Defined contribution retirement plan sponsors have a journey ahead when weighing whether to add environmental, social and governance funds to investment menus.
Challenges for plan sponsors with participants showing greater interest in sustainable investment and ESG funds are myriad, according to industry experts. Plan sponsors must determine the plan’s ESG philosophy and goals for sustainable investing and communicate these to plan participants. But plan sponsors’ communication to and education of participants must account for fiduciary obligations, and not constitute investment advice under the Employee Retirement Income Security Act.
Retirement plan fiduciaries who are considering adding ESG funds to their investment lineups would be wise to map their traditional investment selection process to sustainable investments, says David O’Meara, director of investments at Willis Towers Watson. Each sustainable investment selection must be inspected under a fiduciary lens.
“We see it as looking across all funds—whether or not it’s a branded ESG [fund]. ESG evaluation as part of the overall investment process should be accounted for by plan fiduciaries as they’re evaluating their investments. Whether or not a fund is branded ESG or not, the evaluation needs to be similar and [ESG funds] effectively need to be looked at as a valuable component to a participants’ portfolio,” he says.
Examining and adding ESG is a challenge for DC plans because participants may not understand the terms and the underlying process, nor how the funds invest. The challenges for plan sponsors are educating retirement plan participants on ESG funds, communicating appropriate allocations to ESG funds and explaining terms and how sustainable funds invest, says O’Meara.
“There isn’t a lot of communication going out that’s necessarily differentiated for ESG versus non-ESG,” he explains.
Plan sponsors are concerned that communication “could be viewed as advice,…
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