In-Plan ESG Options Could Increase Retirement Contributions

Plan sponsors might consider building an investment lineup to meet the growing demand for sustainable options from defined contribution retirement plan participants.  

Nearly three-quarters (74%) of retirement plan participants said they would increase their contribution rate if offered sustainable investments, compared to 69% in 2021, according to the Schroders 2022 U.S. Retirement Survey. They said they want their investments to be aligned with their values (87%), and that they see environmental, social and governance investments as a driver of performance (78%).  

Deb Boyden, head of U.S. Defined Contribution at Schroders, says the survey supports plan sponsors adding ESG investments to their plans to boost participant contributions and bolster retirement readiness. Plan sponsors should study sustainable investments to include these as options in the plan investment menu, she adds.   

“In terms of building a plan’s investment lineup to meet the growing ESG demand, the first step for plan sponsors is to gain a deeper understanding of ESG, its various concepts and approaches,” Boyden says. “Additionally, it is important to educate, and perhaps survey your participants, to discover what your plan participants’ level of awareness of or interest in ESG is.” 

For the 31% of 401(k) plan participants who have ESG options in their plan, 90% invested in those options and 73% estimate allocating 50% or more of their assets to sustainable investments.

Plan sponsors that are considering adding ESG options must adhere to the same rigorous fiduciary investment selection and monitoring process, Boyden adds. “Any ESG funds included must be based on their economic rationale,” she says. “Engaging with an ESG plan expert may help expedite the process.” 

Plan sponsors will also have to educate participants on ESG investing throughout the process, Boyden explains. “Participant education at the discovery phase, during the implementation phase and ongoing is critical,” she says.

If the plan sponsor selects an investment for the plan based on its ESG attributes, it will need investment managers to provide sufficient data to demonstrate how the fund is promoting ESG and meeting its stated objectives and guidelines. “Once the plan sponsor has a clear understanding of its goals in making ESG options part of the plan offering, an important next step is to ensure the investment policy statement reflects those goals,” Boyden adds.

Schroders’ survey revealed where participants want to make an impact. “While ESG is most often associated with climate or decarbonization, according to our 2022 U.S. Retirement Survey, the top ESG issues for US investors are actually social in nature—focused on workers and communities,” says Marina Severinovsky, head of sustainability, North America, at Schroders.   

When asked for the survey to determine which ESG segments they would like their investments to make an impact on, plan participants that currently invest in ESG, or would if they had the option, said:

• Employee welfare/living wage: 51%
• Climate change/global warming/carbon reduction: 39%
• Human rights: 36%
• Biodiversity (pollution, deforestation, clean water): 30%
• Diversity and inclusion: 22%
• No specific area: 17%

“It’s vital that plan sponsors keep this in mind as the regulatory landscape evolves and more ESG options find their way onto 401(k) menus,” Severinovsky says.