Personal Finance

Workers want those hard-to-find socially responsible investments in their 401(k) plans: Survey

By April 9, 2019 No Comments

If you’re looking in your 401(k) plan for investments that back clean energy or gender and racial diversity, you may have a tough time finding them.

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That level of access to socially conscious investments is “not good enough,” according to Edward Farrington, executive vice president at Natixis Investment Managers.

That is because those kinds of investments offer key benefits, Farrington said, including higher-quality companies that can potentially withstand market fluctuations better.

Natixis and other financial firms are rolling out investment products that reflect these ideals.

But employers are slow to pick up these options. And experts say there are a couple of reasons why they are holding back.

Natixis is the only firm that currently offers target-date funds that have sustainable investing criteria. But there are other investments available for retirement plans.

Aaron Pottichen, senior vice president at Alliant Retirement Consulting, said his firm offers an index fund from Calvert Investments that screens investments based on ESG criteria.

Still, most of Pottichen’s clients decide not to make it available to employees through their retirement plans.

“We’ve brought it up with literally almost every single one of our clients, and none of them have really expressed interest in doing it,” Pottichen said. “Their No.1 reason for saying maybe we shouldn’t add it is they’re not certain that they want to impose their morals on their employees’ investment choices.”

Many companies are still reluctant to be perceived as crossing that line, he said.

New guidance issued by the Department of Labor last year may have muddied the issue, according to industry experts.

Under President Barack Obama, plan providers more or less got the green light to include ESG funds in their lineups. The guidance under President Donald Trump’s administration, however, was more or less a caution sign to the industry.

Now plan providers must hold ESG funds to the same standards as traditional funds when considering whether to add them to their lineups. “Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision,” the guidance stated.

That has changed the conversations Pottichen has had with retirement plan clients.

“We’re like, ‘Look, it really doesn’t matter if it’s an ESG fund. It still has to go through the same process to determine if it should be allowed on your menu or not,'” Pottichen said.

For Natixis the guidance is a “welcome” change, according to Farrington, though it may have caused some of its peers to hesitate.

“I think it did make some other firms that were thinking about this space hesitate a bit, thinking, OK, what is the message here?” Farrington said.

There are ways that individual investors can help speed up the adoption of these funds, according to Andrew Behar, CEO of As You Sow, a nonprofit foundation focused on shareholder advocacy.

First, if you have access to fossil-free funds or other ESG funds in your retirement plan menu, consider moving your money into them.

“That is a capital shift that people can do right now, and it will take them 10 minutes,” Behar said.

If you don’t have access to these kinds of investments in your 401(k) or other employer-provided plan, speak up, Behar said.

“When companies start to hear their employees say, ‘You’ve got to offer us a fossil-free fund,’ money is going to flow into that,” Behar said.

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