Defined contribution plan sponsors looking to increase participation rates and contribution rates may want to start by aligning investments with workers’ personal values.
Simplicity has been the watchword for driving plan participation in the defined contribution plan arena over the past 40 years. Auto-enrollment, auto-escalation and lifecycle funds are all innovations designed to help simplify plan participation. But getting employees from participation to engagement is not a simple proposition.
Participation is certainly a good start. It means employees are signed on to their plan and making contributions. But that may not be enough to fund a secure retirement. Our 2016 Survey of Defined Contribution Plan Participants1 shows that workers in the U.S. may not be saving enough, with 65% contributing less than 7.5% of salary to their retirement plan each year – the rule of thumb has been that participants generally contribute enough to get the company match.
Investing in personal values
But there are other strategies that could potentially help increase both participation and contribution rates. One such approach is to help participants make a more personal connection to their investments by incorporating Environmental, Social, and Governance (ESG) strategies in company retirement plans. Among the 991 American workers we surveyed, 82% said they would like their investments to reflect their personal values. This includes 79% of those with access to a plan who choose not to participate.
The addition of ESG-related investments could provide an opportunity for plan sponsors looking to boost contribution rates, as 60% of participants say they would increase plan contributions if they knew their investments were doing social good. It may also provide an incentive to increase participation rates, as two-thirds of non-participants say they would be more likely to participate if they knew their retirement assets delivered the same societal benefits. When asked about the inclusion of these types of investments, 74% say they would like to see more socially responsible investments in their retirement plan.
What do participants care about?
Plan participants express significant concern for ESG-related issues in their investments. More than six in ten said they are concerned with the environmental, social and ethical records of the companies in which they invest. This tendency is highest among Millennial investors, of whom seven in ten agree. Even higher numbers of plan participants (77%) say they believe it is important that they help make the world a better place with their investments, including 84% of Millennials, 81% of women in our study and 80% of non-participants.
These sentiments echo what we learned in our 2016 Global Survey of Individual Investors.2 Among the 750 individuals in the U.S. we found that seven in ten believe it is important to invest in companies that have a positive social impact, 70% say sound environmental records are important and 83% say it’s important to invest in companies that are ethically run.
A more complete view of ESG
These attitudes reflect what may be just one dimension of ESG – negative screening to keep out sin stocks and the stocks of companies where questionable ethics can lead to public scandal. But it appears that individuals have a more holistic view on ESG. Among plan participants we find a belief in the positive growth aspects of this investment approach, with 74% saying they believe companies that provide clean water and clean energy present significant growth opportunities for their investments. Of course, all investing involves risk, including risk of loss.
Personal connections. Deeper engagement.
When it comes down to it, ESG could prove to be an effective tool for plan sponsors that can actually give participants a more personal connection to their retirement investments. More than three-quarters of plan participants and eight in ten non-participants believe it’s important to make the world a better place while growing their assets.
For more information, see the full report of our 2016 Survey of Defined Contribution Plan Participants here.
1 Natixis Global Asset Management, Survey of Defined Contribution Plan Participants compiled by CoreData Research, July 2016. Survey included 991 individuals in the U.S. with access to a workplace defined contribution retirement savings plan. Respondents included 661 active participants and 300 non-participants.
2 Natixis Global Asset Management, Global Survey of Individual Investors compiled by CoreData Research, February 2016. Survey included 7,100 investors in 22 countries, including 750 investors in the U.S.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
ESG Investing focuses on investments in companies that demonstrate adherence to environmental, social and governance (ESG) practices, therefore the universe of investments may be reduced. An ESG strategy may sell a security when it could be disadvantageous to do so or forgo opportunities in certain companies, industries, sectors or countries. This could have a negative impact on performance depending on whether such investments are in or out of favor.
A better understanding of sustainable investing can start with a definition of terms.
Explore the history of climate change, along with potential economic opportunities in the years ahead.
Why more corporations and governments are going green, areas of expansion, and what exactly makes a green bond green.