Retirement plan participants save because they're concerned
about their future—but that's not their sole concern. They also increasingly
want investments that align with their values and fuel the change they want to
see in the world. This is the sentiment behind the rising interest in
Environmental, Social, and Governance (ESG) principles in investments, employee
benefits and retirement plans.
Not so long ago, ESG products were considered niche. But
investors, led by Millennials, have started to demand value from their
investments beyond returns. Today, one in four invested dollars takes ESG
factors into account.1 In fact, ESG assets may represent half of all
professionally managed investments within the next five years.2
For plan sponsors and employers that want to remain
competitive — meeting this demand is imperative. Organizations that prioritize
ESG as part of their employee benefits, retirement plan investment options and
broader workplace culture may stand out as employers of choice for the next
generation. Consider these five ways that ESG principles can help your
employees and organization.
1. ESG plans can help improve employee engagement and
retention
Engaging and retaining employees is essential for business
performance and healthy workplace culture. Incorporating ESG investment options
into your retirement plan can help boost engagement and encourage employees to
remain with your company. A recent Voya Financial survey revealed that 41% of
full-time employees are more likely to stay with their employers if their
retirement plan includes ESG-focused products.3 Furthermore, 42% of the survey
respondents said they're more likely to stay with an employer who applies ESG
principles to workplace benefits.4
2. ESG can also boost recruitment efforts
ESG not only helps retain employees, but it's also a
powerful tool for attracting top talent. Investments that consider
environmental, social, and governance factors have broad appeal. For instance,
70% of 401(k) participants are interested in retirement plan options that
positively impact ESG issues.5 As previously mentioned, the interest is
especially growing among younger employees. Ninety-five percent of Millennial
employees are interested in ESG investments—an increase of 9% from 2017.6
3. ESG options can help boost retirement plan
participation
Offering a company-sponsored retirement plan is the first
step toward encouraging your employees to save for the future. The next step?
Getting as many employees to participate as possible. This is another area
where ESG can make a difference. Voya's survey shows that 76% of respondents
would be more likely to enroll or participate in a workplace retirement plan if
it offered ESG investment options.7 Increasing the accessibility to ESG
investments might encourage those who haven't enrolled to finally come aboard.
But the participation perks don't stop there. Sixty-three percent of survey
respondents said that they'd recommend a plan that included ESG options to
other employees.8 And once they are enrolled, 60% of employees said they'd be
more likely to engage with plan tools if the plan included ESG investments.8
4. ESG helps participants save even more
The ability to align retirement investments with values is a
powerful motivator for many plan participants. In addition to improving plan
engagement, ESG investment options can also help boost a plan's overall savings
rate. In fact, 60% of Voya survey respondents said that they'd likely
contribute more to a plan that valued ESG.8
5. ESG can improve plan economies and yield cost savings
Taking a longer view, the impact of ESG investment options
may increase plan participation not just at the employer level but across the
country. More employees participating in the plan can help improve plan
economies, yielding cost reductions that benefit employers and employees. The
demand for ESG is also spurring an increasing number of ESG investment products.
An estimated 200 new funds with ESG investment mandates will debut over the
next three years.2 The groundswell of support and desire for ESG ends up boding
well for the entire ecosystem, from plan sponsors to investors to employees and
ultimately the planet.
Advancing ESG in retirement plans
As awareness of environmental, social, and governance issues
grows, investors and employees want investment options that reflect their
priorities and values. By incorporating ESG into your benefits and retirement plan,
you may be in the best position to meet your participant's needs, enhance the
reputation of your organization, and help build a more ethical and sustainable
world in the process.
One of the latest advancements in the industry has been the
introduction of DALBAR's ESG-Certified Retirement Plan.9 This yearly
certification process evaluates a plan's success in the application of defined
ESG principles more broadly to their retirement plan.
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