5 steps to add sustainable funds to a DC plan
Private sector retirement plans are only in the beginning phases of meeting demand for sustainable options.
Many organizations are seeking to increase their focus on environmental, social and governance (ESG) considerations in all aspects of their operations, including defined contribution retirement plans. Surveys in the past couple of years have found a growing interest among adults in sustainable investing and ESG practices, particularly younger adults.
Related: How expanding the ‘S’ in ESG helps workers, employers, and investors
A growing percentage of people believe companies focused on ESG practices make for a better long-term investment, and they are interested in using their investment dollars to help create a better world. In addition, ESG options appear to be a potential motivator for DC plan participants, many of whom indicated sustainable funds would make them more likely to contribute their plan, according to research conducted by Natixis Global Asset Management.
However, private sector retirement plans are only in the beginning phases of meeting this demand, with only about 20 percent having assets in funds considered socially conscious based on their stated investment strategy. The US-SIF Foundation, which seeks to ensure ESG impacts are assessed in all investment decisions with a goal of creating a more sustainable and equitable society, created a step-by-step guide for DC plan sponsors to add sustainable funds to their plans.
1. Learn about sustainable investing from a fiduciary perspective.
Sustainable investing does not equate with a compromise in financial returns, US-SIF said. In fact, a host of studies has found that sustainable funds often outperform their peers and provide a high level of returns. Examples of ESG criteria include board diversity, anti-corruption policies, diversity and anti-bias policies, human rights, clean technology and smart growth initiatives.
There is a growing school of thought internationally that ESG analysis is a fiduciary responsibility, said the guide. Most countries have some form of policy in place to help investors consider the risks, opportunities and outcomes of sustainable investments.
In the United States, the Department of Labor in 2015 rescinded an earlier bulletin that had discouraged private sector retirement fiduciaires from considering environmental and social factors in the companies and funds in which they invested. The bulletin was replaced with new guidance that reassured plan sponsors and fiduciaries that offering sustainable funds was allowed.
New rules passed late in the Trump administration required plan fiduciaries to provide additional documentation to justify ESG investment strategies, but the Biden administration said it would not enforce those rules and has asked the DoL to propose new rules as early as this month.
2. Determine if participants want sustainable funds.
As interest in sustainable investing grows in the broader market, employees may begin requesting that plan sponsors add sustainable funds to their DC plans. The guide suggests plan sponsors create a survey that measures participants’ attitudes on a broad array of plan considerations, including their satisfaction with current investment choices, their desire to add other options and their likelihood to invest in sustainable funds.
Questions related to sustainable investing options could be further broken into specific issues and concerns, such as environment and climate change, diversity and inclusion, avoidance of unhealthy products, and executive pay. The survey should include explanations about what sustainable investing is to ensure a level of understanding among participants.
3. Consult with your plan administrator or advisor.
Many of the major plan administrator platforms provide access to at least one sustainable fund or have the ability to include any fund option, according to the guide. If one is already available, ask questions about how it was chosen. If a sustainable fund is not already available, consider asking for one, but be aware of any potential fees or administrative issues that may be associated with adding a new fund to an investment lineup.
External consultants and advisors can help build a clearly articulated plan, as well as assist with procedural and reporting aspects, when adding a sustainable fund with appropriate due diligence paid to fulfilling the plan’s fiduciary responsibilities, said the guide. It suggests asking consultants questions about their views on sustainable funds as part of DC plans, any experience they have with sustainable investing, and how they evaluate sustainable investment funds.
4. Choose a fund and keep an eye on it.
There are many options to choose from for DC plan sponsors who have decided to add a sustainable fund to their investment lineup. Domestic equity funds are the most prevalent, but they are also available in other asset classes and geographic regions, said the guide. Exchange traded funds and passively managed funds have included sustainable investments in recent years, and lifestyle and target-date funds are emerging as sustainable fund vehicles.
Determine where the fund will fit within the existing investment lineup and consider the specific type of ESG incorporation strategies funds under consideration use, such as screening out negative sectors or integrating specific ESG indicators. Once added, monitor the fund to make sure it is meeting return expectations in relation to peers or a benchmark and maintaining its stated investment style.
5. Educate participants.
Finally and most critically, alert plan participants to the availability of the new fund and provide educational materials. Information participants may want includes an explanation of specific ESG criteria, a description of active ownership aspects including proxy voting, and general information about sustainable investing. In addition, follow up with participants about their satisfaction with the new option.
Kristen Beckman is a freelance writer based in Colorado. She previously was a writer and editor for ALM’s Retirement Advisor magazine and LifeHealthPro online channel. She also was a reporter for Business Insurance magazine covering workers compensation topics. Kristen graduated from the University of Missouri with a degree in journalism.
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