Aligning company values with its retirement plans

Aligning company values with its retirement plans

retirement plan
Shutterstockemilie zhang

In the United States, about 54 million employees actively participate in a defined contribution, or 401(k), plan. Over the last decade, 401(k) plans have more than doubled in size, holding as of June an estimated $5.3 trillion in assets and representing 19 percent of the $28.3 trillion in U.S. retirement assets. In comparison, 401(k) assets were $2.2 trillion and represented 16 percent of the U.S. retirement market in 2008.

Yet, less than 1 percent of 401(k) plans offer some type of socially responsible fund. According to an Investment News article, in 2017, 401(k) investors committed more than $35 billion in impact investment funds. While this was up more than 58 percent from the previous year, it is still just scratching the surface.   

The World Business Council for Sustainable Development (WBCSD) is trying to better understand the barriers inherent in providing socially responsible funds in a company’s retirement plan and providing solutions to address them. Earlier this year, Aligning Retirement Assets (ARA) was launched to assist companies to better align retirement assets with their overall sustainability goals, including defined benefit and defined contribution plans.

Allianz Global Investors, BlackRock, Legal & General Investment Management, Mercer, Natixis and the Principles for Responsible Investment have joined the initiative’s steering committee to help educate member companies on incorporating sustainable strategies in their retirement plans. As an aspirational goal, the project envisions that 1 percent ($10 billion) of WBCSD member companies’ total retirement assets (estimated at $1 trillion) will be invested in some type of socially responsible funds by 2020.  

The initiative is structured in two phases, centered around the publication of "toolkits" that seek to provide practical information about responsible retirement and the most effective ways to provide these types of funds in a company’s retirement program.

Defining a 'responsible retirement plan'

WBCSD recently published the first toolkit, designed to answer the question "what is a responsible retirement plan?" starting with the basics of how retirement plans are governed and operated. Compared to a standard retirement plan, a plan that could be considered "responsible" will take a range of environmental, social and governance (ESG) considerations into account in selecting investments and constructing a portfolio for employees.

Understanding how retirement plans are governed and administered within a company is an essential first step in addressing the barriers that keep significant percentages of employees from investing in socially responsible funds for their retirement. The toolkit examined the basic structures and legal requirements that form the foundation of corporate retirement plans and specifically looked into:

  • Types of retirement plans;
  • Retirement plan governance and administration; and
  • Fiduciary duty.

It also looked at the ways in which sustainable investment considerations and practices can be better integrated into corporate retirement plans. The work also examined such things as:

  • Definition of a responsible retirement plan and responsible investment approaches;
  • Review of responsible investment methods;
  • Different ways to implement a responsible retirement plan;
  • Regulatory landscape governing retirement plans;
  • The impact on fiduciary duty of responsible retirement plans; and
  • The need for a common set of data to gauge the rate of returns.

While integrating responsible investment options into retirement plans frequently has been mischaracterized as sacrificing returns, forcing political or ethical views into the investment process or as opposed to fiduciary duty considerations, WBCSD found that these views are dated and, in many cases, incorrect.  Rather, we have found that responsible investment approaches can be integrated into retirement plans of all types and sizes, without sacrificing returns.

The big picture: Keeping the best and brightest

Employees increasingly bring their passion for causes into the workplace and expect management to respond to their expectations with new behaviors both inside and outside the workplace. It is only logical that the values these employees express through these causes also would be reflected in the ways in which they would invest their money in their company retirement plans — if given the opportunity to do so.

Some employers who successfully have integrated responsible investments into their retirement plans have found that employees, particularly women and younger employees, tend to save more for retirement when offered investment options that reflect their values. Indeed, a recent Povaddo study of employees who work at Fortune 1,000 companies found that:

  • 65 percent of millennials said they would be more likely to invest in their 401(k) if there were socially responsible funds to invest in; and
  • More than half of millennials and women said they would be more likely to increase their contribution if socially responsible funds were available to invest in

This study also found that:

  • 41 percent of millennials said that providing socially responsible funds to invest in affect their decision to maintain or pursue employment with a company

Companies are in competition to attract and retain the best and brightest employees. According to an article that appeared this summer in the Wall Street Journal, there are more job openings than job seekers. The competition is occurring in an environment where unemployment is at an all-time low and top talent is hard to attract and retain. 

For companies that do provide employees with these types of funds to invest in through their retirement plan, this can be a competitive advantage to attract and retain the best talent. The ARA initiative is pulling back the veneer of corporate retirement plans; identifying the barriers that are keeping most retirement plans from offering socially responsible funds; and providing specific recommendations to overcome those obstacles. 

Closing this gap now is a "triple bottom" win — good for employees, good for business and good for the world.