If you’re confused about adding ESG-oriented investments to a 401k menu—is it allowed, should it be allowed, does the DOL allow it?—you’re not alone.
It’s a reason advisor Katrina Bell, Principal and Co-Founder of Portland, Oregon-based NewCoProject, dedicated a session to it at Excel 401(k): The Advisors’ Conference in Dallas on Monday afternoon.
Titled, “Real World of Implementation of ESG in Your 401(k) Plan Lineups,” the presentation did just that; explain how to carefully, yet effectively implement environmental, social and governance (ESG) options in response to surging participant demand mainly from younger and female workers.
“This is an emerging hot topic in our industry,” Bell said in a pre-conference interview. “However, my experience in going to conferences over the last few years is that it’s not heavily covered. I remember the only ESG session on the agenda at a recent event was at 7:30 am breakout by a product vendor. There were maybe 15 of us there.”
What’s holding it up? The perception, at least, of a lack of clarity about what constitutes ESG, performance concerns, fees and a short track record.
Yet in the last six months, she added, ESG has really become more of a topic, something she’s “delighted by,” as she was brought to the space by her clients’ demands.
“I live in Portland, which is a pretty progressive culture and sustainability issues are huge,” Bell explained. “I have a niche in industries that are very focused on sustainability, architecture being one. The architects’ professional association put requirements into their code of ethics to speak with their clients about sustainability on every single project.”
Noting that she’s often the oldest person in the room at many committee meetings, millennials are increasingly represented.
The ESG impetus
A catalyst was her Chartered Institute of Management Accountants (CIMA) designation, which now includes ESG as a part of its program.
“I made a study of it and found that ESG funds were not, in fact, underperforming and they are actually taking on less risk than some of the more traditional investments. So, I rhetorically asked, “Why can’t we build something that will make the clients happy without increasing their fiduciary risk?” We went about a methodical process on how to add options to the plan that will not cause confusion, or overwhelm anyone, etc. and that will not get anyone into trouble.”
She and her partners built sustainable models that they offered to interested clients, and they sit side-by-side with their more traditional models.
“They must stand up to everything in the investment policy statement and we screen and score them just like everything else.”
While emphasizing that she is not an ERISA attorney, she noted the DOL’s FAB from 2018 and stressed that she’s not replacing anything, and referenced her colleague at NewCo Bonnie Treichel, JD, who regularly reminds committees of the importance of holding ESG investments to the same metrics as other investment options in the line-up and documenting that process because a process without documentation is like no process at all.
“You have to communicate the heck out of it,” Bell concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
