plans should not consider
ESG information does not appear to hold up.
Aron Szapiro
16
pooledemployer
plans have the potential to reduce
fees for participants as they grow, but there are
challenges due to the complex structure of
allowing different employers to operate in one
plan. It's been a little more than a year
since the plans started, and so far, few employers
have joined.
EXHIBIT 2
All-In Costs, Small Plans and All Other Plans
Small Plans
All Other Plans
40%
Small Plans
All Other Plans
20
30
40%
20
30
All-In Cost (in Basis Points)
21-
40
41-
60
41-
60
All-In Cost (in Basis Points)
21-
Plans
EXHIBIT 3
Participants
What Plans Charge and What Participants Pay
Plans
Participants
40%
20
30
10
40%
20
30
Total Cost (in Basis Points)
21-
40
40
41-
60
41-
60
Total Cost (in Basis Points)
21-
0-
20
0-
20
61-
80
61-
80
81-
100
81-
100
101-
120
101-
120
Morningstar investment data matched with Form 5500 data for 2019.
121-
140
121-
140
141-
160
141-
160
161-
180
161-
180
181-
200
181-
200
201+
10
201+
0-
20
0-
20
61-
80
61-
80
81-
100
81-
100
101-
120
Source: Morningstar investment data matched with Form 5500 data for 2019.
40
101-
120
121-
140
121-
140
141-
160
141-
160
161-
180
161-
180
181-
200
181-
200
201+
10
201+
It's All About Assets
Although we often think about plans in terms
of the number of participants, it's really all
about the amount of assets a plan has. Assets are
what give plans leverage with fund companies
to offer low-fee investment options to participants.
The new pooled-employer plans are an
opportunity for smaller businesses to increase
10
3 Mitchell L. & Szapiro, A. 2020. " Paperwork or Panacea. " Morningstar white paper. https://www.morningstar.com/lp/
paperwork_or_panacea

https://www.morningstar.com/lp/paperwork_or_panacea https://www.morningstar.com/authors/2015/aron-szapiro https://www.morningstar.com/lp/paperwork_or_panacea

Morningstar - Q2 2022

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