Skip to main content

ESG and Generational Strategies for Retirement Plan Advisers

Adviser Steve Bogner reviews ESG investing and the financial goals of younger investors.

By Steve Bogner

Over the next three decades, the Gen Xers, millennials, and Gen Zers will be the beneficiaries of some $70 trillion dollars being passed down to them by their parents and grandparents.

Retirement plan advisers should understand what distinguishes these next generation investors from the generations that preceded them.

One such distinguishing factor involves the growing importance among socially conscious investors of aligning their core beliefs with their investments when assessing a company’s commitment to sustainability.

We’re talking, of course, about Environmental, Social, and Governance (ESG) criteria:

  • Environmental. Is the company a good steward of the natural world?
  • Social. Does the company treat its community, suppliers, customers, and employees with respect?
  • Governance. Are the company’s leadership, executive pay, shareholder rights, internal controls, and audits all consistent with the highest expectations?

Although a mutual fund that claims to adhere to the ESG standards may be offered to a retirement plan participant, investing in the fund may not be consistent with a participant’s overall investment strategy. And, as fiduciaries, we have a responsibility to encourage plan participants to weigh a number of factors, including performance.

Consequently, it is incumbent on us to clearly communicate to the participants the impact of adding ESG related investments to their portfolio.

Scroll to Continue

TheStreet Recommends

Under the previous administration, the Department of Labor issued a ruling that focused on the “pecuniary” effect of an ESG investment. However, under the current administration, it is unlikely this language will be promoted.

And, as David Levine at Groom Law Group, a leading benefits, health, and retirement firm headquartered in Washington, D.C., says, “The (DOL) guidance will continue to go back and forth as administrations change.”

Regardless, as fiduciaries, we should identify the risks to the plans we advise in order to protect the plan sponsor, as we also offer investments to participants that may be subject to the whims of Washington.

Key takeaways:

  • Having the Qualified Default Investment Alternative (QDIA) default into an ESG investment may expose the plan sponsor to increased risk.
  • A traditional fund lineup with a robust suite of offerings in various asset classes has traditionally been prudent.
  • One strategy worth consideration is to pepper the current offerings with a select number of ESG options. When doing so, the plan adviser should also consider specifying why these are viable investments. It is also advisable to benchmark the ESG funds for cost and performance.

And, finally, educate the plan sponsor/committee and participants on why it is important to view these options as a complement to the existing portfolio, and the possible risks associated with investing exclusively in the context of ESG criteria.

We don’t know if this ESG trend is here to stay but, for the moment, we should try to balance what the market may be requesting with our responsibilities for protecting the plan sponsors and participants.

About the author: Steve Bogner joined Treasury Partners in 2011, after 11 years with Morgan Stanley Smith Barney. He is responsible for Treasury Partners’ retirement planning services with a primary focus on reducing overall plan risk and fiduciary liability. His areas of expertise include defined contribution/benefit plans and non-qualified deferred compensation plans. He is a certified 401(k) professional, and holds Series 7, 31, and 63 securities licenses, a Series 65 investment adviser license, and is life and health insurance licensed. He was named Financial Times “Top 401 Retirement Plan Advisors” 2016, 2017, 2018, 2019, and 2020.