Is your 401(k) ESG? There’s a certificate for that

Dalbar rates 401(k)s with up to five stars and tells plan sponsors what they can do to improve their plans on the basis of environmental, social and governance criteria.


Emile Hallez

A recently launched pilot program from financial services company auditor Dalbar examines 401(k) plans on their ESG merits.

That program, ESG Certification for Retirement Plans, rates 401(k)s with up to five stars and tells plan sponsors what they can do to improve their plans on the basis of environmental, social and governance criteria.

That does not necessarily mean adding ESG-specific mutual funds, ETFs or collective trusts to the investment menu. Rather, Dalbar CEO Lou Harvey said, the most important considerations are how ESG-friendly a plan is in its overall design, administration and participant outcomes. For example, that includes whether plan committees go through reams of paper.

“By our estimates, there are billions of pages of retirement plan documents that are destroyed every year,” Harvey said. “So how can that be environmentally sound?”

The demand for such a service was clear, he said. Public-facing companies have placed much attention on whether their business practices jibe with ESG, but their retirement plans often have escaped that same scrutiny.

“This firm could be totally committed to corporate responsibility, but when it comes to [their 401(k)] record keeper, they don’t ask or pay attention,” Harvey said.

Some of the things Dalbar considers are a plan’s participation and contribution rates, the online services it offers, fees and the investments available to participants, including retirement income options, he said. If a plan includes funds with strong ESG criteria, that’s a plus, he noted.

Because the Department of Labor has waffled over the past decade on ESG guidance, it would not be fair to evaluate a plan based on investment options alone, Harvey said. This year, the Biden administration halted enforcement of Trump-era rules that apply to ESG considerations for plan sponsors, with the DOL now evaluating changes. Further, there are a handful of bills in Congress that would encourage the use of ESG in 401(k) plans.

To design its program, Dalbar worked with Voya Financial, Ariel Investments and Bank of America. The goal is to evaluate plans based on standards in the Employee Retirement Income Security Act as well as ESG criteria, Harvey said. Dalbar has requested an opinion from the DOL on this topic and is waiting to hear back, he noted.

“We said, ‘We cannot be a pure ESG evaluator with blinders on,’” he said. “We’ve got to blend it with ERISA.”

The program is currently in beta testing and is accepting applicants for no-cost evaluations. It will likely launch as a paid service later this year, Harvey said. So far, it has rated at least two 401(k)s Dalbar’s own plan and Voya’s. The latter received five stars and certification, Harvey said.

The evaluation of Dalbar’s own plan revealed that it was lacking in some options for participants, such as in-service distributions.

“We did not have an option it doesn’t cost a nickel but the option for early retirement withdrawals,” Harvey said. “We didn’t have it in there. Nobody ever asked for it.”

One of the first things the company looks for is whether a plan includes features that don’t cost anything for the plan sponsor but would nonetheless make the plan better.

Whether a plan provides workers with good retirement saving education is also critical, as is whether it helps them move from work to retirement, according to Dalbar.

“We look at the post-retirement services … Do you support the transition from working to retirement?” Harvey said. “So many firms, when you retire, give you a cryptic note that says, ‘Take your money out of the plan.’”

When it comes to investments, Dalbar considers third-party data, such as Morningstar sustainability ratings. Whether a plan’s investment policy statement includes ESG considerations is also a factor, Harvey said. Because ESG risks have a long time horizon, they are particularly relevant for younger workers who are farthest away from retirement, he noted.

“We’ve embodied that as a ‘pecuniary’ measure, to use the DOL’s language,” he said.

For employers, being able to show a good ESG plan rating has obvious benefits, Harvey said.

“This could differentiate them from their competitors,” he said. “Being ESG certified actually increases the participation rate, increases contribution rates and makes your plan more attractive to prospective employees.”

A certification also provides documentation, which can help show that a plan’s fees are reasonable in relation to the services participants receive.

“They now have some independently prepared documentation that says, ‘We’re doing a good job … regarding ERISA and the ESG standards,’” Harvey said. “It’s the whole notion that they can defend their plan against litigation, by having documentation.”


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