Environment, Social, And Governance Investing In 401k Plans

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Can you be an activist investor with your retirement plan dollars? After all, that account is often the largest pot of money the average employee has for investing.

Recently, DOL released guidance on the subject, attempting to clarify retirement plan sponsor duties as they relate to selecting and monitoring investments and specifically ESG investments, and have only created more questions. 

Recognizing that we’re not lawyers and do not provide legal advice, here is an (educational) overview of some of the issues!

ISSUE 1: FIRST, LET’S TALK ABOUT “EXCLUSIVE BENEFIT.” 

When you’re managing dollars under ERISA for other people, you’re held to the (higher) fiduciary standard. As DOL’s position has been, this means you should be “focused solely on the plan’s financial risks and returns, and the interests of plan participants and beneficiaries in their plan benefits must be paramount.” ESG investing could be construed as bifurcating that singular focus.

ISSUE 2: WHERE DO YOU DRAW THE LINE? 

Negative screening practices have historically been prominent; socially conscious investing usually started with a list of companies, then eliminated any that didn’t meet criteria. Up until 2007, the same parent company owns Philip Morris and Cheerios. Most often, they were screened out for being associated with tobacco products. So as an investor, you no longer benefited if Kraft Macaroni and Cheese, Post Cereal, Maxwell House, or Kool-Aid took larger market share. There are similar ESG examples where conglomerates own both ESG-friendly and unfriendly companies.

ISSUE 3: WHAT IS (OR WHICH IS) THE DEFINITION OF ESG INVESTING? 

If a company has only old, white men on their board, but they excel in their field, company culture and DEI practices are good, and they have little environmental impact, do you say 2 out of 3 is good enough and put dollars there? Or should certain factors be favored more than others? 

This seems filled with landmines, which is why many investment firms have used ESG in their investment screening as just another data point by which to decide whether to invest or not. The majority of the investment partners we’ve asked about this have said if several companies are being considered with similar balance sheets and growth prospects, of course they’re going to choose the one with better labor practices, a more diverse board/leadership, or the one with the sustainability edge. They also recognize that any of those factors could change at any time.

ISSUE 4: MONITORING INVESTMENTS IS JUST AS IMPORTANT AS SELECTING THEM IN AN EMPLOYER-SPONSORED RETIREMENT PLAN. 

Monitoring investments, an ERISA mandate, means comparing them to an appropriate measuring stick. But what if the measuring stick isn’t easily identified or available? If using an ESG benchmark, you’d have to ensure that the ESG definitions of the benchmark and the fund being measured are identical. Or, if you used traditional benchmarks, you may come into question if the ESG funds are consistently underperforming the benchmark for an extended period of time, violating an investment policy statement, or calling the exclusive benefit rule into question.

In conclusion, it is possible to put ESG funds into a retirement plan, but not without effort, a properly written investment policy statement and monitoring guidelines, alignment with the employee values (and attorney blessing). It’s a great idea to encourage companies to “do the right thing,” but the inclusion of these investments in employer-sponsored plans like 401k and 403b is difficult and you shouldn’t attempt to go it alone.

Are ESG funds right for your employees and your plan? How do you navigate these landmines? Book a call with us for help.

You can read the full-length article here.

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Courtenay Shipley, CRPS, AIF, CPFA has a diverse background in the retirement plan industry providing a unique foundation for her clients in the areas of fiduciary responsibility, investment analysis, and participant education. During her career she has provided institutional investment consulting to qualified retirement plans, developed business strategy for a boutique third party administrator and recordkeeper, conducted over 9,000 education meetings to groups and individual employees, and served the nonprofit market.

Courtenay is a graduate of Vanderbilt University, and is licensed as an investment advisor representative (Series 66). She holds the Accredited Investment Fiduciary? (AIF?) designation through the Center for Fiduciary Studies, the Chartered Retirement Plan Specialist (CRPS) designation from the American College of Financial Planning, the Certified Plan Fiduciary Advisor (CPFA) from National Association of Plan Advisors, and the Certified Health Savings Advisor (CHSA) designation. Since 2015 she has been featured in the Financial Times Top 401 Retirement Plan Advisors annual list, named a Top Women Advisor All-Star by the National Association of Plan Advisors (2015, 2017-2019), and named a 2018 NAPA Young Gun: Top 75 under 40. Click here for award descriptions and criteria.