Catholic 401(k) MEP will screen funds for morality

A Catholic values group plans to launch a multiple-employer 401(k) plan this month that is compliant with the church’s teachings.

That group, the Catholic Benefits Association, started 10 years ago with the mission of helping employers get exemptions from provisions of the Affordable Care Act, such as having to provide access to contraceptives and reproductive services as part of their health care plans. Now, its CEO says, it wants to help church-affiliated and for-profit companies avoid exposure in their retirement plans to investments that Catholics might find objectionable.

Although church retirement plans are carved out from having to comply with the Employee Retirement Income Security Act, that's not the case for 401(k)s, including the MEP that the Catholic Benefits Association is adding. While the Department of Labor has indicated for years that 401(k)s can include investments based in part on nonfinancial factors, the regulator’s recently passed rule – Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights – clarified the requirements on using environmental, social and governance criteria.

“I’m a big believer in saving for retirement,” said Doug Wilson, CEO of the Catholic Benefits Association. “I looked at my young employees and thought they needed a vehicle to plan a little better than some of us did back in the day … I was surprised at how hard it was to get that done.”

After struggling to start a 401(k) for the group that only included church-compliant investment options, Wilson said the organization wanted to make a retirement plan option available to its members, which include about 1,500 Catholic schools, religious orders and other affiliates. For-profit groups can be members if at least 51% of their ownership and governing bodies are Catholics and if the employers have written policies to provide employee benefits consistent with Catholic values.

The plan, which will be a traditional multiple-employer plan, or MEP, differs from the newer pooled employer plan structure, as the former requires participating employers to share some connection. In this case, that connection is membership in the Catholic Benefits Association.

The organization has been getting a lot of calls from small businesses ahead of the plan’s launch, Wilson said.

“We were looking for morally compliant investment portfolios, and that’s hard to find – especially if you’re a small employer,” he said.

The investment fiduciary for the forthcoming plan, Denver-based Innovest Portfolio Solutions, vetted options to build a diversified menu, Wilson said. While that firm isn't focused solely on religiously compliant investing, the Catholic affiliation of its leadership was one of the qualities the plan sponsor was looking for, he said.

A representative for Innovest did not respond to a request for comment. It's unclear what investment options are included in the plan, though they likely avoid exposure to the weapons industry, treatments for gender dysphoria, and pharmaceuticals or reproductive health services that provide abortions or abortion drugs.

As an ERISA plan, it will have to have documentation showing a prudent process for investment selection, said Kelly Michel, principal of KME Retirement Consulting.

Much like the use of ESG factors in retirement plans, faith-based investment selection “requires a lot of documentation and oversight,” she said.

Last year, Morningstar Investment Management and Plan Administrators Inc. launched a PEP that included investment options that use ESG factors.

So far, there's been at least one lawsuit filed over the use of ESG factors in a retirement plan. Last year, an American Airlines pilot sued the company, claiming that the inclusion of funds using ESG factors on the plan’s menu resulted in breaches of fiduciary duty. The airline has been defending itself in that case, which is ongoing.

It’s clear why Catholic Church affiliates would want a morally compliant menu of investments, but religiously based screens could similarly make plan sponsors a target for class action lawsuits, Michel said.

“It’s just an opportunity for litigation,” she said. “Somebody could argue the same [as] someone does in an ESG environment, that they’re not getting the full swing at the investment options they want.”