ESG funds may be what is needed to increase plan participation. When pension plan sponsors and committees evaluate investment options, they generally do so based on universal themes. These themes may include fees, diversification opportunities and Qualified Default Investment Alternatives (QDIA). Another theme can be ESG. Given the environment we live in today, where social inequalities are getting a lot of attention, pension plan trustees can consider ESG-related investment options. This type of investment incorporates employee demographics and values. Including funds for socially or ecologically conscious or faith-based workers can be an option. This can help increase plan participation and commitment, according to a recent BenefitsPro article.
Evaluating investment options in this way may be relatively new and can be considered a bit off the beaten path. But many employees want to invest according to their convictions. They want options that will help them achieve their financial goals. Most workplace pension plans include “classic” mutual funds, which are often a combination of stocks and/or bonds included in a single portfolio. Funds are actively managed by a professional investment manager to achieve a certain objective. Or, they can be index funds, which tend to cost less and are “passively” managed to mirror an existing index, such as the S&P 500.
Mutual funds that reflect religious beliefs or focus on socially responsible businesses have been around for years. They are often referred to as “ESG funds”. ESG in ESG funds means environmental, social and governance invest. ESG funds are seen simply as socially responsible investments. Although these funds have a reputation for underperforming traditional investment options, more recent studies have shown this to be incorrect. For example, a study by NYU’s Stern Center for Sustainable Business found that ESG funds show improved performance over time and provide downside protection to investors during times of economic or social crisis.
While not all employees need ESG funds and similar options, some will. And they’ll wonder how their money is invested in their company’s 401(k) plan. Having an employer who takes his values into account in the range of investments is a proof of good faith. ESG funds in a plan can improve the perceived value of the plan in the eyes of employees. The provision of these funds can also be a solid diversity, equity and inclusion (DEI). It becomes a tangible representation of your commitment to these measures. Including these investments can help improve employee loyalty, as well as plan participation and commitment. This results in higher work engagement, better productivity and increased retention at all levels.
Steff C. Chalk is executive director of The Retirement Advisor University, a collaboration with UCLA Anderson School of Management Executive Education. Steff is also Executive Director of The Plan Sponsor University and is currently a professor at The Retirement Adviser University.