Impact Investing and 401(k) Plans – What’s the Holdup?

May 2016 | Impact Investing

A February 2015 survey by Morgan Stanley found that more than 70% of individual investors are interested in sustainable investing and compared to the overall individual investor population, millennial investors are nearly two times more likely to invest in companies or funds that target specific social or environmental outcomes.   Another interesting finding is that female investors are nearly two times as likely as male investors to consider both rate of return and positive impact when making an investment.[1]

Millennials – people born between 1980 and 2000 – are now the largest generation in the American workforce[2].  The estimated 53.5 million millennials in the work force are only expected to grow as millennials graduate from college and find jobs.  Millennials are committed to ESG/impact investing.  They want products that unite positive social effects with their long-term savings. A large majority of them are helping spur the availability of products within the impact investing space.

These findings beg the question – why isn’t there more impact investing fund options in 401(k) plans?  As more and more millennials and impact-conscious investors demand these products in their retirement plans, the availability will increase.

Last July, the Federal Retirement Thrift Investment Board voted to move forward with developing a mutual fund window option for the 4.7 million federal employees and military personnel served by the Thrift Savings Plan (TSP), the country’s largest defined contribution plan.   Currently, there are no sustainable and responsible investment options in the TSP but this is hopefully one step closer to being able to provide government employees with an option to invest in mutual funds that consider environmental, social and governance criteria to generate positive environmental and societal impact while generating long-term retirement savings for participants.[3]

Last October, the U.S. Labor Department issued new guidance regarding economically targeted investments (ETIs) made by retirement plans covered by the Employee Retirement Income Security Act (ERISA).  U.S. Secretary of Labor Thomas E. Perez said: “Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand.”[4]

Almost two years after Yale added climate change awareness to their investment strategy, they have started to divest from fossil fuels.  It may be a few more years before we see an influx of impact investing product offerings in 401(k) plans but the momentum is there.  With so many good responsible investment options available and the population shift, qualified plan sponsors should take note and may want to re-visit their offerings.






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