Most Workers Are Open to Sustainable Investing in Retirement Plans, Survey Shows
Why aren’t they following through? Blame ignorance, shifting views on fiduciary duties.
Most Americans with a 401(k) or equivalent employer-sponsored savings vehicle are interested in integrating sustainable investments into their retirement plans, a recently published report by Morgan Stanley’s Institute for Sustainable Investing reveals. Three fourths of survey participants with a 401(k) or equivalent had interest in sustainable investing, reportedly driven by a conviction in such investments’ ability to produce attractive financial returns, but just 36% of plan participants were aware of respective options for such investing.
Awareness of Sustainable-Investment Options in Employer-Sponsored Retirement Plans
Morgan Stanley’s findings—those that revealed a common financial motivation behind the incorporation of sustainable investing into retirement plans—align with prior research on environmental, social, and governance factors conducted by Samantha Lamas, senior behavioral insights researcher at Morningstar. On her past research, Lamas adds, “Our reports on ESG didn’t find an overwhelming interest, even during its heyday. A lot of individual investors were more motivated by the financial benefits of ESG versus social aspirations.” (Find more work from Lamas—and former head of behavioral science at Morningstar, Steve Wendel—here.)
Motivations for Sustainable Investing
Over the past few years, opting for sustainable investments has yielded investors mixed results. According to data from Morningstar Direct, from 2022-24, average performance for a screen of 542 US-domiciled sustainable funds trailed the Morningstar US Market Index by over 7 percentage points. Year to date, however, this trend has notably reversed, with US sustainable funds posting a 7.23% average return against a 5.99% return for the Morningstar US Market Index.
In addition to investor ignorance of green plan offerings and a shifting stance on plan sponsors’ fiduciary duties put forth by the new administration’s Department of Labor, it is also possible that investor concerns surrounding underperformance of sustainable products in recent years may be limiting participation in sustainable 401(k) options.
Beyond surveying individuals for the recent report, Morgan Stanley also collected data from a sample of US corporates. Notably, 62% of corporate respondents identified employee interest in sustainable-investment options for retirement plans as “low or moderate,” a finding that contradicts elevated levels of self-expressed employee interest in these offerings.
Intention-Actions Gaps Persist as a Barrier to Sustainable Investing
Among corporates, Morgan Stanley also found a perceived “disconnect” between the self-articulated “interest” of employees in and actual “take-up” of sustainable-investment options. On this phenomenon, Lamas adds, “even though the survey says that people are interested [in sustainable investing], to get people to engage with their retirement plan has been an age-old, difficult problem.”
Lamas found a similar gap between intention and action when she conducted surveys contrasting investors’ opinions on the merits of ESG investments with their portfolios. For example, although 29% of survey participants in the 2022 Morningstar report written by Lamas and Wendel felt that “company-level ESG policies should be ‘fairly important’ or a ‘very important’ factor’ in investment selection,” just 13% of respondents actually held ESG investments in their portfolios.
Inconsistencies between consumer attitudes and purchases of “green” products extend beyond the financial realm and beyond the United States. A 2022 study published in the journal Cleaner and Responsible Consumption, for example, offers a qualitative analysis of the gap between consumer attitudes toward and actual purchases of organic food in the Klang Valley of Malaysia.
Gaps between stated preferences and behavior may appear to be solely a cause for concern, but Lamas writes in the report, “this ‘do-should gap’ is both a warning … and an opportunity.” In other words, although one may conclude that self-expressed interest in ESG is inflated among employees, another interpretation is that plan participants (and investors as a whole) simply do not possess the appropriate tools or resources (or, at the very least, the awareness of such tools or resources) to actually implement their stated preferences for sustainable investing.
Lamas notes that both financial advisors and digital tools will play a continued role in implementation efforts, as she believes “you need a person holding you accountable or technology that helps you; for example, what if you could click a dial that incorporates sustainable investments into your retirement plan?”
A Shifting Regulatory Landscape
Apart from these psychological biases among employees, corporates surveyed in Morgan Stanley’s report frequently mentioned “regulatory concerns” as another significant barrier to integrating sustainable investing into employer-sponsored retirement plans. Indeed, under a new administration, the Department of Labor has set out to reverse current rulemaking stating that fiduciaries of retirement plans faced with two “equally attractive” investments (those deemed to equivalently serve the client’s financial interest) may integrate ESG characteristics into tiebreaking decision-making processes.
The rule under scrutiny falls under the Employee Retirement Income Security Act and was most recently changed under the Joe Biden administration in November 2022 to communicate that a professional’s fiduciary duty could include accounting for the “economic effects of climate change and other ESG considerations” if deemed material to “a risk and return analysis” of investments.
Recent coverage of proposed changes to the Erisa ESG provision published by Goodwin Procter LLP warns that such shifts may increase the risk of litigation for “plan sponsors, third-party asset managers and other fiduciaries that consider ESG factors in investing Erisa plan assets (including with respect to proxy voting)” by “shifting the burden of proving the prudence of any such consideration to the fiduciary (instead of the plaintiff).”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
United States