PLANSPONSOR - March - April 2023 - 13

How Popular Are ESG Funds-Truly?
WHEN retirement
plan
participants
choose their own funds, those featuring
environmental, social and governance
investments may not be as in demand as
plan sponsors would think.
In new research, PGIM and the
Employee Benefit Research Institute
examined the allocation decisions of 9,324
new defined contribution plan participants,
across a total 108 DC plans-public
and private-who are directing their own
account and whose plan offers at least one
ESG fund in its core menu.
Although some clear demographic
preferences for ESG funds emerged in the
research-e.g., among younger participants
with higher incomes-ESG allocations
were found to be primarily a function
of weak preferences, wrote authors David
Blanchett, head of retirement research
at PGIM DC Solutions, and Zhikun Liu,
senior research associate at EBRI.
The total average balance allocation
to ESG funds for all participants in the
analysis was 1.7%, the research found.
" I think what the results reveal to
plan sponsors is simply that demand for
ESG funds in defined contribution [plans]
may not be as high as suggested by some
surveys, " Blanchett said in an email. " It's
not that some participants don't want ESG
funds; it's that there doesn't appear to be
an especially high demand today-that is,
not that much more than for other investments
available on the core menu. "
Among participants who direct their
own accounts-i.e., do-it-yourself investors-8.9%
had an allocation to an ESG
fund, the average amount being 18.7% of
their total balance, the research shows.
According to Blanchett, plan participants
who do allocate to ESG funds are
likely driven to invest by naïve diversification
rather than a strong conviction
to allocate in that particular way. The
self-directed plan participants could be
randomly picking funds to build a diversified
portfolio, Blanchett noted.
" For example, if there are 10 funds
available, and I allocate 10% to each one,
I'd be diversifying my portfolio by holding
multiple funds, but I wouldn't necessarily
have the most diversified portfolio,
depending on the similarity of the funds
I'm selecting, " Blanchett explained.
" No plan offered more than five ESG
funds, and the vast majority-approximately
76%-offered only one ESG
fund, " the research paper states. " This
those funds could have been unavailable
when the participants self-directed their
plan investments; the funds could have
been " mapped " into their account when
an original investment was replaced in
a fund change, he added. New accounts
selected for the research are apt to have
lower dollar amounts as compared
with older accounts, which Blanchett
acknowledged.
" Newer accounts are [almost] always
The total average balance
allocation to ESG funds for all
participants in the analysis was
1.7%, the research found.
suggests it would be relatively difficult to
build a diversified portfolio using only the
ESG funds in DC plans currently. "
Among the 108 plans studied, the
largest number, 82 (75.93%), offered one
ESG fund; 17 plans (15.74%) offered two
of the funds; five plans (4.63%) offered
three; three plans (2.78%) offered four;
and one plan (.93%) offered five.
" Overall, this research paints a mixed
picture of the actual [participant] interest
and drivers of demand for ESG funds in
DC plans and suggests that plan sponsors
should take a thoughtful approach when
considering adding ESG funds to an
existing core menu, " the authors wrote.
The research methodology limited
participant respondents to new defined
contribution plan enrollees. The research
was narrowed " to ensure we are capturing
participant elections to the respective
funds, " said Blanchett in the email.
" Focusing on new participants ensures
they-likely-had access to the ESG fund
when allocating to the core menu and they
selected that particular fund. "
If the researchers had instead
included all participants with ESG funds,
the smaller balances unless there is a rollover, "
Blanchett pointed out. " This effect
will persist regardless of participant age. "
He noted that the study did not focus
on young plan participants, but rather on
individuals who had newly enrolled in the
plan, who were more apt to be young.
" What this research doesn't tell
us about
is things such as retirement
preparedness or savings, " he said. " For
example, some research has suggested
participants
are willing to
save more
when they have access to ESG funds. "
Data for the analysis was obtained
from a top-10, by assets, recordkeeper of
U.S. defined contribution plans. For the
analysis, approximately 100,000 participants
who self-direct their accounts with
less than one year of service were initially
randomly selected across the entire available
participant population.
To be included in the dataset, the
participant had to be between the ages
of 20 and 80; have been enrolled in their
plan for two years or less; be actively
participating; have an income exceeding
$10,000; and have a balance greater
than $1. -Noah Zuss
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