Matching Preferences and Access: Sustainable Investing in 401(k) Plans

Abstract

The vast majority of 401(k) plan participants want access to investments that match their personal values, yet a small fraction of plans offer those types of investments. The culprit for the existing misalignment has been unstable regulation, which has discouraged plan fiduciaries from including some categories of investments, such as sustainable investments, on 401(k) plan menus. In late 2022, the Department of Labor issued guidance that for the first time explicitly states that fiduciaries do not violate their duty of loyalty by considering participant preferences when making investment-related decisions. This Article makes two unique contributions. First, it evaluates the research on participant preferences for sustainable investments. Second, it provides a framework that fiduciaries can use to assess and consider those preferences while simultaneously fulfilling their duties of loyalty and prudence. If fiduciaries adopt the framework developed in this Article, it could be a triple win. Data indicate, and experts believe, that employees will save more in their 401(k) plans if they have access to investments that support their personal values. An increase in retirement savings would help close the substantial pension gap that exists, particularly for young employees and women who are particularly vulnerable to under saving. Companies will benefit if employees place greater value on their 401(k) plans. And, the world would benefit from increased assets flowing to sustainable investments at a time when climate and social sustainability are close to or in crisis.