Investment Firms Monitor 401(k) Market for ESG Growth

Employer-sponsored pension plans are starting to take ESG into account – and some investment firms are gearing up for massive growth in the space.

Nearly one in five defined contribution plans in Fidelity’s business in 2020 included at least one ESG investment option, and the company expects that proportion to rise amid heightened awareness among young workers .

“Human resources departments hear directly from their employees about the desire for better options that align with their values,” said Keri Dogan, senior vice president of retirement income and investment innovation. working environment at loyalty.

“A lot of this is generational,” Dogan said. “There is clearly a growing demand for climate-specific products [investments].”

The company recently released a small report on near-term trends in the pension industry, based on customer feedback. Greater interest in ESG, in general, was among the findings.

The most recent figure for its total assets in ESG funds within DC schemes, $7.4 billion, is also expected to rise. To prepare for this, the company has hired a sustainability director and is expanding its product list.

Last year, Fidelity launched seven sustainable funds, second only to BlackRock, according to Morningstar data.

And Morningstar itself is interested in the growth of sustainable investing. Last year, the Chicago-based company announced that it was prepare the first specific shared ESG employer plan for the 401(k) market, in collaboration with PAi Retirement Services. A plan for employer pooling, or PEP, is a structure that emerged last year, following the SECURE law of 2019. PPEs allow unrelated companies to participate in the same plan, often with the cost advantages less than they would on their own and the ability to discharge most of the fiduciary responsibilities of overseeing a plan.

Morningstar’s PEP will include a custom target date fund, which — if it’s a sustainable investment — could address one of the biggest ESG hurdles in the 401(k). Indeed, in most cases, workers do not stick to their employers’ plans and tend to stick with the investment option they are placed in, often a target date fund.

And there are very few target date products on the market that are designed specifically with ESG in mind.

“People are much less active in their 401(k) plans around making business decisions or changing the default. To my knowledge, no one is offering default ESG funds at this stage,” Dogan said.

It’s a category of products that Fidelity is considering, although a launch would be a long way off.

A survey the company conducted of participants in the plan found that 26% said they were interested in ESG investing, including 40% of millennials. By comparison, only 10% of all participants expressed interest in cryptocurrency investment options.

It’s not radically different from an investigative report from last year Schroders, which found that 37% of people said their retirement plans include an ESG option, and 90% of those who have the options available invest in it. For those whose plans did not have such options, or if they did not know about them, 69% said they would likely increase their total plan contribution rate if ESG funds were available, according to Schroders.

However, only about 5% of 401(k)s include ESG options, compared to 38% of 403(bs), according to reports last year since Plan Sponsor Council of America.

Among Fidelity’s plan clients who offer ESG funds, 5.4% of participants invest in them, up from 4.8% in 2019, Dogan said.

A turning point for ESG in pensions could be the Department of Labor’s recently revised stance on them, including the permissive use of target-date ESG funds as default options. The regulator has finalized a rule on this subject and should publish it any day.

Until ESG becomes mainstream in default investing, it will take education to make participants more interested in the options their plans currently have, Dogan said, adding that some plan sponsors have asked Fidelity for online sessions dedicated to ESG.

“As an industry, we have a long way to go before participants understand what their choices are and the impact [of them]”, Dogan said. “There will be continued focus and pressure from a climate perspective.”

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