Socially responsible investing may be a way to inspire your employees to save for their retirement. Do you think that you have employees that are anti-abortion, anti-sedan and pro-sustainability? Do some have religious beliefs that your retirement investment menu compromises? Based on their financial or investment literacy most don’t know that they’re actually supporting what they are against in their private life. Incorporating socially responsible investing could be a way to improve morale and get them to give you increased productivity. How do you implement?
Who cares about socially responsible investing?
Research shows that many people are actually looking for socially responsible investing.1 “We’re seeing tremendous interest by participants to have socially responsible investment options available in 401(k) plans,” said Ingrid Dyott, managing director at Neuberger Berman an investment management firm.2 An even larger number of people support charitable causes yet have no idea what socially responsible investing actually is. Many registered representatives and investment advisor representatives working with retirement plans aren’t specialists in socially responsible investing. In my past, I’ve actually had perspective employers in the financial services industry try to dissuade me from even bringing up the topic. For many I believe they simply don’t want to add more research to their investment process. In an effort to work in the best interests of investors, I feel that they should know that this option actually exists. In a retirement plan you can choose to have both socially responsible investments and non- socially responsible investments.
Does your qualified default investment alternative offer a socially responsible choice?
The concept of a qualified default investment alternative highlights the fact that rather than make 401(k) savers better investors you think for them. If you are like many sponsoring firms, you have elected the choice in an effort to help reduce your risk. Unfortunately, these choices typically don’t have socially responsible investing screens embedded in them. There are all-in-one strategies from firms that specialize in providing socially responsible investments. Some of these options can be considered for qualified default investment alternative status. They must be vetted just like the other possible choices for a qualified default investment alternative.
If you’ve read my blogs on ERISA 3(38) investment managers there is another way that you might be able to access socially responsible investments. One that seeks to give you, the fiduciary, a higher level of risk management than simply picking and monitoring an investment intended to be a qualified default investment alternative.
Differentiating your firm with socially responsible investing
Socially responsible investing can leave employees perceiving that you are a caring company. I once met a 401(k) saver that was horrified that her retirement plan had international investments that conflicted with her anti-Sudanese police. However, she was afraid of telling her employer. While I assume that her employer would simply select another choice, affected the way that she perceived her employer.
Is your retirement benefit a way to differentiate yourself from other employers for little to no cost? In a on our sister website Envision Wealth Planning we discussed whether or not an individual (participant) needed a brand-name 401(k) plan. One of the thoughts that drove writing that blog was whether or not that would be a way to differentiate yourself from other employers a potential new hire might be considering.
A map to adding socially responsible investing into your menu
What are your implementation options?
- If you have a plan advisor, you could ask them come back with some options for helping you implement this. In most cases, this won’t be there expertise. They may be limited in what they can suggest either because their financial registration limits them to only commission-based choices or your record-keeper may limit the investment choices available to you. If this is the case, you should be concerned that other investments in your menu may not pass the prudent investment tests of the Department of Labor.
- You could seek out consultants like us that can help you develop a strategy to implement socially responsible investing only and continue to work with your existing team. In Can ESG investing fulfill retirement happiness?” we explored some of the considerations of implementation.
- You could take a holistic approach and do an analysis of your program to see what pieces need tweaking or changing. We recommend that you seek out a fiduciary advisor such as a broad-based ERISA 3(21) investment advisor, meaning investment, providers and administration or an independent Named Fiduciary (402(a)) to help with the strategizing.
We look forward to helping you in whatever road you choose. We believe it’s too important not to live your life on purpose.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. No investment strategy assures a profit or protects against a loss. Socially responsible investments are subject to the risk that, because social criteria excludes securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to investments that don’t use these criteria.
1Beyond profits: Millennials embrace investing for social good, LA Times, December 7, 2014
2Demand for socially responsible investing options in 401(k)s on the rise, Investment News, November 7, 2014
