Dave Zellner, longtime CIO of Wespath Benefits and Investments, the nonprofit investment management firm serving the United Methodist Church, has been a bulwark of stability during tumultuous times. After more than a quarter century at the helm, he is handing over the reins to a public pension plan veteran.
The church has witnessed turmoil in recent years, as thousands of congregations have disaffiliated over its decision not to enforce bans on LGBTQ clergy and prohibitions on its ministers from officiating at same-sex weddings. Both bans were entirely repealed by the UMC in May.
Those disaffiliations by conservative churches have resulted in the loss of 30% of the UMC’s members and considerable financial stress.
That turmoil, however, never gravitated to Wespath.
Zellner has served as chief investment officer since 1997, a constant figure during a turbulent era both for the church and financial markets and where he has been an innovator and overseen an impressive growth in assets in the United Methodist Church’s defined benefit and defined contribution plans as well as external management. In 2019, he formally launched an external OCIO business for other faith-based nonprofit organizations.
As of Dec. 31, Wespath Benefits and Investments had $28.2 billion in assets under management. Of that total, defined benefit plan assets totaled about $9.9 billion, while defined contribution plan assets totaled about $9.1 billion. In the five DC retirement plans there are 66,500 participants.
Zellner is retiring on Aug. 1, and taking over for him is Johara Farhadieh, former executive director and CIO for the $25.1 billion Illinois State Board of Investment, Chicago.
In a July 16 interview with Zellner and Farhadieh at Wespath’s Glenview, Ill., offices, Zellner said the recent turmoil in the United Methodist Church resulted in a full-scale "derisking" effort in the pension fund in 2023 by significantly increasing its allocation to fixed income.
Zellner said the move to derisk with the pension fund fully funded was to remove the potential that the church would have to make additional contributions, now that there are so many fewer clergy and lay employees with the church that can make their own contributions.
As of Dec. 31, the actual allocation of the DB plans was 67% global fixed income (up from 51% a year earlier), 23% global equities (down from 38% a year earlier), 7% alternatives (the same as a year earlier) and 3% other (the same as a year earlier).
Series of challenges
The derisking move was the last of a series of challenges Zellner and his staff have had to face over more than a quarter century.
Chief among those challenges, he said, was the need to provide assurance for the church’s actively engaged retirement plan participants during market downturns.
“I think the No. 1 challenge was just providing the calm comfort and assurance to our participants that when we went through each one of these down cycles, that we had a discipline process in place,” said Zellner, “that we were maintaining our disciplined process where a long-term investor just keeps calm and carries on. You know, we had the bursting of the tech bubble and the internet bubble in 2000 to 2002.”
From the dot-com recession to the global financial crisis and the COVID-19 downturn in 2020, Zellner said the UMC’s members would always be engaged and reach out to ask whether their account balances were safe.
“It is just providing assurance to people that cycles happen,” said Zellner. “It’s just a natural part of investing and (we) just stay the course.”
Educating those participants has been a priority for Zellner throughout his tenure. In 2013, Zellner was recognized by Pensions & Investments in its 2nd annual Innovator Awards in the category of distribution planning. It was that year that Zellner and his staff introduced a lifetime income strategy for UMC's five defined contribution plans.
The program, LifeStage Retirement Income, was launched as a companion to the existing managed account called LifeStage Investment Management, which presents a “payment safety zone” based on a participant's account balance, age and investment approach. It establishes a monthly income stream for retirees, and includes the calculation of a cost-of-living increase. Also, a reserve can be established for unanticipated expenses.
The LifeStage managed account program overall is similar to target-date funds, said Zellner.
“It’s similar to target-date funds. It automatically adjusts one’s asset allocation as they age, and it allowed them to provide unique information about themselves,” said Zellner. “A psychological risk tolerance that allowed us to tailor a unique asset allocation for them based upon their individual needs.”
Pioneers in responsible investing
Zellner and his staff were practitioners of responsible investing, well before the broad adoption of the term ESG in 2004, to align their investing with the values of the church.
“I don’t know that I would call ourselves mission-based investors, but when I started we were members of the Interfaith Center of Corporate Responsibility and we were one of the leading investors in that group,” said Zellner. “What we’ve always aspired to do was align our investments with the values of the church. That being said, it’s an aspiration, not a requirement. Our church doctrine is very clear that our sole responsibility is to provide prudent financial services to our participants and act in their best interest.”
Zellner’s “light bulb” moment in realizing the full value of responsible investing took place in 2006, when the UMC was the only religious institution invited by United Nations Secretary-General Kofi Annan to help craft responsible investment principles.
“I realized that there was this broad group outside the United States that had a philosophy of ‘We’re long-term investors. We want sustainable, long-term companies that can provide the best possible returns to our stakeholders and we need to encourage them to adopt policies and business practices that will encourage long-term sustainability'.”
Zellner realized that responsible investing was not necessarily about moral and ethical solutions.
“It’s about having business practices, and practices that will result in better long-term investment results and performance,” he said. “The reality is, that there’s too much focus on short termism. And the reality is, that we as plan sponsors are guilty of promoting that. Collectively, the community judges their asset managers on quarterly performance.”
“Even the ones that claim to be long term, well they’ll say five years in our mind is long term,” said Zellner. “But the reality is, our participants are going to be involved for 30, 40, 50 years and beyond, and so we really need to think beyond the next quarter or beyond the next year or beyond the next three years, and that’s in my mind what ESG and sustainable investing is. It’s encouraging companies to have policies and business practices that will produce the best possible returns for the long run.”
