The evidence that E.S.G. can match or beat traditional investment options is piquing greater interest among plan sponsors.
“We’re getting more questions from plan sponsors — they’re asking if they should be adding this to their investment menus,” says Mikaylee O’Connor, head of defined contribution solutions at RVK, a New York-based investment firm that advises workplace retirement plans. “What’s driving many of the conversations with plan sponsors is there is more research that supports consideration of sustainable investing.”
But obstacles remain — starting with regulatory uncertainty.
Under federal law, plan sponsors have a fiduciary obligation to employees to put the economic interests of participants ahead of other considerations when making decisions about retirement benefits. But guidance issued in recent years by the Labor Department on whether E.S.G. products meet that obligation has shifted repeatedly.
Sponsors typically take a conservative approach to change. “Part of the issue is a reluctance to upset the apple cart,” said Timothy Yee, a specialist in E.S.G. investing and co-founder of Green Retirement, which advises 401(k) plans, including Veritable Vegetable’s. “Some senior managers view their 401(k) plans simply as a cost center, rather than as a way to promote company values, or retain employees.”
Most experts agree that E.S.G. investing in workplace plans will take off only if it becomes available more widely through target-date funds, which automatically reduce participants’ exposure to stocks as retirement approaches. Target date funds have been the overwhelming favorite in 401(k) plans since they were designated by the Department of Labor as a qualified default investment choice.
Many plan sponsors view these funds as the most cost-efficient way to deliver improved retirement outcomes to plan participants of various ages.
But there’s an expense hurdle stopping target-date funds from becoming socially responsible funds. By definition, E.S.G. and socially responsible investing funds are actively managed and typically carry higher expense ratios than passive index funds. The Natixis target-date fund series, which is marketed as an E.S.G., carries an average expense ratio of 0.58 percent, which is a bit lower than the 0.62 percent average for all market-weighted target-date funds in 2018, according to Morningstar. But the industry’s most efficient passive target-date fund offerings are far less expensive than that — Vanguard’s charged just 0.12 percent last year.