Socially Responsible 401(k) Options Show Employers Take DEI Seriously

Diversity, Equity, and Inclusion (DEI) is a priority for many employers and as an HR Manager, you have probably been tasked with implementing programs in your workplace toward this end. Simultaneously, many companies see how prioritizing strong values, guiding their business toward social impact, and showing leadership in workplace culture helps attract quality talent, retain top performers, and distinguish themselves in the marketplace.

But how can your organization put its money where its mouth is?

One way for employers to demonstrate that diversity and social impact matter is through the investment choices in employee retirement plans, such as a 401(k). Over the years, as the US workforce has become younger and more diverse, expectations around the issues and values an investment should address have shifted — and socially responsible and sustainable investment options abound to cater to this shift.

Socially Responsible Investing, or SRI, is a term that is often used somewhat interchangeably with “ethical investing,” “impact investing” and “sustainable investing,” which reference the core idea: that companies demonstrate stronger performance in the areas of environmental, social, and governance (ESG) criteria make more desirable investments – on ethical principles, financial measures, or a combination of the two.

Though SRI traces its roots as far back as the 18^th century, there are some myths about it. The process of moving a company’s 401(k) to a more sustainable option can be involved, but it is achievable as long as you know objections that might come up and are prepared to respond. It also demonstrates a true alignment of your company’s mission and values. Here are four myths about SRI:

Myth 1: SRI is niche or fringe

Although SRI has been sometimes regarded as a niche market or a fad, the number of investors adopting ESG strategies suggest otherwise: in the five years between 2014 and 2019, a Morningstar report on the landscape of US sustainable funds showed the number of mutual funds branded as sustainable increased by over 140%. The Forum for Sustainable and Responsible Investment (US SIF) found that as of 2020, one out of every three dollars under professional management in the US was managed according to sustainable investing strategies. Most fund managers have at least one – if not a whole menu – of different socially responsible or sustainable funds to choose from.

Among institutional investors – insurance companies, pension plans, and other major players on Wall Street – a 2019 survey from Morgan Stanley found that 57% envision a time when they will only allocate investments to managers with a formal sustainable investing approach. Their recent Sustainable Signals research on individual investors shows the demand for sustainable investing is even greater:

• 50% of investors and 73% of millennials made changes to their investment portfolios or plan to within the next 12 months in response to social justice issues
• 79% of all individual investors, and 99% of millennials are interested in sustainable investing
• 76% of investors cite performance concerns as the biggest barrier to investing sustainably

Myth 2: SRI investing delivers lower returns

The myth that sustainable investing delivers lower returns to investors has been hard to shake. But researchers at New York University’s Stern Center for Sustainable Business found improved financial performance due to ESG becoming more noticeable over longer time horizons and that ESG can provide downside protection to investment portfolios, particularly during social or economic crises.

Morgan Stanley found that US sustainable equity funds outperformed traditional peer funds by a median total return of 4.3% and reduced investment risk during the first wave of coronavirus in 2020. And though outperformance can be challenging to predict, sustainable funds tend to favor higher-quality investments that, according to Kenneth Lamont of Morningstar Europe in a July 2021 Financial Times article, “may reasonably be expected to outperform the market over long periods.”

But the persistence of the myth of lower performance is precisely why socially responsible and sustainable options are so hard to find in employer-sponsored retirement plans. The Plan Sponsor Council of America found in 2019 that 2.9% of 401(k) plans had even one ESG or sustainable fund as part of the menu.

Myth 3: ERISA doesn’t allow SRI investments

The fiduciary standards an employer must abide by when selecting appropriate investment options for employees is a high standard to clear.

But the Department of Labor says “ESG factors, and climate change issues, in particular, pose financial risks that plan sponsors should consider as prudent fiduciaries.” Academic research and industry experts alike point out that sustainable funds perform just as well – if not better – than other funds, a view shared in the Institutional Shareholder Services survey in 2021.

Myth 4: DEI and SRI investing are separate issues

There’s a final angle for HR professionals to consider about adding SRI options to a 401(k) menu: adding socially responsible and values-based options to your retirement plan menu can be an actionable, meaningful DEI initiative that demonstrates an employer’s commitment to equity and inclusion.

Signaling to your values and values-focused employees that you recognize there are options out there for them goes beyond lip service and may inspire greater loyalty to the company – as well as greater participation in the company’s 401(k). And even just one SRI option may cover a lot of ground.

As information about socially responsible and sustainable investing becomes more widespread, HR managers will want to position themselves to respond to queries from employees. It may also be worth surveying your staff to see how many wish to have these options in the employer’s plan. In the end, a values-based approach to retirement savings might be more than just a way of retaining and engaging employees. It could help attract new talent as well. Keeping your company competitive by simply identifying and offering the benefits that employees deeply connect with is a chance for HR to shine.