Despite confusion, responsible investing a draw for DC plan participants, survey finds

Updated with correction

Responsible investing can have a powerful draw for 401(k) and other defined contribution participants and can help plan sponsors drive more participation and contributions, according to results of a wide-ranging new survey by Calvert Investments Inc.

But the survey found much confusion among participants about the meaning of responsible investment, even though 87% of responding participants and 86% of responding eligible non-participants want investments aligned with their values.

Some 37% of responding participants and 36% of responding eligible non-participants said they would contribute more to their workplace retirement plan if offered responsible investment mutual fund choices, while 36% responding participants and 33% of responding eligible non-participants said the availability of responsible investment fund choices would not affect their view of the retirement plan.

Of responding eligible non-participants, 15% would be much more likely to participate in a workplace plan if responsible investment fund choices were available and 41% would be somewhat more likely, while 1% each would be somewhat less likely and much less likely. For the remaining 42% of responding eligible non-participants, the availability of responsible investment fund choices would have no impact on their decision whether to participate in a workplace plan.

Responsible investment generated a great deal of enthusiasm among respondents.

If a plan offered responsible investment fund options in all asset classes, 32% of all respondents would direct all plan contributions into the responsible investment mutual funds, 53% would direct a portion and 15% are unsure.

Calvert's survey, conducted between July 29 and Aug. 10 by marketing research firm 8 Acre Perspective, received responses from 1,231 participants of defined contribution plans and 295 eligible non-participants. Some 80% of respondents participate or are eligible to participate in 401(k) plans, 14% in 403(b) plans and 6% in 457 plans, all across a diverse group of industries and pretty much evenly divided by region across the country. The total assets of plans of respondents weren't available.

Calvert's research was driven to bolster understanding of three key issues, said Lynne Ford, executive vice president, Calvert Investment Distribution Inc., a unit of Bethesda, Md.-based Calvert Investments. Calvert's $13 billion in total assets under management, all in responsible investment strategies, includes $5 billion in institutional assets, largely from qualified workplace plans, Ms. Ford said.

The first is a “long observed” disconnect between participants and intermediaries, including plan sponsors, and investment consultants, about the interest in responsible investment, Ms. Ford said.

The second attempts “to understand whether including responsible investment in a plan or not would help achieve … objectives employers have” such as increasing participation and contributions in plans, Ms. Ford said.

The third takes a look at whether a perception of a plan sponsor having a good retirement plan bolsters employee satisfaction and engagement with employers, and promotes the employer as a good place to work, Ms. Ford said.

“One thing that we found interesting for plan sponsors is that both people who are participating in plans as well as people who are not participating but who were eligible … nine out of 10 people said (they would) like to have (investment fund) options aligned with our values,” Ms. Ford said.

“We really see this (participant interest in responsible investment) as a trend and a finding consultants and plan sponsors need to know about,” Ms. Ford said. The findings “are really amplified when you talk about millennials and women.”

“If as a fiduciary you are … responsible for getting more people to contribute (to plans), then looking at this data and understanding the positive impact it has on how people interact with the plan would be an important thing to do,” Ms. Ford said.

“I can almost build a case (that) as a fiduciary you want to assess and offer responsible investment options as a way to broaden out what you offer (in investment fund choices) and get more people engaged in the plan.”

Speaking about using the survey findings, Ms. Ford said: “Once we sort of educate plan sponsors, then (Calvert will look to) help plan sponsors educate participants” about responsible investment.

The survey did not address whether participants believe responsible investment funds will help achieve retirement income objectives.

“We didn't zero into retirement income specifically in this survey,” Ms. Ford said.

The survey doesn't address fiduciary concerns, although Ms. Ford said Calvert has a 1998 Department of Labor letter not challenging responsible investment suitability.

The survey found participants are confident about responsible investment performance and risk, while confused about the meaning of responsible investment. The survey didn't provide respondents with performance data or benchmarks.

On performance, 23% of respondents believe responsible investment funds will perform better than other mutual funds, 47% believe they will perform about the same as other mutual funds and 17% believe performance will be lower, while 13% are unsure.

On risk, 21% of respondents believe responsible investment funds will have lower risk than other mutual funds, 52% believe responsible investment funds will have about the same risk as other mutual funds, and 16% believe the funds' risk will be higher, while 11% are not sure.

On fees, 23% of respondents believe responsible investment funds will have higher fees than other mutual funds, 48% believe the fees will be about the same, 17% believe fees will be lower, while 12% are not sure.

Some 54% of responding participants “would be willing to pay a bit more for an RI mutual fund,” the survey found.

“I personally don't feel it is wishful thinking (about performance),” Ms. Ford said. “It's being responsive to what (participants) see as successful companies in the world they live in.”

Investment consultants and plan sponsors, who were not included in the survey, generally have “a long-held perception … that there's performance concern with responsible investment,” Ms. Ford acknowledged. “We have a lot of data that refutes that (concern) now. That (performance concern) doesn't hold true with (most) participants.”

On the meaning of responsible investment, 19% of respondents believe it means being responsible with money when investing, such as investing an amount a participant can afford or avoiding impulsive investments, while 9% believe it means saving enough for a rainy-day need or a great retirement or being “safe about investing,” and 11% associate responsible investment with a good investment return.

Most respondents are unfamiliar with responsible investing: 36% of respondents never have heard of it and 27% are aware of it but knowing nothing about it, while 26% are somewhat aware of it and 11% very familiar with it.

An even 50% of respondents weren't even sure if their workplace plans offer any responsible investment funds, while 28% believe their plan does and 22% believe their plan does not. On the other hand, 74% of respondents who think their plan offers responsible investment choices believe they have allocations to those investment options, while 18% believe they do not and 8% are not sure.

“There is an opportunity for more education … because what we are seeing when we describe what is an opportunity to invest aligned with your values, people say, 'yes, I'm highly interested in that. I'd like to learn more.' The (participants) are looking for the plan sponsor to bring (responsible investment) to them,” Ms. Ford said.

Consultants and plan sponsors “are on different wavelengths” from participants, Ms. Ford said the survey results show. “The investment professionals are not talking about (responsible investment) but individual investors are waiting to learn more.”

The survey found a general overall interest and commitment by respondents to social and environmental causes, and sought to relate those priorities to inclinations involving responsible investment in workplace defined contribution plans.

The survey breaks down some findings by generation of the respondents: millennials, Gen Xers, baby boomers. The findings show all generations list “saving for retirement” as their top priority in life among 12 choices that include “paying attention to world news,” “watching my favorite TV shows,” “dressing well,” and “eating at nice restaurants.” Of the life priorities, some 92% of baby boomers place saving for retirement on top, 90% of Gen Xers, and 86% of millennials. The findings show younger generations shift priorities more to stronger interest in responsible investment in workplace plans than baby boomers.

Calvert produced a 55-page report, “DC Participant Engagement Research Report,” on the survey. A summary of the report can be found here.