No matter your age, having a 401(k) is crucial to preparing for your future. But did you know that by understanding how to make your 401(k) sustainable, you can also help prepare us all for a better and brighter future? Sustainable investing can help guide corporate leaders to become more responsible within their companies and communities. So, it is important to consider making your 401(k) more sustainable.
Socially Conscious
The essence of sustainable investing is having a socially conscious perspective when evaluating your financial contributions. This is also known as SRI, or socially responsible investing. The goal of socially responsible investing is to align an individual’s values with their financial decisions. One way of doing so is by following ESG guidelines. ESG guidelines investigate the environmental, social, and governance factors of a corporation. At present, only 2.9 percent of 401(k) plans have even a single fund dedicated to ESG impact.
Why is Socially Conscious Investing Important?
Socially conscious investing can help push companies away from just looking at their bottom line. Instead, sustainable investing is exemplified by the principles of a triple bottom line. This focuses on the three Ps: profit, people, and the planet. By investing in companies that consider this well-rounded view of their impact, we can build a brighter future – not just for the company’s executives, but for their employees, their communities, and the environment. But what should they really be looking at within these categories?
Profit
This is fairly self-explanatory. However, in our American society, a business’ financial gains are essential to its survival. A company must generate a profit for its shareholders. This is where most corporate goals have been focused in the past. This makes sense: in order to do anything for your staff, your community, your environment, you must first be successful in business. However, the problem lies in ending your goals here and forgetting about more community and global-based factors.
People
In looking at the people-oriented goals for a company, there has been an important shift that came with the triple bottom line philosophy. Rather than valuing shareholders above all else, companies have shifted focus to allow stakeholders to share the spotlight. What is the difference? Shareholders are exactly that, individuals who hold shares in the company. Meanwhile, stakeholders include anyone who is affected by a company’s decisions, such as employees, customers, and their communities.
The Planet
Because corporations have historically been to blame for climate change, there is a need to apply pressure. As a society, we must insist that corporate leaders recognize the importance of their impact on the planet and act accordingly. Thus, ensuring planetary goals as a part of corporate strategy is key.
PPP Please
So how do we hold companies accountable for their adherence to the three Ps? We put our money where our mouths are. This is the goal of sustainable investing. So just as businesses need sustainability in their strategies, you need sustainability in your investments. That way, corporations can see what potential shareholders are looking for in a company: sustainability.
Best 401(k) Investments
Sustainability can be focused on for all of your retirement accounts, including Roth IRAs and employer-sponsored 401(k)s. Typically, 401(k) contributions are invested in mutual funds, index funds, or target-date funds. And these funds tend to be limited depending on your employer, or rather, the plan administrator. Unfortunately, this translates into 401(k) options often not including socially responsible investment opportunities. So let’s talk about the options you do have.
Self-Directed Brokerage
Should you find that the funds available for your 401(k) do not align with your values, you have the choice to customize your opportunities with a brokerage window. A self-directed brokerage 401(k) account is still held by the administrator, however all transactions are chosen and set in action by the individual who holds the account. There are still limitations set by the plan administrator as to the funds you may choose. Regardless, the options tend to increase when you select a self-directed brokerage window. That way, you can see more success in making your 401(k) sustainable.
This option does have its downsides, however. Due to the restrictions some employers set for self-brokerage plans, investment risk can increase. Not to mention, investment risk naturally rises when an individual manages finances themselves. Those who are not financial professionals may not understand the complexities of the market and best-practices for portfolio management. Thus, they may not understand the best ways to minimize the risk of their investments.
If you are interested in a self-brokerage 401(k) account, we strongly advise you to hire a professional advisor. Here at EGÉA SRI you have the opportunity to speak with our Chartered SRI Counselors™ for a free consultation. This way you can ensure that our firm, as well as the funds we help you choose, match your values.
Advocating for More ESG-Rated Funds
If you aren’t quite ready for a self-brokerage 401(k) account, that is entirely understandable. Your next option is advocating for more ESG-rated funds made available by your employer. There is strength in numbers, so gather your co-workers and make a plan to approach your Human Resources team. Make sure you prepare thoroughly for any pushback. Many companies do not have a full understanding of the fact that socially conscious investments are proving to be a rewarding opportunity during times of both market expansion and severe volatility.
401(k) Investment Organizations
No matter your choice in 401(k) investment organizations, finding a firm to aid your financial journey is proven to increase your success rates. In fact, studies show that those who work with an investment professional see 3% or more value added to their portfolio. And if you are searching for a team that is devoted to sustainable ESG investments, the EGÉA SRI team has over two decades of experience building portfolios that are values-based. We believe it is important to invest in your beliefs to help build a better society for us all.
Disclosure:
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
