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Should You Invest in ESG Funds in Your 401(k) Plan?

Saving the earth and saving for retirement don’t always go hand in hand.

By Paul Swanson, CFA

Investors are putting more money than ever before into mutual funds and ETFs that test the equities within based on environmental, social and governance (ESG) criteria. According to Nasdaq, 51% more institutional investors and 45% more fund selectors engaged in active ownership of ESG investments in 2020, compared to 2019. Overall demand for ESG investing is not slowing down and the Department of Labor recently declined to enforce a Trump-era rule that would have made it harder to add ESG funds to retirement accounts. 

But savers may be surprised that they won’t find many ESG funds as option in their employer sponsored 401(k) retirement plan, with only 2.6% of plans having ESG option in 2019, according to data from Plan Sponsor.

Paul Swanson

Paul Swanson

ESG funds in 401(k)s are rare partly because there is no codified standard for measuring ESG performance, making advisors wary as picking the most financially sound ESG funds can be difficult. This lack of regulation can make it hard to identify companies that are truly sustainable from those that have merely tried to jump on the bandwagon. When companies provide employees with 401(k) retirement accounts, they accept responsibility that the funds within their plans live up to their descriptions. But the lack of a global standard means it can be hard to tell if an ESG fund has achieved or will ever achieve its goals.

This tension can only be compounded as Gen-Zers, many of whom have grown up in a society in which showing environmental responsibility is an accepted norm, age and join the ranks of employees investing in 401(k) plans. Greater transparency and communication around the criteria companies follow when labeling a fund an ESG and the fees involved could inspire more institutional confidence in them. Without it, adding more ESG funds to the mix of 401(k) investment options could make plans even more confusing to employees.

It’s frustrating to feel as though your retirement planning may not fully align with your sustainability goals. After all, ESG investing sometimes seems to be a quick solve to make sure that your finances and your morals coincide. 

That said, looking into the future, there are some promising signs that the U.S. might catch up with Europe and put in place the kind of disclosure requirements and regulation that would make ESG funds a more reliable and accessible part of retirement plans. 

In the meantime, take a closer look at the standards governing your money and utilize those ESG funds for your shorter-term financial investments. For retirement, do your diligence and consult your financial advisor about the pros and cons if you do happen to see an ESG option as part of your plan.

About the author: Paul Swanson, CFA®, CIMA®

Paul Swanson, CFA®, CIMA®, is vice president, Retirement, Cuna Mutual Group, a leading insurance, financial services and technology company focused on helping people achieve financial security through all life stages.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or positions of any entities they represent.

CUNA Mutual Group is the marketing name for CUNA Mutual Holding Company, a mutual insurance holding company, its subsidiaries and affiliates. Corporate Headquarters: 5910 Mineral Point Road, Madison WI 53701 © CUNA Mutual Group 


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