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ESG Arrives in Nation’s Largest Retirement Plan

Image provided by Mohamed Hassan, Pixabay.

Although ESG is one of the hottest trends, its full impact has not been felt in retirement plans. According to the Plan Sponsor Council of America’s 62nd Annual Survey, as of 2019, only 2.9 percent of 401(k) plans included sustainable offerings, amounting to a mere 0.1 percent of assets in all plans. In stark contrast, demand is high: the Schroders 2021 US Retirement Survey indicated that “of those who were aware of their ESG options, 9 out of 10 said they invest in them.” This dichotomy can be explained by the cautiousness of those in charge of the plans in the face of an increasing number of lawsuits and the difficulty in persuading them to add new funds. And on the regulatory front, the prior administration’s Department of Labor introduced a rule prohibiting 401(k) and pension plans from considering ESG. Things are changing, however. The Thrift Savings Plan (TSP), the biggest defined contribution plan in the US with $760 billion worth of assets and 6.3 million participants from the federal government and the military, will start including ESG offerings in the summer of 2022. 

This development has been a long time coming. The Forum for Sustainable and Responsible Investing (US SIF), the domestic trade group for sustainable investments, has been trying to get TSP to take such steps for more than ten years, according to CEO Lisa Woll. In July 2015, the Federal Retirement Thrift Investment Board (FRTIB) in charge of administering TSP garnered praise from US SIF for voting to pursue a mutual fund window option, which would expand participants’ choices and allow them to select and invest in funds aligned with their values. Although many years in the making, the timing is now ripe. 2020 saw $51.1 billion flow into sustainable funds in the US, according to Morningstar. And May 2021 saw President Biden issue an executive order requesting the Department of Labor to “consider publishing, by September 2021. . . a proposed rule to suspend, revise, or rescind” previously introduced anti-ESG rules, identify actions that could “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk,” and assess how the FRTIB has taken ESG factors into account. 

Next year, the window will launch. While TSP currently offers 10 lifecycle target-date funds and five individual funds, all managed by BlackRock and State Street Global Investors, the new brokerage option-like window will consist of more than 5,000 funds for participants to choose from. Last year, Alight Solutions was hired as the fund’s administrator and Accenture Federal Services as the record keeper; and other asset managers will be brought on in addition to BlackRock and State Street. The new window is significant for TSP, whose spokesperson told Barron’s that “we have generally fewer funds than most 401(k) plans, so it’s possible more participants will go through the window” than in other retirement plans. It is also significant for the entire industry, given TSP’s preeminence and size. 

There is still work to be done. This May, having examined and compared the climate approaches of TSP and plans in the UK, Japan, and Sweden, the US Government Accountability Office (GAO) issued a report concluding the FRTIB “has not taken steps to assess the risks to TSP’s investments from climate change as part of its process for evaluating investment options,” thus “leaving participants potentially vulnerable.” It noted that even though the plan is legally mandated to use a passive investing strategy, FRTIB has acknowledged and made adjustments for investment risks in the past and can do so again. While TSP’s last assessment of its policies and offerings in 2017 did not consider climate, GAO hopes the next assessment in 2022 can be “an opportunity for FRTIB to conduct a focused evaluation of these risks and clarify what additional steps, if any, are needed.”

The mutual fund window, confirmed after the GAO report’s publication, is a partial solution to the problems pointed out. It is definitely a huge step forward: as Matt Patsky, CEO of Trillium Asset Management, explained, “this is a sea change. We’ve opened the floodgates to people feeling safe to select ESG options for retirement plans broadly.”

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