“Employees’ financial insecurity strongly contributes to anxiety that can reduce productivity.” Michael Johnson and Tom Tropp outline investment and fiduciary considerations to help plans support employee and organizational wellbeing.
Many employers agree there’s a sound business case for helping employees improve their financial wellbeing, especially in support of retirement. Now, as the path to economic security continues to narrow for more Americans, the ethical rationale has become more widely accepted. Stats and stories about the precarious state of personal financial solvency are regular features in the media — including the inability of some people to absorb even a small financial setback, or the plight of older workers who are poorly prepared for retirement.

OWTI imageMore organizations are starting to understand firsthand that employees’ financial insecurity strongly contributes to anxiety that can reduce productivity. And a recent survey analysis shows that leading employers are more likely to invest in employee financial wellbeing.¹,² This finding suggests that, overall, they see greater value in reducing stress on the job to support both productivity and on-time retirement. Helping employees retire on time is a bedrock component of the social contract between employers and their workforce — and serves the financial interests and future opportunities of both.

The defined benefit dilemma
Whether or not an employer continues to offer a defined benefit (DB) pension plan is a big factor in shaping their employee retirement responsibilities. Overall investment in this benefit is dwindling, but some level of commitment endures for many plans that remain a core part of retirement programs. Employers typically wrestle with several DB plan maintenance issues, including longevity. For instance, they may debate whether to keep the plan open only to existing employees — or terminate it and transition participants to a defined contribution (DC) alternative. As they work through the questions, communicating their decisions to plan participants is critical.

Employers that continue to administer DB plans carry important fiduciary responsibilities, not the least of which is the fundamental duty to ensure a plan is adequately diversified. This duty carries the expectation for an investment program that’s structured to increase the plan’s likelihood of meeting its obligations. And it implies making adequate employer contributions of cash or real property and pursuing a reasonable investment strategy — while paying close attention to risk controls and plan costs. Asset diversification is part of that strategy.

One of the most important considerations in developing the DB plan’s investment strategy is to explicitly determine the board’s appetite for risk. Choosing the lowest-risk portfolio to achieve a targeted rate of return isn’t always the best course. Some plan sponsors are better off taking on greater investment risk than others — if they’re in a position to more readily make up any shortfalls in plan assets. For these employers, their optimal portfolio would involve both higher risk and higher expected returns. Those with less risk tolerance should pursue a more conservative investment strategy with lower expected returns.

The defined contribution difference

The considerations are somewhat different for employers that offer DC plans. Participants are in charge of their investment decisions, so the plan sponsor’s fundamental objective is to enable them to make appropriate decisions without being overly prescriptive.

In practice, that means supporting employees by providing:

  • Employer matches along with resources that inform and encourage adequate savings contributions
  • A range of cost-effective investment options that are robust but not overwhelming
  • Ready access to education, tools and advisors for help in building portfolios that align with investment goals and risk tolerance

Socially responsible investments

Considerations may go beyond risks, returns and plan costs when evaluating DB or DC investment options. There’s a growing interest in socially responsible funds and related investment strategies that align with organizational or individual employee values. The common cause of these funds and strategies is a desire to “do well” as investors and “do good” as conscientious citizens. However, there are a number of factors that employers and plan sponsors should consider if they want to invest in these funds or make them available to employees.

More diligent due diligence

As with any investment strategy, the objective for socially responsible funds is to optimize across a variety of desired attributes, including the expected growth and stability of the underlying assets. Yet many of these funds have a relatively short track record — often less than a decade — making it impossible to evaluate past performance against benchmarks over multiple business cycles. This increases the burden of fiduciary responsibility for employers, who need to evaluate the soundness of the funds and the potential trade-offs involved in their investment strategies.

Selective focus

Socially responsible funds often exclude companies from their investment portfolios based on the perceived societal impact of their products. Familiar examples are producers of guns, tobacco products or fossil fuels. Other criteria such as the broader behavior of the company as a corporate citizen are not typically considered — possibly because defining characteristics are less apparent. However, corporate behavior does impact society, and there’s substantial evidence that it is an important predictor of an organization’s sustained success.

Ratings game

Investment decisions should be based on independently verifiable data, and it’s important to understand how the data for nonfinancial investment criteria is developed. In recent years, an abundance of self-designated, independent evaluators of company performance have entered the market — specializing in social interest areas from carbon footprints to the ethical treatment of animals. The intent of their ratings is to influence the decisions of potential employees, customers or investors about whether to work for, buy from, or invest in the company.

One way for employers to determine the legitimacy of evaluators is to consult with a group of peer companies across a wide range of industries. They should then prioritize a select few whose evaluations are likely to be the most relevant to their own employees, customers, investors and other stakeholders.

Although the interest in socially responsible funds has increased the complexity of investment decisions, the bottom line is still the same — employers need to steadfastly exercise their fiduciary responsibilities in managing their retirement plans. For DB plans, that includes making sound investment decisions on behalf of employees and plan beneficiaries. For DC plans, it includes providing a set of investment options that meet employees’ needs, and then helping them make appropriate decisions.

This article is an excerpt from our 2019 Organizational Wellbeing & Talent Insights Report – U.S. Edition.

Michael Johnson
National Practice Leader, Investment & Fiduciary Consulting

Mike is responsible for guiding development and delivery of the firm’s capabilities across a full range of institutional investment and fiduciary services. He also provides broad-based investment consulting advice informed by his institutional and retail securities experience, and his expertise in union/Taft-Hartley matters and employee benefit plans.

Tom Tropp
Corporate Vice President, Ethics & Sustainability

As internal ambassador of ethics and sustainability, Tom visits offices around the world, engaging with Gallagher employees about the company’s shared values and the role of ethics in business. He is also the liaison to the United National Global Compact, the Ethisphere® Institute, the Boston College Center for Corporate Citizenship and other organizations dedicated to the cause of corporate social responsibility.

¹Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Midsize Employers,” April 2019
²Arthur J. Gallagher & Co., “Best-in-Class Benchmarking Analysis for Large Employers,” April 2019
³Transamerica Center for Retirement Studies, “18th Annual Transamerica Retirement Survey,” June 2018