Forty years ago, the IRS started allowing tax-deferred salary deductions, marking the birth of 401(k) retirement plans. This was the same year the first millennial babies were born. It’s time we fixed the retirement plan rules to recognize this generational shift.
Millennials, together with Generation Z, often think about the use of money differently from previous generations. They tend to have greater interest in buying goods made in a responsible manner and in utilizing investment products, such as mutual funds and exchange-traded funds, that seek returns as well as addressing critical environmental and social issues. These products are often known as environmental, social and governance (ESG) investments.
An Accenture survey found that 80% of Generation Z and 63% of millennial respondents asked their adviser about sustainable investing. In contrast, only 27% of baby boomers did the same.
However, less than 3% of 401(k) plans offer a single fund that considers ESG factors and a mere 0.1% of total plan assets are in ESG funds, according to the Plan Sponsor Council of America’s most recent member survey. By contrast, assets that apply ESG criteria have grown by almost 43% between 2018 and 2020, and now represent a third professionally managed assets.
The last year has seen Americans react to COVID, economic inequality and racial injustice. Additionally, the latest report of the Intergovernmental Panel on Climate Change has been declared a code red for humanity. Addressing these issues demands that investors take environmental and social issues into account – something that is particularly important in the calculations of long-term investments such as retirement plans.
With millennials and Generation Z making up almost half the workforce, there is an obvious gap between the investment options they want and what their 401(k) plan, if their employer offers one at all, is likely to offer.
For most millennials and Gen Zs, their retirement fund is likely to be their most significant investment holding. The Federal Reserve’s latest Survey of Consumer Finances shows that only 13.8% of Americans younger than 35 directly hold stocks, while a more substantive 45.3% have a retirement account. And yet, with a majority of retirement plans not offering even a single sustainable fund, most employees will simply be locked out of this opportunity.
Why don’t retirement plans offer sustainable investment options?
Over the past two decades, the Department of Labor (DOL) has produced seesawing guidance and rules regarding the inclusion of funds that use ESG criteria in private sector pension plans, reflecting the views of the president sitting in the White House at the time.
Most recently, the Trump administration produced two rules that reflected their general disinterest in addressing ESG issues. These rules met overwhelming opposition from many investment firms. The Department of Labor, under President Biden, is committed to reversing these rules and clarifying that retirement plans may use sustainable funds in their retirement plans. The DOL has indicated that such new proposed rules will be released this month.
This regulatory pendulum swing has made the pension fund industry wary of adding ESG-oriented funds in retirement plans. Thus, in addition to the regulatory changes needed at DOL, it will also be critical for Congress to make more permanent change by amending the laws that govern pension plans to clarify that ESG funds are acceptable in retirement plans.
Fortunately, there are bills pending in the U.S. House and Senate — Representative Levin’s Retirees Sustainable Investment Opportunities Act and Senators Smith and Murray’s Financial Factors in Selecting Retirement Plan Investment Act — that would do just that. If passed, they would help close the ESG retirement gap and give plan participants the right to choose an ESG retirement plan. Our planet and our next generation of investors cannot wait.
Andy Levin (D-MI) represents Michigan’s Ninth District. Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment.