Investing in funds that focus on companies addressing environmental, social and governance factors apparently is not part of the New York state of mind — nor that of other defined contribution plans participating in Pensions & Investments' 2019 survey of the 1,000 largest U.S. retirement plans.
Of the 106 sponsors who responded to the question on whether they offer ESG investments, only 14 said yes.
One such plan, the New York State Deferred Compensation Plan, a $25.7 billion retirement plan for state employees, has offered an ESG fund in its investment lineup for at least 20 years, but few participants have invested in it. Through the end of December, only 1.6% of the plan's 245,000 participants were invested in the fund, allocating $38.1 million to it, just 0.15% of the plan's total assets.
"It is my best guess that participants want to maximize their returns," David Fischer, executive director of the plan, Albany, said of the modest uptake of the ESG investment offering. "Although ESG sponsored funds speak of excess returns, which may over some future term be true, it hasn't generally shown up yet."
Most defined contribution plan sponsors aren't willing to wait. In fact, most are not including ESG investment options in their lineups at all, fearing their perceived higher cost, lack of performance track record and potential fiduciary liability, industry practitioners say.
In a survey of 240 defined contribution plan sponsors last year, Alight Solutions found that only 7% offered ESG funds in their plan lineups, and the overwhelming majority — 89% — said they had no plans to add them to their lineups.
"While plan sponsors do care about ESG, they place a greater emphasis on performance and price," said Anna Fang, research analyst at Cerulli Associates in Boston, noting that sponsors are concerned about lawsuits.
Shawn O'Brien, a senior analyst also at Cerulli in Boston, added that because many ESG products are new they "don't have a long-term established performance record for which advisers and plan sponsors can go on to evaluate."
Plus, Mr. O'Brien said, ESG products are generally seen as more expensive than their non-ESG, plain vanilla passive counterparts.