Employees will question how their 401(k) is invested: Are HR directors ready?

In the face of increasingly difficult news coverage around climate change, social inequities, and corporate scandals, more people are looking for ways to directly contribute to solutions. Money has always been a driver of change and an employee’s 401(k) is a key component – if not the most central part – of their financial life. As individuals become more thoughtful about how their resources and savings are deployed, an employee’s retirement savings will undoubtedly become part of the equation.

HR directors are seasoned experts in meeting the needs of their staff among a variety of workplace scenarios – from accessibility and ergonomics, to accounting for the differing dietary needs for the next staff lunch. Even just ordering pizza in for your team requires quite a bit of thought. Depending on your workplace culture, you may have a large group of employees who are happy with a standard pepperoni and cheese or meat lover’s pizza. But there will be a few vegetarians to consider, folks who may require an option without pork, and maybe even a couple of employees who need a dairy-free pizza. We have become comfortably attuned to making accommodations for differing needs when it comes to things with such low stakes as free office pizza, so why not look at your company’s marquee benefits as well, taking into account such elements as an employee’s religious faith and personal values?

Increasing the options on an existing 401(k) offering

When HR professionals work with their retirement plan sponsors to develop a menu of investment options, it may feel sensible to stick to well-known combinations of funds in an attempt to best suit an entire staff. But as investing becomes democratized and information about the myriad products available becomes more widespread, individual investors are learning that they don’t have to settle for garden variety mutual funds that have little to offer by way of a lifestyle or values match.

“People increasingly want their investments to reflect their beliefs, and they are seeking financial outlets that help them achieve that goal,” says Jane Carten, President and Portfolio Manager at Saturna Capital. “The more they learn about what’s possible, the less tolerant they are of 401(k) options that limit them to a one-size-fits-all approach, particularly if the investment selection conflicts with their views or religious beliefs.”

It may be helpful to take a step back and review what a mutual fund is and why there are so many options. A mutual fund can be thought of as a basket of several different individual securities – stock, bonds, or both – that are combined into one portfolio by a professional investment manager to achieve a specific investing goal. Buying single securities can be extremely risky, but by spreading risk over a variety of different investments, mutual funds can be less volatile than individual securities.

Index funds are similar to mutual funds except that they are managed “passively” by investment managers seeking to replicate a securities index rather than by hand-selecting specific securities for a portfolio. The vast majority of retirement plans in the US invest in either actively managed mutual funds or index funds, due to the level of diversification and ease these vehicles offer.

Mutual funds can be formulated to provide different levels risk and can also be built to satisfy a near-infinite number of investor’s social preferences or faith-based requirements. They can focus on or exclude entire industries like tobacco or fossil fuels, investments in a specific country such as Sudan, China, or Russia — or even entire geographic regions.

Mutual funds that comply with an investor’s religious beliefs have been available to investors for decades and now, a steadily growing number of mutual funds focus on investing in socially responsible companies – or companies that show good performance in their environmental impact, how they approach social issues such as diversity and worker health and safety, and on governance matters such as board composition and CEO pay. These factors combined are known as “ESG” investing, also referred to as socially responsible and sustainable investing.

Although socially responsible investing has long suffered under the stereotype that it delivers lowers returns than traditional investments, plenty of research in the past decade has demonstrated this not to be the case. In fact, researchers at NYU’s Stern Center for Sustainable Business found that improved financial performance due to ESG becomes more noticeable over longer time horizons and that ESG provides downside protection to investment portfolios, particularly during social or economic crises.,

Small changes lead to great outcomes

You can think of faith-based and ESG investment options as something like the vegetarian or gluten free pizza options – not every employee will require such options, but for those who do, having their employer consider their values is an easy but valuable form of recognition.

Providing faith-based and ESG options can also be considered as a meaningful DEI initiative that demonstrates the employer’s commitment to equity and inclusion.

Signaling to your environmentally-conscious, socially-conscious, Muslim, Christian, or other faith-focused employees that you recognize there are options out there for them will not only inspire greater loyalty to the company, but may also encourage greater participation in the company retirement plan. More employees saving for retirement in the company’s plan means more employees who are engaged in their workplace – and as HR professionals know, the time and costs saved from turnover is a nice kind of money in the bank.

Stephanie Ashton, MBA, is Manager of Corporate Social Responsibility at Saturna Capital.