Participants’ Posture on ESG Investing Not Showing in Retirement Plans

The sentiment for ESG investing is positive among all generations though their actions in retirement plans don’t show it. How should plan sponsors fit ESG into the investment puzzle?

The 2019 Survey of Plan Sponsors and Retirement Savers from American Century Investments found 90% of defined contribution (DC) retirement plan sponsors who offered or are considering offering environmental, social and governance (ESG) investments believe their participants would be interested.

However, only 37% of participants actually expressed some interest in ESG options. Diane Gallagher, vice president, retirement value add, American Century Investments, in Kansas City, Missouri, notes that those individuals would be interested if the ESG investment’s performance was comparable to the average product.

According to the ESG Investor Sentiment Study from Allianz Life Insurance Company of North America, nearly two-thirds (64%) of Millennials said ESG issues are important in their investing decisions, with Gen Xers not far behind at 54% and Baby Boomers at 42%. However, currently only 17% of Millennials, 7% of Gen Xers and 3% of Baby Boomers are participating in ESG investing.

Constantine Mulligan, partner and director of investments for the Retirement Plan Services Group at Cerity Partners in Chicago, tells PLANSPONSOR, “ESG investment options have been a common topic broadly discussed among plan sponsors in an exploratory manner more recently, but have generally seen minimal uptake amongst plan participants. For plan sponsors that do offer ESG funds, we typically have seen low adoption by participants, with less than 10% allocating assets to the strategy. While ESG investing seems to make sense in theory given the evolving awareness and consideration to social impacts, overall participant adoption remains low.”

This may be explained in part to a lack of education. Gallagher says retirement plan participants’ overall knowledge is low. Four in 10 survey respondents indicated they are not sure their company offers them and couldn’t define ESG. The Allianz study also found a lack of knowledge; only 15% of Americans know specifically what the letters “ESG” in ESG investing stand for.

The Allianz study also found that Millennials are more likely to be interested in learning about various types of ESG information. But all generations are in agreement that they aren’t sure how to evaluate whether the companies included in an ESG investment care about causes they support (71% of Millennials/64% of Gen Xers/69% of Baby Boomers).

“These stats show us that people from all generations are looking to learn more about ESG and want to put their values into action,” says Kelly LaVigne, vice president of consumer insights, Allianz Life. “But they feel they need more education and guidance on how to best make ESG investment decisions.”

Guillaume Mascotto, vice president and head of ESG, American Century Investments, based in New York City, says, “Our latest research shows the U.S. is the second largest market for ESG in the world. For Millennials, it is very important, and $68 trillion in wealth will be transferred from Baby Boomers to Millennials over the years. Millennials will demand options to invest money to align with values.”

He adds that, “We think in the next 10 years, not only will there be a continual shift to tech-focused investment vehicles, but also a greater interest for products that not only secure financial viability but reflect values.”

Including ESG investing in retirement plans

Mascotto says recent guidance from the Department of Labor (DOL) has caused confusion and slowed down the use of ESG in DC plans. But, just as with other investments offered in DC plans, it has to be incorporated as a prudent investment product. “The DOL says, when selecting ESG investments, plan sponsors shouldn’t be sacrificing returns or adding risk. The guidance underscores the importance of the integration of ESG choices in the investment menu, but in balance with long-term returns,” he adds.

In terms of returns, Mascotto says many ESG strategies are created in the passive investing space. They’ve been providing returns, but they also fall with the market. “Market volatility underscores the importance of active solutions. They are a shield from systemic forces like the micro shocks that happened in December 2018. It’s not a strategy overly exposed to momentum factors and volatility,” he adds.

Mulligan says, “Plan sponsors looking to offer ESG options should work within the construct of the plan’s Investment Policy Statement to ensure any ESG fund offered to participants satisfies the general governing criteria of the IPS. This generally will include parameters for fund evaluation, selection and monitoring.  The investment options should complement the plan’s other investment choices that allows for a well-diversified fund menu for participants.”

The selection of ESG investments uses the same process as for any investment type, Gallagher says. Plan sponsors should still be focused on helping participants accumulate assets for retirement and their duty of prudence and loyalty. Not only should plan sponsors follow their IPS, she says, but they should know their employee base well—not just the demographics but investment savvy.

“I think the foundational finding of the survey is sometimes plan sponsors estimate incorrectly the perceptions of their employee base. They underestimate the receptivity of auto features, but overestimate the interest in ESG,” Gallagher says. “But plan sponsors also said they need more information [about ESG], so it is important for plan sponsors to get educated about the topic.”