ESG Is Coming to 401(k) Plans

For those outside of the asset management and financial advisory worlds, an often overlooked result of the 2020 presidential election has been a change in attitude toward allowing environmental, social, and governance (ESG) funds into 401(k) plans.

Put simply, the Trump Administration did not support ESG 401(k) inclusion. President Biden’s supportive stance could open a wide new frontier for a group of funds that are already gaining plenty of traction without the assistance of the enormous 401(k) market.

“Until now, retirement plans have been left behind in the rush to sustainable investing. In 2019, according to the most recent data from the Plan Sponsor Council of America, 3% of 401(k) plans had an ESG option, representing 0.1% of plan assets,” reports Leslie Norton for Barron’s. “Morningstar says that just 4.5% of defined-contribution plans have one sustainable fund in their lineup, and they make up, on average, 0.17% of the offerings.”

Data confirm the employer-sponsored market represents remarkable opportunity for ESG fund issuers, though it remains to be seen how changes on this front will impact sponsors of exchange traded funds because 401(k)s are one frontier ETFs have yet to conquer in sizable fashion.

“Consultant McKinsey projects that defined-contribution plans will hold $11 trillion in assets by the end of 2022. If sustainable investments expand to 10% of assets in the next five years, that could add $1 trillion,” according to Barron’s.

Other data points confirm areas of opportunity for ESG fund issuers. By some estimates, four in 10 401(k) participants don’t even know if they can access sustainable investing options in those accounts, but almost 70% say they might be compelled to contribute more to those plans if ESG options were on the table.

As for what’s next, the Biden Administration is making clear it won’t enforce policies from the previous administration that kept ESG funds out of 401(k) plans. However, it could be a while before these options officially arrive in employer-sponsored plans.

As Barron’s notes, 401(k) sponsors often face an assortment of litigation from market participants, indicating sponsors are likely to tread cautiously regarding ESG implementation.

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