9. When your company doesn't offer a socially responsible 401k

Today's letter is about getting your company to offer a socially responsible 401k. Here's the letter:
 
My employer doesn't offer a socially responsible 401k, what should I do?

Investing according to your values is a hot topic these days, so I don’t think your HR department will be caught completely off guard, that’s the good news. 

Because it is such a hot topic right now, there are lots of funds, or for listeners that are new to investing, bundles of stocks, that have been put together with values based investing in mind. The most popular rating system that is usually discussed is called ESG. Environmental, Social, and Governance risk ratings.

Unfortunately, I don’t think everyone is completely clear about what the ESG rating of a company is. The ESG rating is a risk rating because the thinking is that a company who doesn’t take precautions to safeguard the environment against their harms is more likely to spill oil in the ocean. Or a company that doesn’t create safe environments for their employees is likely to have a nightmare when their employees get sick. Or a company that doesn’t practice transparency in terms of how they pay their board members or what percent of employees are women, or members of marginalized groups, those companies are more likely to get caught up in a scandal for bad behavior.

So it’s not really a rating of how harmful a company is to our world, and it definitely isn’t a rating for how hard a company is trying to fight for any particular set of values. That being said, it is the most popular rating system that is discussed when we think about values based investing, or some people refer to this as socially responsible investing.

So what some mutual funds do is they look at bundles of companies and they look at their ESG ratings, and they might also look at other factors for values that they think their investors will be interested in. For example, although ESG ratings don’t really have anything to do with tobacco or pornography, I have seen some mutual funds exclude some companies based on those characteristics. And the mutual fund will list out what values they were screening for when they put together that bundle. It’s not a perfect system, because maybe you think tobacco is harmful, but not pornography. Or vice versa. OR maybe those are values you share, but you don’t think the mutual fund is being strict enough in deciding which companies to include and exclude. The other thing is that the administrative fees for ESG funds are higher than traditional mutual funds.

Still, I would encourage you to not let perfection be the enemy of the good. I have to believe that there are financial professionals out there that are creating a more robust rating system and a wider variety of funds for people to choose from. In the meantime, I think it’s great that you’re pushing your company to offer some socially responsible options for employees. Most people in America who invest, do so through their employer 401k programs rather than picking individual stocks on their own or working with a financial advisor. So you will be potentially impacting lots of people, all of your colleagues, and maybe even introducing this way of thinking about investing to some of your colleagues.

In order to maximize your chances of success, I have three tips for you to consider:

Buddy up, get other employees into the effort. They probably won’t add options unless you have a ton of influence at your company, but if they see that there’s a group of people that want this, you’ll have more weight. It probably won’t be hard to get some employees to get on board with you, Morgan Stanley did a report and found that 88% of survey respondents with access to 401k plans are interested in sustainable 401k options, but less than half say they are available according to the Morgan Stanley Institute for Sustainable Investing report in 2019. 

Be patient. This will probably take a year to change.

Don’t let up the pressure. Keep asking, and asking, and asking. If you have a financial advisor, you might even get their help in how to word the request in the first place.

Please do stay in touch and send an update on what ends up happening at your job and any other tips you gather along the way. Good luck! 

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