Data & Research May 13, 2021

ESG Investments Can Lead to Higher Contribution Rates

More plan participants are increasing their demand for and interest in environmental, social and governance funds. 

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A new Schroders study finds incorporating environmental, social and governance (ESG) investments into retirement plans may lead to greater contribution rates.

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The “2021 U.S. Retirement Survey,” conducted in late January among 1,000 U.S. consumers ages 45 to 75 and 230 workers with employer-sponsored defined contribution (DC) plans, reported that of those participants who were aware that their plan had ESG options, nine out of 10 said they invest in them. The survey found that 37% of DC plan participants said they are offered ESG-related investment options by their employer, while 40% said they did not know.

Of those who said their DC plan did not offer ESG investment options or did not know, 69% said they would or might increase their overall contribution rate if they were offered ESG options. Only 31% said they would not.

As interest in sustainability practices rapidly increases, workers in different age demographics are demanding access to ESG options in their plan’s lineup. The most common supporters of ESG investments are Generation X and Millennial employees, says Sarah Bratton Hughes, head of sustainability, North America at Schroders.

“You have this combination of both Gen X and Millennials who are super focused on sustainability,” she says. “The pandemic has only accelerated that. There is much more of a focus on how companies are treating all their stakeholders, and the pandemic is bringing to light how that impacts investment returns, as well as individuals over the long term.”

 Deb Boyden, head of U.S. defined contribution at Schroders, adds that as more members of Generation Z enter the workforce, demand for ESG investments will accelerate.

“We’re recognizing the broader awareness and trend of sustainable consciousness, and it’s increasing everywhere,” she notes. “That trend is now being reflected in DC plans, especially with younger investors that are part of the workforce and who have a savings plan.”

The survey also discovered changes in contribution rates for retirement plans throughout the pandemic. In 2020, 33% of plan participants said they increased their contribution rate, while 10% said they decreased it. Fifty-seven percent reported leaving their contribution rate unchanged. Almost three in four (74%) plan participants said the COVID-19 crisis will have no impact on when they plan to retire, while 17% said they plan to retire earlier and 9% said they plan to retire later.

With some workforces returning to a sense of normalcy throughout the U.S., more participants said they look forward to focusing on their assets. Fifty percent of participants surveyed said their primary investment objective is to grow their assets, compared with 21% who don’t have access to a DC plan. That group of respondents largely (56%) said their goal is to generate a steady income.

Asked how confident they were in their ability to smartly invest their assets in retirement, 42% of plan participants said they were “very confident” compared with 18% without a DC plan.

As ESG interest rises, Boyden says she expects many participants will grow their assets through sustainable investments.

“Investments and ESG mentality coming together really goes hand in hand,” she says. “It’s not just one or the other now. It’s individuals wanting to achieve both goals in their investment process.”

Data & Research May 13, 2021

Record Balances: DC Plan System Continues to Thrive

Fresh data shared this week by Principal and Fidelity shows defined contribution retirement plan balances have—yet again—reached record highs, but the data underscores the need to improve access for more workers.

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The latest crop of client data published by Fidelity Investments shows defined contribution (DC) retirement account balances have reached a new record for the second consecutive quarter.

According to Fidelity, the new record was reached because of consistent savings among workers and steady contributions from employers, buoyed by a positive stock market performance. Despite many U.S. workers still feeling the impact of the coronavirus pandemic, loans and withdrawals from retirement savings accounts trended downward during the first quarter of this year.

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Fidelity’s data shows the average 401(k) balance increased to $123,900 at the end of the first quarter, marking a 2% increase from the end of 2020 and a 36% jump from a year ago. The average 403(b) account balance increased to a record $107,300, representing an increase of 1% from last quarter and a 42% boost over Q1 2020.

“While the stock market’s recent performance provided a boost to retirement savings balances, individuals can’t control how the market performs from quarter to quarter or year to year. What they can control is establishing and sticking to consistent, positive savings behaviors,” says Kevin Barry, president of workplace investing at Fidelity Investments. “This behavior is important to putting investors on the right track to reach their long-term retirement savings goals.”

Barry credits plan sponsors and participants for showing strong discipline during an incredibly challenging year. Indeed, despite many workers continuing to face financial challenges related to the pandemic, the percentage of workers with an outstanding 401(k) loan dropped to 17.5%, down from 19.7% in Q1 2020. According to Fidelity, only 1.6% of 401(k) savers initiated a new loan in the first quarter, which was flat from Q4 2020 and down from 2.4% a year ago.

“The first quarter of last year was a difficult time for many as the effects of the pandemic started to impact the global business landscape,” Barry says. “Plan design and employer contributions continue to help workers with their savings efforts.”

Data shared this week by Principal underscores the role employers are playing in lifting their workers’ financial futures. Across the firm’s recordkeeping clients, 1.8% of all plans submitted plan design amendments during the first quarter of this year. Of those, 40% have reinstated their matching contributions, and there was nearly three times more match return activity during Q1 2021 compared with Q1 2020.

According to Principal, requests for hardship or disaster withdrawals were down 30%, while requests for loans were down nearly 25% quarter-on-quarter. The reduction in withdrawals among the firm’s sample set is particularly positive when considering that coronavirus-related distribution (CRD) relief was halted at the end of 2020. Individual 401(k) saving deferral decreases were down 60%, and deferral saving starts were up more than 35%.

Fidelity’s analysis finds employers are taking key steps to help their workers save more for retirement. In addition to matching contributions to their employees’ accounts, employers are designing their workplace savings plans with features that can improve workers’ savings rates. Fidelity’s data shows the average 401(k) employer contribution rate was 4.6%, and the average amount contributed to employees’ 401(k)s was $1,720 during the quarter. Among 403(b) accounts, the average employer contribution was 4.1% and the average amount was $3,000. Overall, companies made matching 401(k) contributions to 83% of employees in the quarter.

Fidelity says more than a third (36.9%) of companies now automatically enroll employees into their 401(k) plan, which can help put employees on the path to savings. Among large organizations with more than 50,000 employees, the percentage that automatically enroll employees increases to 62%. Of the employees automatically enrolled in their 401(k) plan, more than 90% stay enrolled in their plan.

“Employers recognize how the design of their workplace savings plan can have a positive impact on retirement savings efforts,” Barry adds. “Recently proposed legislation, such as SECURE Act 2.0, could provide additional support for employers as they help their employees save for retirement.”

Some context for these numbers comes from the Georgetown University Center for Retirement Initiatives, which earlier this year published a report in collaboration with the Berggruen Institute and ESI Consultant Solutions, “What Are the Potential Benefits of Universal Access to Retirement Savings?”

The center says there are an estimated 57 million private sector workers, or 46% of the population working in the private sector, who do not have access to a retirement plan through their workplace. This is particularly true for workers at small businesses and among lower-income workers, younger workers, minority groups and women.

As Barry noted, the SECURE Act 2.0 could help expand retirement plan coverage, for example by incentivizing startup companies to join pooled employer plans (PEPs), but even that bill—recently passed by the House Ways and Means Committee—is not a panacea for getting all U.S. workers saving in the DC plan system.

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