NY Times: How to Get Socially Conscious Funds Into Your 401(k)

Your colleagues choose the investments. Be polite. Respect their duty to act in your best interest. Bring friends. And keep trying.

By Ron Lieber, Jan. 10, 2020

If you want to make a big difference in the world using your hard-earned money, you don’t have a lot of tools at your disposal if you’re not extremely wealthy.

But everyday people have an untapped multi-million-dollar advocacy opportunity staring them in the face each pay period: workplace retirement plans that haven’t added socially responsible investment funds.

Just 2.9 percent of 401(k) plans have even a single fund dedicated to environmental, social and governance issues, according to the Plan Sponsor Council of America’s most recent member survey. If your retirement money is not stashed in one of these so-called E.S.G. funds, you probably have invested in companies that extract or refine pollutants, mow down rain forests or mistreat people or animals. And that means that you’re endorsing their work with your dollars.

If this makes you uncomfortable, you stand a good chance of fixing it. It’s not simple or quick. But if you are resolved to, say, do something about climate change in 2020, diverting millions of dollars in retirement money from companies that warm the planet isn’t a bad place to start.

So first, a bit about how things work. Someone (or a committee of people) at your employer either picks or approves the lineup of mutual funds for your retirement plan. Ask a human resources person — or the president or chief financial officer or executive director at a smaller organization — and you’ll soon have a name or names. Now, rally your like-minded friends (the more the better) and get ready to make your case.

Those plan’s deciders answer to you, in theory — and their interests are aligned with yours, given that everyone wants to have a great plan with good choices. But this is where it starts to get complex.

These colleagues are supposed to act as fiduciaries when the federal regulations are in play, choosing funds only after a careful process that puts employees’ interests first. The Department of Labor, which oversees these plans, sensing the growing interest in E.S.G. investing, offered some guidance for the deciders in 2018: “Fiduciaries must not too readily treat E.S.G. factors as economically relevant” and should focus on “financial factors that have a material effect on the return and risk of an investment.”

This can make plan-deciders jittery, because of the persistent belief that socially responsible funds tend to do worse than the broader market or the niche that they inhabit.

If you hear this argument, point the person making it to a 2015 study in the Journal of Sustainable Finance & Investment, which examined about 2,200 pieces of research. It found that about 90 percent of those studies showed no negative relationship between concern for social factors and corporate financial performance. A large majority, in fact, showed positive findings that were stable over time. A 2016 study from the Journal of Applied Corporate Finance supplies additional support. The mutual fund researcher Morningstar filed a similar report last year.

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