ESG, cryptocurrency discussed a lot but not often adopted

Environmental, social and governance investing and incorporating cryptocurrency into 401(k) plans have become popular topics of conversation recently.

But widespread adoption of ESG funds in plan lineups still hasn't taken off, due in large part to regulatory pingpong out of Washington. The Department of Labor under the Trump administration finalized a rule stipulating that Employee Retirement Income Security Act plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk.

The Biden administration proposed its own rule in October that would explicitly permit retirement plan fiduciaries to consider climate change and other ESG factors when selecting investments and exercising shareholder rights. A final rule is expected later this year.

As of Dec. 31, there was only $33.4 billion managed in ESG mandates for defined contribution plans, down 2.7% from the previous year according to P&I data.

"We are definitely seeing an uptick in conversations around ESG from plan sponsors, (but) not seeing movement of ESG funds incorporated into plan lineups very quickly," said Matthew Brancato, principal and head of client success for Vanguard Group Inc.'s institutional investor group in Malvern, Pa. "I think we need clarity from DOL, which should happen this year."

Among Fidelity Investments' 401(k) plan clients, 18.2% offered a sustainable fund as of March 31, an increase from 17.6% at the end of 2020 and 14.3% at the end of 2017, according to Michael Shamrell, Boston-based vice president of thought leadership. Sustainable includes funds utilized by plans that are classified by Morningstar as sustainable investment overall, as well as those classified as using ESG engagement.

Fidelity managed $787.8 billion in U.S. DC assets under ESG principles as of Dec. 31, up 6% for the year, according to P&I data.

Overall, ESG assets rose 4.4% in 2021 to $2.1 trillion for the firms that responded to Pensions & Investments' current and previous year's DC money managers survey.

On cryptocurrency, Fidelity made news in April when it announced a program where participants in DC clients' plans can place up to 20% of their 401(k) plan accounts in bitcoin in a stand-alone investment called a digital assets account. Fidelity's announcement came six weeks after the Labor Department issued a March 10 "compliance assistance release" telling 401(k) plan fiduciaries to "exercise extreme care" before selecting cryptocurrency as an investment option.

Notably, the price of bitcoin, the largest cryptocurrency, has fallen more than 50% in 2022.

Dave Gray, Boston-based head of workplace retirement offerings and platforms at Fidelity, said in an email that Fidelity "continues to have strong interest for digital assets and the blockchain. We are proud of the digital assets account as a responsible solution to meet the demands of mainstream interest. In fact, client interest has not only been strong, but also spans across a wide range of industries and company sizes. We are on track to launch our first plan sponsor clients this fall."

MicroStrategy, a business intelligence solutions provider, will be the first employer to add Fidelity's digital asset account in a retirement plan.

Other DC managers, like Vanguard, don't expect to offer a cryptocurrency option.

"We focus on offering investment options that offer enduring risk premia, have an enduring client demand and fit into a client portfolio that's going to be able to drive a long-term outcome," Mr. Brancato said. "We've seen this movie before around hot products and money flowing in and then money flowing out, and those environments are not conducive to long-term investor outcomes and that's what drives us."

David O'Meara, New York-based senior investment consultant with Willis Towers Watson PLC, doesn't "expect crypto to be a meaningful investment with defined contribution plans, certainly in the next few years. In the long term, perhaps. Crypto assets are still largely in the hands of very few people and so it's not been adopted in an institutional investment portfolio to a meaningful degree."

He added, "We question as to whether or not any defined contribution participant can knowledgeably invest in crypto assets and understand what risks and opportunities there are in those funds."