Advisers weigh risks of adding ESG to retirement plan menus

The Department of Labor’s release Friday of its revised regulations on the use of socially responsible investments inside company-sponsored retirement plans isn't expected to move the needle in terms of how ESG funds land on 401(k) plan menus.

Whether the rules surrounding ESG funds on the plan menus feel more relaxed, as they did under the Obama administration, or more stringent, as they do under the Trump administration, financial advisers say the momentum has been slowly building.

“The biggest trend we’re seeing is when the employers have a younger employee base and those employees start asking for ESG funds on the menu,” said Dan Herron, principal at Elemental Wealth Advisors.

“We saw the appetite for ESG inside retirement plans pick up slightly at the end of 2019, and then pick up pretty substantially this year,” Herron said.

Even as he recognizes the increased appeal of such funds among retirement savers, Herron said the plans he advises on have only included “one or two ESG funds, and they are the biggest and most diverse funds out there.”

While some interpreted the DOL’s final rule as designed to dampen the use of ESG funds inside retirement plans, financial advisers working with plan sponsors say there has never been enough clarity on the topic to know with certainty which way to turn.

“I think the DOL is trying to help, but I don’t know that they’re going about it the right way, because the guidelines are written so vaguely, a lot of times it’s up to the adviser and plan sponsor to interpret them,” said Neal Nolan, director of business retirement services at Parsec Financial.

While Nolan is seeing a “steady trickle” of increased interest in having ESG products in retirement plans, he believes the companies that sponsor plans are primarily focused on not breaking the law.

Thus, as the DOL tries to define the parameters for adding ESG funds, Nolan is seeing plan sponsors worried about not having enough of the funds available.

“The companies that we work with are very attuned to fiduciary liability, and they are worried that the plan is at risk for not having ESG funds on the menu,” he said. “The business owner is worried about fiduciary risk, and they will always be at risk because they have to monitor the adviser. Part of the problem with the DOL’s rule is, who are they talking to when creating this legislation?”

For his part, Nolan subscribes to the following general guidelines, “You can offer any type of investment as long as it will help investors meet their retirement plan objectives. The best practice is to follow the due diligence. And that falls back on the plan sponsor to understand the due diligence.”

As ESG strategies gain broader appeal across the investing universe, more investors, financial advisers and investment managers are applying the general principles alongside more traditional investing analysis.

But as long as there are distinctions that single out ESG strategies, the financial advice industry will be locked in this middle space between how the rules are being interpreted in terms of access for retirement savers.

“Given the strict and very limited lineup of funds that Raymond James is allowing, we have no choice,” said Tim Holsworth, who is affiliated with Raymond James as president of AHP Financial.

“There are currently no ESG funds available, and I have not been contacted with any interest in that regard,” he said. “However, when it comes to personal accounts, we have had some interest and we do use a couple of ESG funds. It’s still a very limited interest, perhaps because clients don’t know their options.”