SURVEY SAYS: Socially Responsible Investments in DC Plans

Last week, I asked NewsDash readers, “Do you invest in socially responsible investments in your DC plan, and do you think the returns on these investments are on par with non-screened investments?”

The majority (73.9%) of responding readers work in a plan sponsor role, while 13% are TPAs/recordkeepers/investment managers, 8.7% are attorneys and 4.3% are advisers/consultants.

Two-thirds of respondents reported they do not care if their retirement plan investments are in socially responsible companies, and one-third do care. Three-quarters said their company’s DC plan does not offer ESG-screened investment options, while there was an even split (12.5% each) of plans that do and respondents who don’t know if their plans offer ESG-screened investment options.

The majority (87.5%) of responding readers do not invest in socially responsible investments in thier DC plans, and 12.5% said they do.

Asked whether they think ESG-screened investment returns are on par with non-screened investments, 58.3% said some are and some aren’t, 20.8% don’t know, 16.7% said no and 4.2% said yes.

In verbatim comments, some pointed out that their plan’s objective was just to provide an appropriate mix in their investment menus. Some were for and some were against using ESG factors in considering fund options. Editor’s Choice goes to the reader who said: “ESG-screened funds should be subject to the same process to determine if they are appropriate for our DC plans as are all other funds.”

A big thank you to all who participated in the survey!

Verbatim

With a streamlined investment menu, it’s not appropriate to try adding a lot of extra investments catering to these segments. If employees want to invest in these types of funds, they are available through a Mutual Fund Window.

Our primary focus is offering a diverse fund line-up that provides a mix of passive and active asset class options to participants who wish to actively manage their own portfolios and passive target-date funds for those who do not.

Social Engineering should be left outside of retirement plans

When managers incorporate ESG factors into a bottoms-up fundamental analysis it often adds another dimension to risk management that can add value over time.

Our DC plan exists only to make it possible for our employees’ retirement. Period.

Traditionally, the lineup is all about investment returns based the particular investment objective. Those returns are measured numerically because more money is better. ESG effectively says money is not the only measure and we will sacrifice money for principle. It shrinks the universe of available investments to get the best returns.

The plan has had a socially responsible fund option for several years. Even though it performs well, participation in that fund option is low.

I don’t see the allure, in contrast to my fellow Millennials. All of our active investment managers have always used some form of “ESG” in their framework for stock selection. But I, nor my investment committee, would impose anything on them as restrictive as this, nor would we impose an entire mandate or sleeve on our total asset allocation. Generally, constraining the sandbox constrains alpha. Plus, they’re the stock pickers, not me – I just find the stock pickers and the correct AA.

Any decent active manager is already considering the advantages, and potential disadvantages, a company might have. If not, they’re giving away excess return.

For me, the returns would have to be very near to other investment options. Frankly, I can’t afford to underperform.

ESG-screened funds should be subject to the same process to determine if they are appropriate for our DC plans as are all other funds.