Sustainability and your 401(k): Build the future as you save for the future

Paul talks about growing interest in sustainable options through workplace retirement plans and offers four things to consider when investing.

The idea that investments can seek to build a better world while building a better account balance has been around a long time, but sustainability has gained increased interest over the past 10 years. That interest is now reaching your 401(k) plan, according to BlackRock’s 2019 DC Pulse Survey.

According to the survey, 62% of people currently saving in their workplace retirement plan say that it’s important to have investing options that support environmental and social causes they care about–up from 49% a year ago.

This is especially true for the millennial generation, 76% of whom say it’s important to have investment options that promote diversity, alternative energy and similar causes. What’s more, almost half say they would actually save more for retirement if their plan had these investing options.

Employers have taken notice. In our new survey, 74% said they are aware of sustainable investing strategies (up from 67% last year), and 36% now offer these investment options (up from 26%). And of those who are aware but don’t offer these types of strategies, more than eight in 10 say they are likely to consider doing so in the next 12-24 months.

Why the growth?

We are in an age where many people–especially the young–see these causes as not just “nice to have” but critical to the planet’s health and survival. But it’s not just being driven by passion. The case for sustainable options in DC plans is bolstered by:

  • Academic and investment research suggesting that sustainable practices, such as how well a company manages its carbon footprint and the diversity of its employee population, may correlate to long-term investment performance.
  • Increased data that makes it easier to measure how companies ‘score’ on a range of sustainability factors and create strategies that leverage this insight.
  • Employers who increasingly believe in offering these strategies either as part of their own sustainability mission or as a way to encourage their employee population to increase retirement savings.

Rules to keep in mind

If sustainable investing appeals to you, remember to apply the same rules to your sustainable options as you would to any investment. Keep in mind that you should consider:

1) Diversifying your investments (a broad mix of stocks and bonds) and making sure that your overall investment mix fits your age and your appetite for risk.

2)  Staying invested for the long term. There will be times when sustainable investing strategies outperform other investment options, and there will be times when they don’t. However, moving in and out of investments to chase returns can often lead to poorer returns than staying the course.

3) As is always the case with your retirement savings, focusing on what you can control–namely, your contribution rate. Saving consistently with every paycheck, and increasing your savings rate over time, can help you achieve a higher account balance.

4) Fees can take a bite out of your return, so compare the expenses of any sustainable option with similar investments, while recognizing that a modest fee premium may be justified for a sustainably-oriented fund to pay for additional research expenses.

Even if your plan doesn’t offer a sustainable investing option, you may still be able to devote some of your retirement portfolio to environmentally and socially responsible investments through a brokerage window. According to our survey, 40% of plans offer a brokerage window, which may provide access to a wider array of investments, usually for an additional fee paid. You may want to consider sustainable exchange traded funds (ETFs), which typically have lower fees than sustainable mutual funds.

The trend toward sustainable investing shows every sign of gathering strength thanks to a perfect combination of investor interest, improved sustainability data and potential connection between sustainability and profits for individual companies. It’s a combination that may be of interest to any investor, but especially the young, who want to chance to change the future even as they save for their own future.

Paul Mele is the Head of Participant Engagement for BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

Source: BlackRock 2019 DC Pulse Survey

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