Sustainable Investing in U.S. Private Sector Retirement Plans:
A New Institutionalist Perspective
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Perceived risk
The litigation risk frame elicits fear and anxiety among fiduciaries. The frame uses a historical perspective, focusing on negative experiences of peers for their investment decision-making on investment options relative to fees, style, and performance. The litigation risk frame also highlights uncertainty in regulatory enforcement and court judgment.
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Ambiguity aversion
The ambiguity element intersects with overhanging fear of litigation, uncertainty in the political future, ideological constraints. Ambiguity aversion is evident on two fronts. First, fiduciaries and industry actors view future regulatory guidance as ambiguous due to inconsistent regulatory enforcement. Second, service providers maintain a frame of ambiguity regarding naming conventions used within investment marketing and investment process.
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Best practices
Retirement field actors believe that fiduciaries are expected to follow “best practices” on sustainable investing when they become available. The actor(s) that disseminate these “best practices” is (or, are) critical to create herd behavior. Best practices are found to be an amorphous, yet mimetic, force which at times represents fiduciary behavior at odds with the best interests of plan participants and beneficiaries.
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Herd behavior
Peer influence is a strong force among fiduciaries in terms information sharing, education and training, and decision making. In fact, 35% of plans sponsors surveyed said within their investment committee they observe “the tendency to follow the crowd on plan design or investment decisions.”
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Power struggles
Being viewed as an expert on plan design is a source of power. The retirement field actor with most stable power across plan sizes is legal counsel. The combination of overreliance on ERISA counsel for plan design guidance and fear of litigation was reported to stall innovation. With evolving topics like sustainable investing, however, the influence of legal counsel declines as the role of networks and media rise.
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Inertia
The stalling of fiduciary action on sustainable investing is the norm, whether it’s adding it to the agenda for a committee meeting or proceeding with information gathering. “Waiting to see”, “dampening of adoption”, and “sitting on the fence” were common descriptions of actors’ assessment of fiduciary action towards sustainable investing due to the “chilling effect” of the DOL activity.
More than $6 trillion of savings subject to the Employee Retirement Income Security Act of 1974 (ERISA) is invested unsustainably, constituting a policy problem through market failure and policy contradiction. Externalities from capital allocations perpetuate systemic inequalities, while information failure yields suboptimal investment decisions. As a result, unsustainable investing, when material environmental, social, and governance (ESG) factors are discounted, is the status quo in private sector workplace retirement plans. In contrast, sustainable investing in private sector retirement plans can achieve a more just and efficient capital markets allocation while enhancing retirement income security of American workers.
For most retirement plans, inaction influenced by the litigation risk frame is irrational because of the low probability of litigation given the expected positive, long-term impact to participants and beneficiaries.
But when looking at only the largest plans, personal risk perception and statistical reality become more aligned.
“I went to a seminar where I got scared because the lawyers, they're talking about how plans were getting sued.”
— large plan sponsor on fear of litigation
“Fiduciaries can be reticent to do something like this [sustainable investing] because they feel like it might even create some type of personal liability.”
— network executive on perceived risk
Driving and oppositional elements on fiduciary decision making on sustainable investing
The interview word count spent on peer influence and best practices is 2x that of other actor influences.
“There's a group of plan sponsors that try to stay with the herd, and they want to do what their peers are doing.”
— investment manager
