The Retirement Market: An Ocean Of Opportunity
The executive order on retirement savings, which President Trump signed on Friday, shines a spotlight on corporate-sponsored retirement plans. The $28.0 trillion U.S. retirement market offers opportunities for growth in environmental, social and governance (ESG) assets under management (AUM), particularly among corporate-sponsored retirement plans.
60% of corporate plan sponsors that participated in a recent NEPC survey indicated that they were not interested in incorporating ESG investing, which means considering ESG factors in both investment decisions and ownership policies and practices.
Of plan sponsors that incorporated ESG investing, 70% were defined contribution plans, or plans in which benefit payments to retirees depend on investment returns. Nevertheless, fewer than 10% of 401(k) plans—a type of defined contribution plan—offer ESG investing options. An even smaller 6% of defined contribution plan sponsors, or those promising a specified monthly benefit at retirement, incorporate ESG. Accordingly, corporate-sponsored retirement plans are a relatively uncontested market space, or blue ocean, for ESG fund managers.
Headwinds from Insufficient Data And Training
Of the 60% of corporate retirement plan sponsors that are not interested in ESG, over a third solely focus on financial factors when making investment decisions and over a quarter need more data to evaluate the impact of ESG factors on financial performance. Accordingly, future growth in ESG investing in the $5.3 trillion 401(k) market and more broadly the $10.3 trillion U.S. defined contribution and private-sector defined benefit plan markets will depend in part on improving data on the relationship between ESG and performance and educating plan sponsors about ESG.
Shifting Regulatory Sands
Department of Labor guidance on ERISA has ebbed and flowed on ESG factors along partisan lines since 1994. By way of background, ERISA establishes minimum standards that govern the operation of private-sector employee benefit plans. Most recently, the Department of Labor Field Assistance Bulletin 2018-1 restated that ERISA fiduciaries may not assume greater risk or sacrifice returns to pursue social or environmental goals. Future updates to this guidance could expedite or slow the growth of ESG retirement savings AUM.