Federal workers to gain access to ESG in retirement portfolios
Change scheduled for summer 2022
Millions of federal workers will soon have the option to direct their retirement savings to funds that incorporate environmental, social and governance factors in their investment decisions.
The Thrift Savings Plan, a $762 billion defined contribution plan akin to a 401(k) for most federal government workers, will become the latest and the largest retirement plan to offer participants ESG investment options.
By next summer, the plan’s 6.3 million participants from federal civilian agencies and uniformed services will gain access to a mutual fund window in which they can designate portions of their accounts to any of more than 5,000 funds, including some that consider ESG factors, according to the Federal Retirement Thrift Investment Board, which administers the TSP.
“I’m excited,” Rep. Andy Levin, D-Mich., said in an interview. Members of Congress are federal employees and TSP participants. Levin indicated he plans to make the selection himself when it becomes available.
“TSP is doing this because there is a demand for it,” said Levin, who has a background in pensions from his prior labor union work. He also helped establish a green energy company in Michigan before entering Congress. “ESG aligns people’s long-term financial interest with their values, and it makes investors feel good.”
FRTIB spokesperson Kim Weaver confirmed in an email that investor demand for more flexibility in their investment portfolios drove the board to develop the mutual fund window.
“We have heard requests for greater investment flexibility in all of the surveys we have done over the last eight years and we commonly hear this same viewpoint through all of our customer contact channels,” Weaver said.
TSP is the largest defined contribution retirement plan in the world. This category, which includes 401(k)s, passively invests workers’ contributions in capital markets and generally offers a range of growth strategies from aggressive to conservative. These retirement savings vehicles contrast with defined benefit plans, such as traditional pensions.
There won’t be any mandatory changes for TSP participants next year. Its five core funds will remain. The mutual fund window simply allows participants to customize their retirement portfolios by expanding options to include ESG funds and other “do-it-yourself” diversification, Weaver said.
“To the extent participants wish to incorporate a particular investment outlook into their portfolio, they will have the means to do so through the mutual fund window,” Weaver said.
Sustainable investment strategies may be a popular selection for many TSP participants, especially younger ones, Levin said. Younger Americans, who typically both undersave for retirement and care about climate impact, could be more attracted to retirement savings and other investments when they are also able to support those policies, he said.
“Young people are more likely to participate in markets if they can invest their values,” Levin said.
Most Americans are invested in capital markets only through retirement savings portfolios despite a recent uptick in direct stock holdings because of mobile apps such as Robinhood. Pew Research Center data shows 52 percent of Americans are invested in the stock market, but only 14 percent hold stocks directly. The rest hold the investments through retirement accounts.
Levin has introduced two bills related to sustainable investment policy disclosures by investment managers and retirement plans. The Labor Department also said it will revisit rules from the prior administration that made it harder for 401(k) plan managers to invest in ESG funds.
With millions of Americans gaining access to ESG-focused options through retirement portfolios, their ability to invest in those factors could cement the sustainable investment movement led by large funds that have started looking at ESG factors as financial risks.
Following a request for an analysis by Sens. Jeff Merkley, D-Ore., and Maggie Hassan, D-N.H., the Government Accountability Office released a report in May that recommended the TSP assess the potential impact of climate-related risks on the plan's investments.
The congressional watchdog pointed out the financial services industry itself is beginning to consider climate as a long-term financial risk factor and urged the FRTIB to “evaluate TSP’s investment offerings in light of risks related to climate change.”
At the time, the TSP board pushed back on the notion it hadn’t considered climate risk at all but took no further position on the recommendations in its initial response to the report. In late June, however, the board announced TSP participants would be able to select ESG options among others in a new mutual fund window by next summer.
Republican Sens. Patrick J. Toomey of Pennsylvania and Ron Johnson of Wisconsin sent a letter to the TSP’s oversight board on June 30, asking about the influence that large investors, including BlackRock and State Street Global Advisors, have on companies to force them to implement their preferred policies on climate or social policy.
The senators also questioned whether the consideration of ESG factors violates fund managers’ fiduciary obligation to solely consider the participants’ financial interest. They gave the board until July 26 to respond to an analysis of proxy votes by BlackRock and State Street over the past five years and their influence over TSP investment managers.
ESG opponents, however, could face a steep uphill battle with businesses responsive to a wider range of stakeholders including customers, investors and employees.
Data has shown ESG investments can outperform the market, according to Levin. The business world knows it's necessary to act comprehensively to save the planet, and that diversity isn’t just some political slogan, he said.
As for whether he can bring Republican colleagues on board, Levin said: “I put a lot of effort into bipartisanship, but it’s work.” Levin thinks ESG could be an area for bipartisan collaboration because it comes down to “orthodox economic theory.”
“If you believe in capitalism, you have to believe in markets, choice, and transparency,” Levin said.
The financial services industry understands that ESG factors are relevant to a company’s market performance, Bryan McGannon, a spokesperson for US SIF: The Forum for Sustainable and Responsible Investment, said in an interview. US SIF, a group composed of advisers, firms and banks, promotes sustainable investing. The group has been pushing the TSP to allow ESG selections for years, McGannon said.
“We are thrilled TSP will offer ESG options in the mutual fund window,” he said. Educating the federal workforce about the options, how to make these selections, and what these investments mean will be an important next step that his group plans to work on, he added.
The significance of the world’s largest retirement plan allowing its vast number of participants to join the ESG investing movement wasn’t lost on McGannon, though he said the options will most benefit participants.
“ESG investments are a good risk management strategy,” he said. “Considering ESG criteria alongside traditional financial metrics makes good sense.”
The sustainable investment movement is now a permanent fixture in the financial world, according to McGannon. “The market has moved,” he said. “The financial services industry is never going back.”