SRI Investments in 401(k) Plans—Myths and Challenges for Plan Sponsors

Despite growing demand for sustainable, responsible and impact (SRI) investments from participants, a small percentage of 401(k) plans provide such options in their investment menus. In a Benefits Magazine article from earlier this year, Gregory D. Wait, CEBS, reviews the challenges that plan sponsors face in incorporating SRI investments in their plans and suggests possible approaches.

SRI Investments in 401(k) Plans—Myths and Challenges for Plan Sponsors

Defining SRI Investing

SRI investing is a broad term that incorporates various activities dedicated to managing money in a way that results in the double bottom line of competitive returns and social good.

SRI investing approaches can include:

  • Excluding companies or industries from an investment portfolio because they violate the investor’s values or exhibit high social risk profiles
  • Investing in specific themes that are devoted to social good (impact investments)
  • Selecting investments based on environmental, social and governance (ESG) criteria
  • Engaging with company management on ESG issues.

Leading ESG issues include proxy access, corporate political activity, climate change, labor and equal employment opportunity, executive pay, human rights, board diversity and sustainability reporting.

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Where Are We Now?

Research suggests that incorporating ESG factors in the investment process is not detrimental to portfolio returns, and a growing number of consumers are voting with their wallets by rejecting products made by companies that are known to have ESG conflicts and supporting companies that they believe have a positive social impact—a trend particularly true for younger generations.

What About 401(k) Plans?

Although defined contribution plans, specifically 401(k) plans, have become the primary savings and investment vehicle for many U.S. workers, only 4% of 401(k) plans have an ESG fund in their menu, and only 0.03% of 401(k) plan assets are invested in ESG funds.

Myths and Challenges for Plan Sponsors

Plan sponsors have been reluctant to add SRI funds to their 401(k) plan menus for the following reasons:

  • The persistent—and debunked—myth among plan committee members that an investor must sacrifice returns in order to invest with environmental or social responsibility
  • Employees are generally reluctant to express their wishes to employers regarding their 401(k) plan, and few employers survey their participants to ask about those wishes. Investment committees are sensitive to their fiduciary duty and often have been provided inconsistent guidance regarding SRI investments.
  • Despite the proliferation of new SRI mutual funds, there is still only one SRI target-date fund (TDF) in the marketplace. Because TDFs have become the default investment in most 401(k) plans, they have seen significant growth in recent years.
  • Even though employers are struggling to find workers in today’s low unemployment economy, and many companies have embraced the concept of corporate responsibility and social impact, they have not yet made the connection between adding SRI funds to their 401(k) menu and the attraction and retention of employees (especially Millennials).

Nearly two-thirds (64%) of investment advisors have not recommended SRI investments to their clients. Retirement plan consultants tend to be conservative in their recommendations and often suggest the addition of a single SRI fund to a 401(k) plan menu to satisfy participants who may be interested.

Fiduciary Concerns

The fiduciary concern and confusion about SRI among plan sponsors is understandable.

  • An Interpretive Bulletin (IB 2015-01) issued in 2015 clarified that “[ESG] issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” A more recent DOL Field Assistance Bulletin (FAB 2018-01) seems to again discourage the use of ESG investing.
  • Nothing in this DOL guidance is truly new under ERISA. Plan fiduciaries must objectively evaluate investments, and all investments must pass criteria established in the plan’s investment policy statement (IPS).
  • The fiduciary standard is to make decisions solely in the best interests of plan participants and their beneficiaries. If the availability of SRI funds in a 401(k) plan menu would encourage higher rates of participation and higher savings rates, while also generating equal or superior risk/return outcomes, it seems that the fiduciary standard is met.

[Related Reading: Three Steps Plan Sponsors Can Take to Bolster Retirement Security]

401(k) SRI Approaches

Plan sponsors that decide to add SRI options to their investment menus can consider a few options.

  • Some 401(k) plan sponsors have added a single SRI equity index mutual fund to their plan menu to satisfy participants who desire to invest responsibly.
  • For plan sponsors that want to offer a single fund, a balanced SRI fund may be the best option since these funds include both stocks and fixed income investments.
  • The one SRI TDF series currently in the marketplace does not yet have a three-year track record, so it would not meet most plans’ IPS criteria. However, when it has reached the three-year mark, it can be considered for those plan sponsors that prefer a single fund approach.
  • Many plans offer multiple tracks of investments to their participants. Some plans may include another track that includes index funds or global funds. In order to incorporate SRI funds into their plan investment menu, plan sponsors could consider adding an SRI track of standalone funds that would mirror the menu in the traditional standalone mutual fund track.

The Future of SRI Investments

So, where are we headed? Here are four predictions about the future of SRI:

  1. Some investment professionals believe that incorporating ESG criteria in the investment process will soon become mainstream. Traditional investment managers are beginning to view ESG data simply as additional information that can help them make better decisions.
  2. Individuals who want their investments to have positive social and environmental outcomes often prefer fund managers that actively engage with corporations or invest in securities that have an explicit impact.
  3. It could take longer for traditional investment firms to embrace the concept of corporate engagement on social and environmental issues.
  4. Plan sponsors should consider their corporate mission and employee population when considering investment managers for their plans.

Justin Held, CEBS
Senior Research Analyst at the International Foundation 

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Justin Held, CEBS

Senior Research Analyst at the International Foundation

Favorite Foundation Service: Foundation Research Surveys


Benefits Related Topics That Interest Him Most: Behavioral economics, socially responsible investing, apprenticeship training


Personal Insight: Justin loves everything baseball, visiting and checking off ballparks as he travels. In this free time, he enjoys hiking at national parks, cycling and reading about U.S. history.

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