Advocacy group is urging companies to align 401(k) plans with climate goals

Shareholder advocacy group As You Sow is calling on some of the nation's largest companies to make sure their 401(k) retirement plans are in sync with what they're doing to fight climate change, a notion it says the industry is blowing off.

In shareholder proposals filed with Amazon.com Inc., Comcast Corp., Microsoft Corp. and Campbell Soup Co., the non-profit scolded the companies for offering retirement plan investment options it says are out of whack with their otherwise commendable climate action goals. The proposals specifically call out the companies for offering default investment options that are loaded with fossil-fuel companies and those that cause deforestation risk.

To address the contradiction, the proposals ask management to prepare reports reviewing how their current retirement plan investment options align with environmental commitments ranging from achieving net-zero carbon emissions to purchasing 100% renewable energy.

While shareholders of Amazon and Comcast have already voted down the proposal, with only 9.1% and 6% of shareholders, respectively, voting in favor, As You Sow nevertheless secured enough votes to file the proposal again next year. The shareholders of Microsoft and Campbell's will vote on the proposal at their annual meetings later this year unless the companies agree to take action to address the issue beforehand.

Amazon and Comcast have flatly rebuffed the proposal, saying in proxy materials that plan fiduciaries independent of the board are responsible for selecting 401(k) investment options, which they point out must be made solely in the interest of plan participants and beneficiaries. Retirement plan advisers have also lambasted the proposal for essentially allowing shareholders to meddle in a process where advisers say they don't belong.

Amazon and Microsoft declined to comment beyond what was available in public filings. Comcast and Campbell officials did not respond to requests for comment.

The resistance caught As You Sow's CEO Andrew Behar off guard. Mr. Behar expected the companies to be on board with the proposal's goal of fixing an obvious misalignment and thought that Amazon — a company with a strong climate and sustainability policy and a sizable 401(k) plan — would be a "good first company" to kick things off.

Surely, Mr. Behar reasoned, a company that ordered a fleet of 100,000 electric vehicles would want to be aware of funds that invested in companies that were burning down the Amazon rainforest.

Once Amazon realized that its 401(k) plan was "completely out of alignment with everything else it did," it would want to fix it by adding, say, a fossil-free fund or a deforestation-free fund, Mr. Behar said.

Instead, Amazon "simply pulled up the drawbridge and said 'we have no intention of changing this at all,'" he said referring to 401(k) lineups.

As You Sow estimates that $720 million of the $12.8 billion in Amazon's 401(k) plan is invested in oil, coal and fossil-fired utilities with another $53 million invested in deforestation-risk agribusiness. The figures and other plan information provided by As You Sow on its website is based on companies' latest Form 5500s as of Dec. 31, 2020, and mutual fund data from Morningstar Inc., which is updated monthly.

Amazon's 401(k) plan uses the Vanguard Target Retirement Funds series as its qualified default investment alternative, a fund that received mostly Ds and Fs on As You Sow's environment and social scorecards.

Comcast's $15.1 billion plan and Campbell's $1.9 billion plan also use the Vanguard target-date series as their default investment option. Microsoft's $38 billion plan, meanwhile, uses as its default option the BlackRock LifePath index series, which also earned mostly Ds and Fs on As You Sow's ESG criteria.

Neither Comcast, Microsoft nor Campbell offers any sustainable investment options in their plans, unlike Amazon, which offers one sustainable investment option — the Vanguard FTSE Social Index Fund — as well as a self-directed brokerage window with access to ESG funds.

Mr. Behar would like to see the companies change their default options to ESG-oriented target-date funds, such as the Natixis Sustainable Future Series, which Mr. Behar said have better ESG scores and have outperformed the companies' default target-date investment selections. "They're not perfect," Mr. Behar said of the alternative fund. "They're Bs and Cs instead of Ds and Fs, but at least it's a step in the right direction."

Mr. Behar would also like to see the companies add sustainable funds to the investment menus, faulting even Amazon, which already offers an ESG fund and a brokerage window.

"Nobody knows that it's there or how to use it," he said of Amazon's brokerage window, adding that the company should educate employees about it as well as the ESG fund offered within the plan. The ESG fund holds less than 2% of plan assets.

Critics of the shareholder proposal argue that it's incompatible with ERISA law. "A company can decide to pursue climate-based objectives, but ERISA does not permit the company to pursue those objectives in its 401(k) plan if doing so would conflict with the financial interests of the participants," said Kent A. Mason, a partner at Davis & Harman LLP in Washington.

"You have to be able to conclude that the fund that takes ESG into account is at least as financially prudent as a fund that doesn't," Mr. Mason added. "If you can't conclude that, you can't offer it."

Greg Mykytyn, senior vice president with Commerce Street Peak Advisors in Dallas, also bemoans the proposal, saying it makes shareholders "investment fiduciaries" who can't be held accountable to participants and beneficiaries.

"You're essentially making the shareholders part of the investment committee of the ERISA-backed plan, and that is just ludicrous," Mr. Mykytyn said.

If retirees file a lawsuit against the investment committee that an ESG fund "wasn't all that it was said to be," it's the fiduciaries who are on the hook, not the shareholders who bear no liability, he said.

Mr. Mykytyn also fears that the proposal will be a "brain drain" on 401(k) plan committees as "competent committee members will not want to be a fiduciary when they lack full discretion."

Joe DeBello, a managing consultant in the retirement and wealth division of OneDigital Investment Advisors in Orlando, Fla., takes issue with the idea of swapping out low-cost index funds with higher-fee ESG fund options, a move that he says will raise costs for plan participants by 70 to 80 basis points. "It seems to fly in the face of everything that's been decided by the courts in terms of prudent processes and governance," he said. "It flies in the face of all the relentless pressure on plan fees."

As You Sow's Mr. Behar counters that fees alone aren't everything. Plan sponsors also need to consider fund performance.

"The whole idea that you only judge a fund by its fees is very flawed," he said. "In terms of judging returns or pecuniary results, you need to judge fees and returns together."

Davis & Harman's Mr. Mason brushes aside the argument. Whether ESG funds are better or worse than non-ESG funds for participants is up to the plan fiduciary — not shareholders — to determine, he said. "It's ultimately up to the fiduciary in a very financially oriented way of thinking to make that determination," he said.