Environmental, social and governance investing and incorporating cryptocurrency into 401(k) plans have become popular topics of conversation recently.
But widespread adoption of ESG funds in plan lineups still hasn't taken off, due in large part to regulatory pingpong out of Washington. The Department of Labor under the Trump administration finalized a rule stipulating that Employee Retirement Income Security Act plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk.
The Biden administration proposed its own rule in October that would explicitly permit retirement plan fiduciaries to consider climate change and other ESG factors when selecting investments and exercising shareholder rights. A final rule is expected later this year.
As of Dec. 31, there was only $33.4 billion managed in ESG mandates for defined contribution plans, down 2.7% from the previous year according to P&I data.
"We are definitely seeing an uptick in conversations around ESG from plan sponsors, (but) not seeing movement of ESG funds incorporated into plan lineups very quickly," said Matthew Brancato, principal and head of client success for Vanguard Group Inc.'s institutional investor group in Malvern, Pa. "I think we need clarity from DOL, which should happen this year."
Among Fidelity Investments' 401(k) plan clients, 18.2% offered a sustainable fund as of March 31, an increase from 17.6% at the end of 2020 and 14.3% at the end of 2017, according to Michael Shamrell, Boston-based vice president of thought leadership. Sustainable includes funds utilized by plans that are classified by Morningstar as sustainable investment overall, as well as those classified as using ESG engagement.
Fidelity managed $787.8 billion in U.S. DC assets under ESG principles as of Dec. 31, up 6% for the year, according to P&I data.
Overall, ESG assets rose 4.4% in 2021 to $2.1 trillion for the firms that responded to Pensions & Investments' current and previous year's DC money managers survey.