Sustainable investment options are drawing interest, especially from millennials
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Many 401k plan sponsors are considering whether ESG mutual fund investment options belong in their 401k plans. The following discussion takes a look at the factors to consider in deciding whether to add ESG funds to your plan.
Are plan sponsors allowed to offer ESG funds?
Many plan sponsors are confused about whether it is even legal to offer ESG funds in their 401k plans. A Department of Labor (DoL) ruling late in the Trump presidency appeared to discourage 401k plan sponsors from offering funds that considered ESG criteria.
In March of this year, President Joe Biden’s Department of Labor advised that it would not enforce the Trump era ESG rule cited above and would eventually issue additional guidance.
Currently, there is no prohibition against offering 401k investment options that include ESG elements. The general consensus about the Trump DoL ruling is that it was completely out of touch with what is happening in the marketplace. The feeling is that the Biden DoL will issue guidance that is accepting of ESG investing.
What do ESG, SRI and “sustainable investing” mean?
These terms can be confusing. There are a number of abbreviations that are used to describe investing with a social conscience.
ESG is an abbreviation for environmental, social and governance, the major sustainable investing criteria.
The overall approach of investing with a social conscience is referred to as sustainable investing. The concept of sustainable investing includes a full spectrum of socially responsible investing, or SRI approaches.
The most basic sustainable investing strategy is exclusionary, which seeks to avoid investment in things like tobacco. A middle of the road approach is the inclusion of ESG factors in the analysis of investment options. The most committed sustainable investing approach is impact investing which seeks to generate a measurable social or environmental impact along with a financial return.
The terms socially responsible investing and sustainable investing are often used interchangeably. They basically mean the same thing: investing with a social conscience. Sustainable investing is the current phrase used most often to describe investing with a social conscience.
Where should my plan start with sustainable investing?
Plan sponsors who wish to wait for the guidance on ESG investing that the Biden DoL will provide don’t have to ignore sustainable investing in their 401k plans.
An easy way to start discussing sustainable investing with your employees is to begin to report the Morningstar Sustainability Rating for each of the mutual funds in your 401k plan. Discussion about these ratings can easily be added to your employee education sessions as well. Talk to your investment adviser about obtaining the ratings for your funds.
Three reasons to include ESG funds
I am not going to tell you that you and your management team will become better people by adding ESG funds to your 401k plan. Nor will I say that it is the right thing to do or that we all should have a more elevated social conscience. These are the reasons why you should consider adding ESG funds:
1. Better performance
That’s right, funds that are constructed using ESG criteria have been shown to outperform. These studies have shattered the long-held belief that in order to invest with a social conscience you must sacrifice investment performance. Not true, not anymore.
It’s reasonable to ask where the outperformance is coming from. The main ESG factor contributing to outperformance is governance. Those companies that score high on governance end up being better managed and, logically, the best-run companies in any industry generate higher profits.
2. Your workforce believes in sustainable investing
Do you have any millennials working for you? Studies show that 90% of millennials want to align their investments with their values. In addition, 87% of millennials will analyze an investment’s ESG factors before investing in it, while 76% of older millennials believe climate change is a serious threat.
Believe it or not, 77% of millennials say ESG criteria are their top investing priority when considering an investment. And, if your plan offers ESG investments, 90% of plan participants say they will invest in them, according to a recent study.
If you employ a lot of millennials, you have a workforce that believes in sustainable investing. Offering ESG funds in your 401k may not make you a better person, but it will result in your workforce placing a higher value on your 401k plan.
3. Everyone is doing it
You shouldn’t manage your life or your 401k plan based upon what everyone else is doing, but you can’t ignore what is happening with sustainable investing. Many large corporations have developed social responsibility statements and goals. This is not a trend that is going to fade away.
If you add ESG funds to your 401k plan right now you wouldn’t be an early adopter. If you wait, your plan may lag the market in terms of plan design. To maintain a leading-edge 401k plan, you should at least begin talking about sustainable investing with your employees.
Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or firstname.lastname@example.org.
Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or email@example.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.