Defined contribution plan sponsors and their advisors should explore how to add impact investing options to the platforms they offer their plan participants. According to a new Prudential Retirement report, “doing good while doing well” could appeal to many employees, particularly those under the age of 34. However, the industry will need to educate investors regarding the potential for investment returns and the ability to manage risk.
“Many employers and plan advisors have wondered how to add an impact investing option to their 401(k) platforms,” said Sri Reddy, senior vice president and head of Full Service Investments at Prudential Retirement. “I’m proud Prudential is among the earliest and most active impact investors, joining more than a third of America’s largest corporations. We’re hoping that our experience—and our success—helps to spark imaginations and foster innovation as the industry considers offering these opportunities to a wider range of investors.”
Reddy co-authored Prudential Retirement’s new paper, “Impact Investing: What Role for Defined Contribution Plans,” which details findings of 1,000 401(k) participants aged 21 to 55. Only a third were familiar with impact investing, which is distinct from philanthropy in that it measures both investment return and requires a measurable impact for each investment. Once those surveyed understood the concept, 39 percent were very likely to consider impact investing. Even so, if offered in their workplace retirement plan, survey participants listed risk and lower performance as top concerns.
There are several impact investing methods, according to “Investing with a Purpose,” a joint study on corporate impact investing by Prudential and CECP, a CEO-led coalition that says a company’s social strategy is integral to its success. The paper argues that the approaches providing the greatest potential for impact—and returns—include direct investments, corporate venture capital, self-managed funds and investing through a third-party fund.
New U.S. Department of Labor rules have allowed for the possibility of impact investing within workplace-sponsored retirement plans, but plan sponsors still need reassurance that performance can be transparently measured, tracked and reported, according to Reddy.
“We may still be five to 10 years away from broad offering of impact investments within retirement plans,” Reddy said. “In the meantime, we can begin the conversation and prepare for demand, especially as investors increasingly favor making a difference while they invest to save enough for their own retirement goals.”
Interested in learning more about impact investments? Read Prudential Retirement’s paper here. Want to speak with Sri Reddy? Contact Monique Freeman.
Interested in learning more about how corporations invest to make a difference? Read the Prudential/CECP paper. To learn more about Prudential’s impact investing efforts, contact Alicia Rodgers-Alston.