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How ESG Can Really Impact the 401(k) Industry—Beyond Investing

The vast difference between a being a fiduciary and a steward.

Two major concepts dominating the 401(k) landscape these days are ESG investing and the DOL fiduciary rule set to be enforced this month.

And while ESG investing is important, applying the “G” or governance concept to advisors’ and providers’ businesses could have a much more dramatic impact as will advisors who act as stewards rather than a fiduciary.

Fiduciary is rules based so advisors can comply with the letter of the law but skirt the intent. Stewardship is ethics based with the important ingredients of transparency, being real with clients and prospects defined as being open, honest and candid on subjects difficult to discuss, as well as putting other’s interest first even if it might hurt our bottom line.

Governance, the sometimes-forgotten part of ESG, means deploying good governance. Bad governance, epitomized by VW during their emission scandal and Facebook due to the of misuse of data, leads to mismanagement, unnecessary risk taking and the inability to capitalize on opportunities.

So what does this have to do with RPAs and providers?

I often hear that 401(k) professionals feel fortunate to have a noble job to help people prepare for retirement and manage difficult financial issues. That privilege comes with an obligation, however. We are not selling shoes here or making movies.

Rather than just complying with fiduciary rules and fulfilling legal obligations, we need to ask ourselves, ‘is our business designed to help people or maximize profits?’ These two goals are not always in conflict but when they are, which one prevails?

Are we transparent with all the conflicts that exist in our business such as marketing? The lack of transparency is why annuities are having such a hard time gaining traction in DC plans. Let’s not make the same mistake.

Do we confront difficult issues with clients or tell them what we think they want to hear to get us hired or maintain the relationship? For example, do RPAs recommend that clients conduct due diligence on their own fees and services with an independent third party?

For too long, the DC industry has taken advantage of the lack of knowledge and interest by smaller and mid-market DC plan sponsors. Not fee-disclosure rules but advisors who aggressively pushed record keepers and money managers were the reasons that prices and service improved, weeding out the pretenders.

Plan sponsors are waking up as benefits, especially financial ones and particularly retirement planning at work has become a strategic tool to recruit and retain workers as well as improve morale and productivity.

As RPAs evolve their compensation to flat-fee-plus-costs for ancillary services, especially participant services, inherent conflicts can arise, which means advisors either act as stewards policing themselves or are they complying with the rules as a fiduciary.

Stewardship and good governance may seem scary to some RPAs, especially those owned by larger entities focused on a return of their investment or that are part of entities that push products not be beneficial to clients.

I believe that good stewards will attract like-minded clients willing to pay a fair fee and will appreciate and reward them in the long run when advisors sacrifice their self-interest and bottom line.

Sometimes I get pushback from providers because I write or say things that might hurt their business, which in turn means they withhold support. One DCIO executive who no longer supports me said he reads and watches my stuff because he feels like I am being real (open, honest and candid) and I am not mean or vindictive. I’m no saint and I may never get their support back but I believe my honesty will benefit me in the long run.

We are at a critical junction with the opportunity to help the 97% of workers who do not work with a traditional advisor and transition older workers into retirement income solutions. Just as we do not know who is swimming naked until the tide goes out, a rising tide can lift all boats.

Trust takes a long time to earn and a moment to lose. We all have our own “bully pulpit”—we can use it to benefit ourselves at the sacrifice of clients or deploy good governance acting as stewards, not just complying with fiduciary rules, helping clients while improving our businesses in the long-run.

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