ESG Funds May Help Boost Participation

Financial Wellness BenefitESG funds may be what is needed to increase plan participation.  When retirement plan sponsors and committees evaluate investment options, they typically do so based on universal themes.  These themes may include fees, diversification opportunities, and qualified default investment alternatives (QDIAs).  Another theme may be ESG.  Given the environment we live in today, where social inequity receives quite a bit of attention, retirement plan fiduciaries may consider ESG related investment options.  This type of investing incorporates employee demographics and values.  Including funds for socially or environmentally conscious or faith-focused workers may be a choice.  It may help increase plan participation and engagement, according a recent BenefitsPro article.

Evaluating investment options this way may be relatively new, and may be considered a little off the beaten path.  But many employees want to invest according to their beliefs.  They want options that will help them meet their financial goals.  Most workplace retirement plans include “vanilla” mutual funds – which are often a mix of stocks and/or bonds included in one portfolio.  The funds are actively managed by a professional investment manager to achieve a certain goal.  Or, they may be index funds, which tend to cost less and are “passively” managed to reflect an existing index, such as the S&P 500.

Mutual funds that reflect religious beliefs, or that focus on socially responsible companies, have been available for years.  They are often referred to as “ESG funds.”  The ESG in ESG funds, stands for environmental, social and governance investing.  The ESG funds are considered simply, socially responsible investments.  Although these funds have a reputation for under-performing traditional investment options, more recent studies have shown this not to be accurate.  For example, a study from NYU’s Stern Center for Sustainable Business found that ESG funds demonstrate improved performance over time, and provide downside protection for investors in times of economic or social crisis.

Although not every employee may require ESG funds and similar options, some will.  And they will question how their money is being invested in their company 401(k) plan.  Having an employer that considers their values in the investment lineup is a show of good faith.  ESG Funds in a plan can improve the plan’s perceived value in employees’ eyes.  Providing these funds can also be a solid diversity, equity, and inclusion (DEI) initiative.  This becomes a tangible representation of your commitment to these measures.  Including these investments can help improve employee loyalty, as well as plan participation and engagement.  This translates to higher engagement at work, better productivity, and increased retention across the board.


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