Providing Socially Responsible Investing Options in Defined Contribution Plans

Offering a retirement plan to your employees is a great way to offer a competitive benefits package. But what about the investment options your plan provides? As a plan sponsor, you may often assess new investment options for your participants, largely considering the demographics of your participants, such as age, financial literacy, and other types of quantifiable data. Have you ever considered their societal values? Over the past few years, more plan sponsors are considering their participants’ societal values when developing investment menus to craft a strong array of options for their employees. This focus on environmental, social, and government issues within investing is typically known as Socially Responsible Investing (SRI) and is a great way for participants to “put their money where their mouths are” by making a societal impact as they save for retirement.

The Growing Desire for Socially Responsible Investing

Socially Responsible Investing has particularly gained traction in the past few years as Millennials have entered the workforce and investment arena. Studies show that younger investors are more inclined to commit to SRI than their older counterparts. As more Millennials overtake the workforce and Baby Boomers continue to retire, we can expect to see a continued growth in SRI.

As a result, more companies are offering Socially Responsible Investing options. Already, between 15 and 20% of 401(k) plans today offer SRI options. Research from a Calvert Investments study found that plan participants whose company retirement plan offers SRI options are “significantly more likely to express high satisfaction with their plan.” 66% of participants with Socially Responsible Investing options are “highly satisfied” with their employer plans as opposed to 44% of those whose employers didn’t offer SRI options. Furthermore, 78% of participants seek a greater understanding of the companies in which they invest.

Risk and Return

As plan sponsors choose to move in this direction, it is critical to bear in mind their duty to maintain their sense of fiduciary responsibility. Like any and all investments, Socially Responsible Investing involves risk. Researchers have been attempting to quantify the risks and returns from SRI and compare these metrics with those of traditional investments for years. UN PRI points out that investors often associate a company’s positive societal impact with high-functioning management practices and a well-oiled corporate structure, and thus a likeliness to provide low-risk, high-return investment options. While this is simply an inference, projects like a UC Berkeley 2004 empirical study demonstrate that the relationship between corporate social responsibility and financial performance are “positive and statistically significant,” supporting the view that “socially responsible corporate performance can be associated with a series of bottom-line benefits.”

That being said, choosing to avoid certain sectors of the market may mean foregoing some high-performing assets. Though many SRI firms do not often severely limit the companies in which they choose to invest, it is common that several key sectors are excluded from SRI portfolios, resulting in returns that are sometimes lower than their non-socially-screened counterparts.

However, firms who offer SRI investing still have a responsibility to their constituents to provide a competitive edge on the market, and thus work to maintain a level of return analogous to funds that do not consider environmental, societal, and governmental factors. Therefore, it is important to reflect on the performance and underlying risk-return characteristics of any socially responsible investment option one might be considering. If its returns and other performance metrics are not competitive, it cannot be considered a feasible investment choice, regardless of how it addresses environmental, societal, and governmental concerns.

To date, there is not a consensus among financiers on the most accurate way of measuring SRI performance. They can be compared to a specific social index, to a traditional index, or to a custom index, but each of these appraisals will warrant different results. Consequently, it is the responsibility of a plan sponsor to vigilantly assess each Socially Responsible Investing consideration, just as they would with any other type of traditional investment.

Next Steps

As financial markets grow ever more complex and intertwined, it is fortunate that plan sponsors, advisors, and participants are still able to consider such a wide range of investment opportunities. As new generations invest, Socially Responsible Investing has taken large steps toward establishment as a mainstay in financial markets. Available options for SRI continue to grow extensively, allowing plan sponsors and participants to choose from a variety of investment strategies.

Regardless of the strategy selected, it is important to maintain the fiduciary obligation to plan participants by offering financially competitive investments at the forefront. When incorporating SRI investments, the same qualitative and quantitative guidelines should be applied as when considering non-Socially Responsible Investing selections.

At PlanPILOT, we offer a wide array of plan consulting services, from compliance review and fee analysis to fiduciary governance and vendor search, evaluation, and structure review. To learn more about our services or providing Socially Responsible Investing options in your benefits plan, give our office a call at (312) 973-4911 or email us at info@planpilot.com.

ESG & Retirement Plans Environmental, social and governance (“ESG”) investing is growing in its understanding, acceptance and usage in the retirement plan industry. Read More »

Related Posts