Why ESG retirement plans could get employees to save more for the future

Employees want to lead life — at work and beyond — on their own terms, and that’s influencing how they’re investing in their retirement funds. 

Eighty-seven percent of retirement plan participants want their investments to be aligned with their values, according to Schroder’s 2022 Retirement Survey. That’s leading the majority of employees (74%) to seek out investment options that follow environmental, social and governance goals. Those employees would also contribute more if offered an ESG option. 

In 2021, 69% of employees said the same, pointing to a steady increase in demand for this benefit. However, only 37% of plan sponsors offer an ESG-related investment plan, Schroders found. Employers may feel uncomfortable diving into uncharted waters and need more education, along with government support, says Deb Boyden, head of U.S. Defined Contribution at Schroders. 

Read more: Go green or go home: Employees want their 401(k)s to reflect ESG goals 

“There is a lot of education necessary with adding ESG options, when they’re implemented and ongoing,” she says. “Another factor is a final Department of Labor regulation ruling, and that is the main reason why plan sponsors are getting ready and thinking about adding this option.” 

The proposed changes to a 2020 DOL rule would remove Trump-administration initiated barriers, which limited fiduciaries from recommending plans that address climate change. The Biden administration released an executive order in May 2021 directing the federal government to treat climate change as a threat to workers' retirement savings. As such, the revised DOL ruling, which is anticipated to be released this summer, would allow plan sponsors to address the financial impact that ESG factors and climate change have, and provide solutions and options that align with those values. 

An employer’s first step should be to survey employees to get a sense of their investing needs, along with education gaps that need to be filled, Boyden says. While it seems good on paper to invest in an ESG option, many employees lack the knowledge of how it works and where their money is actually going. 

The standard practice most employees engage in is to invest in a target date fund offered by their employer, without having much choice in the companies and investments that make up the fund. Today, employees are looking for more choices — and want to know that their money is going to the causes and issues they support. Discovering what those are, Boyden says, requires surveying employees to gain  an understanding of where they’re at in their investing journey. 

Read more: How advisers can boost retirement plans and capitalize on the ESG boom

Schroders’ survey found that 51% employees are most interested in investing in funds that address employee welfare and help provide a living wage; 39% would like their investments to target climate change and global warming; and 36% want their investments to make an impact on human rights.  

Offering those targeted options will be a gradual shift for most employers, Boyden says. Instead of switching plan administrators entirely, employers are working with asset managers who are integrating ESG issues into their risk management process, and those changes in approach can help employers and employees shift to a more value-based investment strategy. 

“Another fundamental factor taken into consideration when creating a portfolio is looking at ESG factors of a company and how it contributes to the bottom line in a positive way to that company,” Boyden says. “Employers want to meet their participant base where they're at, and will do anything they can to get [employees] contributing to the plan and increasing their contribution.”