Communicating on ESG to 401(k) Plan Participants

A framework for helping 401(k) retirement plan participants understand sustainable investing is emerging. 

Defined contribution plan sponsors are a frequent first stop for questions from participants, as investor interest in and dollar flows allocated to environmental, social and governance investing continues to grow, according to a blog post from Megan Yost, senior vice president and engagement strategist at Segal Benz.   

In the post, Yost urged plan sponsors to provide a framework that helps plan participants understand ESG, while also cautioning employers to be careful that information is not construed as providing investment advice.

“Like any investment option in a DC plan, plan sponsors cannot selectively promote one choice over another to their people,” Yost wrote. “Be sure to keep this in mind when developing your communications and education strategy.”

Plan sponsors that are subject to the Employee Retirement Income Security Act must operate the 401(k) or other plan type in accordance with their fiduciary duties to participants.

Research published earlier this year by Schroders shows that 74% of retirement plan participants said they would increase their contribution rate if offered sustainable investments, compared to 69% in 2021. The interested participants want investments to be aligned with their values (87%) and said they see environmental, social and governance investments as a driver of performance (78%).

With the growing interest in ESG options for sustainable investing in DC plans, a Callan survey found that 49% of institutional investor respondents included ESG factors into their decisionmaking process. This represented an increase of 7 percentage points from the previous year and was more than double the figure from 2013.

The 40% of respondents that had not yet incorporated ESG approaches but were considering doing so was the highest share in the survey’s nine-year history and more than three times the level in 2019, according to Callan.

“Institutional investors, or people who oversee big pools of money like pension funds or endowments and foundations, have been debating whether to evaluate ESG in their investment decisions for years,” Yost wrote. “Among institutional investors, including ESG factors in decision-making is not widespread, but it’s growing.”

Yost added that plan sponsors can equip themselves with a framework for communicating on ESG using available resources—including white papers and webinars—from the industry trade group, the Defined Contribution Institutional Investment Association.

The framework is a collaboration between Yost, Stephanie Moersfelder, associate director for business development and client service at Impax Asset Management, and Bonnie Treichel, chief solutions officer at Endeavor Retirement.

The framework encourages plan sponsors to develop their ESG muscles via a framework that can integrate sustainability rankings into performance reports and participant statements; leverage change as an opportunity to broadly educate participants; and enlist the support of others—external providers and internal partners—to create effective communications.