- Americans are caring more and more about sustainable investing.
- A new rule proposed by the Department of Labor hopes to make ESG funds more available to employees.
- 401(k) experts hope it will go into effect in early 2022.
Nearly half of Americans call themselves environmentalists, and those that do are often letting that belief system drive their investment strategies.
Interest in investing that prioritizes environmental, social, or governance (ESG) factors has been growing over the past few years. In early 2020, one of every $3 of the total $51.4 trillion US assets professionally managed were ESG funds, 42% more than two years earlier, according to the US SIF Foundation — and it's estimated to keep growing.
ESG investing, also known as socially responsible investing or impact investing, takes into account how well a company or an investment performs in certain criteria. For example, environmental factors include a company's efforts to reduce the impact of climate change; social factors include human rights or working conditions throughout a company's supply chain; and governance refers to how diverse a company's leadership is or what political causes it contributes to.
But even for the most sustainably-minded investors it's not always possible to direct company-based 401(k) plans to ESG investments — for now, at least. A new Department of Labor proposed rule could change that.
Being able to invest a 401(k) into ESGs depends on what a company offers with its retirement plans. "Oftentimes, plan sponsors will offer a diversified array of investment choices for their participants to choose from to build their investment portfolios, and there may be an ESG-themed investment option that's available in that lineup of choices," Liana Magner, executive vice president and head of institutional and retirement strategy at Natixis Investment Managers, told Insider.
401(k) managers are responsible for selecting the investment options that are available under the plan for employees to choose from and monitoring their performance. Magner said that Trump administration rules required fiduciaries to make these decisions solely on risk and the return objectives of plan participants, not other factors like ESGs. This has led to some hesitation among 401(k) managers in including ESG-themed investments, Magner added.
However, the Biden administration has said it will no longer enforce this rule. In October, the Department of Labor issued a proposed rule stating that ESG factors could be considered financially material criteria for 401(k) and other plans. If approved, the rule could give employees broader access to sustainable investing.
It's tough to say when the final rule might go into effect, but analysts say it will likely be the first half of 2022. Aaron Schumm, CEO of Vestwell, told Insider that he hopes more employers will consider including ESGs among their 401(k) investment options. "As part of the plan design and the offering that's being put forth to the employees, I would hope that's part of a deep discussion around what's important to the employer as well as the employee," he added.
As employees are showing more interest in socially responsible investing, Schumm said he's seen more companies (including his own) start offering ESGs. "That was part of the driver for us — we had a lot of people ask, we had our own employees ask if ESGs could be incorporated," he said. "So we made them available in our own plan."
In today's highly competitive labor market, Schumm said employee benefits, including retirement plans with options that suit sustainably-minded employees, will help with recruitment and retention.
For employees whose employers don't offer ESGs in their 401(k) plans, Schumm and Magner suggested simply asking for it.
"You could always put the request into the HR department to say, 'This is something that's important to me, and is it possible to add a sustainable investment option to the core lineup in our 401(k) plan?'" Magner said. "They could also just do more research on the choices that are available in their plan lineup to see if any of those choices actually integrate ESG into the investment process of their traditional core options."