403(b) Plans: The Trendsetters for ESG Investing?
403(b) plans are rarely ahead of the curve on major retirement plan innovations. These plans were certainly not the early adopters of trends like per-head flat dollar pricing or zero revenue share funds. However, there is one area in which they are leading the charge: the adoption of Environmental, Social, and Governance (ESG) investments.
According to CNBC, only 3% of 401(k) plans offer ESG funds. While ESG struggles to gain a foothold in most retirement plan types, there are many 403(b) plans that have held ESG investments for decades. In fact, in 1991, when I first began my career at Cammack Retirement Group, it was unlikely to find a 403(b) plan sponsor who did not offer at least one ESG fund. While these investments were known then as socially responsible funds, rather than ESG, many of the same investments are still around today.
Nearly 30 years later, the ESG environment in 403(b) plans has witnessed little change. Some plans have even expanded their offerings beyond the traditional exclusionary funds that avoided investments in products like tobacco or fossil fuels, into inclusionary funds and impact investing. At the cutting edge of 403(b) investing are plans that offer complete ESG tiers of investments from which participants can craft a diversified investment array of ESG funds.
Why have ESG funds found long-standing tenure in 403(b) plans? Historically, these plans were dominated by insurance companies, and these companies often included at least one ESG offering in the variable annuity products they offered to 403(b) plans. Over time, mutual funds - the only other investment option available in most 403(b)s - increased in popularity, but they did not eliminate the ESG annuity offerings present in many plans. Fast forward to today and many 403(b) plans include both ESG mutual funds and annuity investments.
And, despite initial concerns, the Department of Labor (DOL)’s Final ESG Rule confirmed that the existence of ESG investments has not had an adverse effect on 403(b) plans. Hopefully, 401(k) and other plan sponsors who are considering ESG investments can take comfort in that fact.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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