401(k) Plans Share in Green Investment Options
Dylan Telerski / 5 Mar 2021 / Business
Americans have expressed increased interest in Environmental, Social, and Corporate Governance (ESG) funds over the last decade.
U.S. investors have sunk $17 trillion into assets managed by companies that promote diversity and clean energy. About one-third of all professionally managed assets fit ESG investment rules. Americans invested $21 billion in ESG mutual funds in 2019 – four times the prior record. Despite the economic turmoil, 2020 ESG funds are more than double the records set in 2019. While ESG funds have grown in the last few years, workplace retirement plans have generally not been robust in exploring green investment options.
401(k) Plans and ESG Funds
Workplace-sponsored retirement plans represent a huge pot of wealth. Almost a third of all U.S. retirement assets are held in 401(k) plans. Yet, only 3% of 401(k) plans offer employees an ESG fund investment option. As a result, only a tenth of 1% of 401(k) assets are held in socially responsible funds.
Several roadblocks have prevented these investors from scooping up ESGs:
Retirement investment trends
Target-date funds dominate the workplace retirement plan sphere. The emphasis placed on all-in-one funds that shift from stocks to bonds as investors near retirement are a “safe” default for all employees who are auto-enrolled. One in every $5 invested in 401(k) plans are tied up in such funds – up from one in $10 a decade ago.
Employers are afraid of going out on a limb with investments that could have higher costs or underperform. Companies that pledge adherence to ESG principles will need to live up to their disclosures or find themselves on the receiving end of lawsuits. Even though all but one ESG index fund had higher net returns this year, these lawsuits could potentially jeopardize shareholder profitability, making ESG a riskier type of investment.
Trump administration rules
The Labor Department changes guidance and regulation of ESG funds with every new administration. The Trump administration required employers to evaluate investments based on risk and return, not ESG characteristics. Employers are explicitly prohibited from auto-enrolling workers into an ESG fund. President-elect Biden, who has made climate change a priority, may issue new guidance to open up ESG-based investments using 401(k) funds.
Are Changes Coming in 2021?
Changes may be coming in 2021 to alleviate roadblocks for 401(k) investing based on ESG factors. Given that the administration is prioritizing investment in clean and renewable energy to combat climate change, new incentives may be launched to encourage 401(k)s to make ESG-based investments.
Start Your Small Business 401(k) Plan in 2021
If you are a solopreneur or small business owner without a 401(k) plan, contact Ubiquity, one of the nation’s leading providers of Small Business and Solo 401(k) plans. We can answer any questions you may have – like how a Solo 401(k) differs from a SEP IRA, or whether ESG funds are an investment option you might consider offering employees.