Does your organization represent a cause, such as eradicating cancer or promoting environmental sustainability? Do you have moral or faith convictions that don’t allow you to support certain activities such as abortion? If you don’t might your employees?
Given that your retirement plan is to be run for the benefit of your employees, you should consider including investment strategies that fit your convictions and the interest of your employees. Besides the social benefits, this demonstrates you care about your employees. We can provide this service as a standalone if you retain your current investment advisor or broker, or be included as part of our complete service package.
Your choice of recordkeeper is important. Some recordkeepers either may have no choices or may limit your investment choices to ones that serve their interests. Many recordkeepers or retirement plan brokers tout the number of options that you can choose from. However unless the record-keeping firm is actually open architecture your choices are limited. I have had their representatives call their less limited, open architecture. Most firms don’t think of providing an array socially responsible or ESG investing options when determining their lineups. Their decisions are based on their business needs.
Screening your 403(b) investments
Few people read the details about what they are investing in. I don’t blame the average investor for not doing so. Most people typically look at the returns of their investment choices when making their decision. However, what is the decision-making process behind the numbers? If your investments do not specifically state that they limit their investments in companies aligned with your mission than on any given day they can support the company’s that your nonprofit was founded to combat. There are several companies that have some kind of investment strategy that align with various environmental, social or governance causes. There are companies that specialize in screening investments for various social concerns that are not investment managers.
ESG investing as part of a prudent investing process
A growing number of investors interested in incorporating social, ethical, moral, religious, and environmentally sustainable strategies into their portfolios. You may be one of them. The Center for Fiduciary Studies offers an Optional Practice Standard, 2.7 to formalize incorporating ESG investing:
- When socially responsible investment strategies are elected, the strategies are structured appropriately.
- The goals and objectives established for the portfolio are evaluated to determine whether socially responsible investing is appropriate and/or desirable.
- If a socially responsible investment strategy is elected, the investment policy statement documents the strategy, including appropriate implementation and monitoring procedures.
The exclusive purpose doctrine under the Employee Retirement Income Security Act (ERISA) focuses upon the need to align the investment options with the central purpose of an ERISA-covered plan, which is saving for retirement or health and welfare benefits. Thus, fiduciary standards of care cannot be abandoned.
ESG investing specialist advisor
Work with an advisor that is a specialist in ESG investing. Hopefully this person is also your ERISA 3(21) co-fiduciary advisor or an ERISA 3(38) manager. As this may not be the case, you or retirement plan consultant may need to look for a specialist advisor or broker to assist. As there is no ESG investing designation acknowledging skill, be sure to ask plenty of questions to get a sense of the specialist’s knowledge and access to investing tools to help your due diligence. Your specialist can do sufficient research to identify ESG strategies for your plan that are likely to be prudent, effective, and practical to implement and that are regularly monitor whether in fact they are accomplishing the intended results. These may be broad-based or specific issues based on your goals.
It is important to note that your chosen recordkeeper, often referred to as plan provider, may limit your access to the universe of available ESG investing strategies. You can always advocate for them to expand their platform or take your business to “greener” pastures.