Personal Finance | October 5, 2022

Five steps to greening your 401(k) – and why it’s harder than it should be 

Zach Stein

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Guest Author

Zach Stein

Seems like it shouldn’t be that hard: Build a portfolio from the better sustainable funds. Add them to your company’s 401(k) fund lineup. Educate your team about their new options… 

Voila! You have greened your 401(k) plan. 

In reality, it rarely happens that way. Rare is the 401(k) plan with a single sustainable fund in it, let alone a comprehensive sustainable portfolio that savers can “set and forget” like they do target-date retirement or college-savings funds. 

At Carbon Collective we’ve evaluated hundreds of 401(k) plans, from five-person nonprofits to major corporations. It’s crazy to us that there aren’t good climate-friendly 401(k) options for climate-focused non-profits and startups. This leaves them investing their own and their employees’ money in fossil fuel companies through their 401(k)’s. 

Companies and their employees can change the status quo. Outside of feeling better about where you’re invested, greening a 401(k) matters because we simply cannot solve climate change without changing how we invest. 

The science is clear on this. To avoid catastrophic warming, we need to stop investing in fossil fuels, halt any new fossil fuel expansion and increase investments into climate solutions  7- or 8- fold per year. 

When it comes to individuals like you and me, 401(k)’s are where a majority of our investments are held. We should be able to avoid investing in fossil fuels and be able to instead invest in the solutions that need to scale exponentially to solve climate change. This is not just investing with our values, it’s investing in the world we want to retire into.

And adding funds to your 401(k) is not a monumental ask. It typically won’t increase costs to the company and it should not increase their legal liability (assuming it’s done responsibly). 

Fiduciary duty  

The very short version: liability. The 401(k) world is extremely risk-averse, from the recordkeepers who administer the plans, to the corporate consultants that evaluate them, to the investment committees that approve them. 

When a company sets up a 401(k) plan, it is taking on a fiduciary responsibility to protect the financial interest of the plan’s participants (aka employees). If the company fails to do so, they can be liable to getting sued by their employees (and this does happen). 

The definition of fiduciary responsibility is evolving as we speak. Some fiduciaries believe they must account for environmental and social risks and impact in their investments. Some politicians don’t want them to. Texas’ Gov. Greg Abbott’s anti-ESG decision, which barred major bond underwriters like JP Morgan for being anti-fossil fuel, is expected to add an estimated $500 million in fees – definitely a reimagining of fiduciary responsibility.

On the other end, student groups are suing university endowments for not divesting from fossil fuel because they believe it’s a breach of fiduciary duty. As the world of investing evolves, the application of fiduciary responsibility must evolve.

Employees have untapped power. In many ways a company’s employees are their most important stakeholder group. More important than their investors or even customers. If you leave, then a company will have nothing to offer either group. No product/service and no investment returns. You, as an employee, have great power. 

The status quo only changes when enough people decide to change it. There is a pathway to green your 401(k). For those that want change, we offer this map of where to start and the roadblocks you will likely encounter, as a business owner, nonprofit operations manager and/or a passionate employee.

Step 1: Research your own 401(k) plan 

Before contacting HR to ask for a change, we’ve found the best first step is to take 15 minutes to dig into your existing 401(k) plan options. First, it always helps when making a request like this to show you’ve done your homework, and second, it likely can put you in a stronger position to make a clear, actionable request. 

All you need to do is log into your 401(k) plan and navigate to the place where you can see which fund and portfolio options are available to you. You may need to click something like “Change my Investments” to get there. Don’t worry, you won’t have to change anything, we just want to see the menu. 

Once you have the list in front you, focus on two things. First, the expense ratios for the available funds. Part of a company’s fiduciary duty is to protect its employees from paying higher than necessary fees for the funds in the 401(k). But it’s quite common for fund fees in 401(k) plans to be quite high. Many old-school 401(k) providers get a commission  for including certain expensive funds in the plan lineup. 

It’s difficult to see how including such expensive funds is consistent with their fiduciary responsibility…which is why high expense ratios can give you leverage. If you see a lot of fund fees that are above 0.50%, then you may be overpaying in fees and the employer is at higher risk of getting sued. 

Second, any available sustainable options. Scan the fund names for certain keywords like: “ESG, green, or sustainable.” Write down any fund tickers you see and the full fund name. The fund name is important because you’ll want to see if the sustainable options offer broad investment coverage. 

Once you’re done, enter the tickers into: It’s a great, free resource that will show the fossil fuel exposure in funds. Write down the percent exposed to fossil fuels in each fund. 

Step 2: Draft your request letter

The next step is to take your research and formalize it into a letter requesting better, greener portfolio options. Let’s define some key terms. You’ll want to get in front of potential pushback from the powers that be.

  • Investment advisor: A 401(k) plan, especially at a 100+ employee company will often have an investment advisor signed onto the plan. They share the fiduciary responsibility with the employer and help build/maintain portfolios.
  • Investment committee: A group of executives at the company that take responsibility for any changes to the 401(k) plan.
  • QDIA: The default portfolio option for any employee who doesn’t opt into an alternative portfolio/fund. 

We’ve drafted an example letter using a real-world example 401(k) plan. Feel free to copy/paste from it.

To our employers, 

We are writing to you to express our displeasure with the investment options in our 401(k). As the fiduciary responsible to safeguard the financial wellbeing of us participants in the plan, we believe you are falling short on two accounts: 

  1. First, many of the funds available in the plan are unnecessarily expensive. Us employees should not be involuntarily stuck paying these high fees. 
  2. Second, and more importantly, by neglecting to include a comprehensive series of sustainable fund options, you are forcing us employees to invest in ways that do not account for the greatest financial risk of our time: climate change. While we would love for the QDIA to be a sustainable portfolio, we understand this may be too great of an ask. Therefore, we ask that you add a series of funds that would enable an employee to construct a diversified, fossil-fuel free portfolio across asset classes should they opt out of the QDIA. We also would request that after making this change, you provide adequate opportunities for employees to educate themselves about their new plan options. 

We know you take feedback like this seriously and we would be eager to work with you to correct these issues. We would be happy to recommend a series of Investment Advisors for you to interview that can improve our plan options and are also happy to address the Investment Committee directly, both with our concerns and potential solutions. 

Thank you for your timely response. 

  • The Green 401(k) Working Group

Step 3: Get signatures

Once you have your letter like the above ready and finalized, go and collect signatures. Try and get as many of your fellow colleagues as possible. You’re not trying to remove anyone’s portfolio options or involuntarily change them out of their current funds. You just want to add better green options for anyone who wants to opt in. 

Step 4: Send

Once you have all of the signatures collected. Send them and the letter as broadly as you can to the powers that be. Make sure you include: the head of HR/people, CEO, COO, and as many board members as you can. 

Step 5: If that doesn’t work

If that fails to materialize in any tangible change, draft a second letter. Collect signatures. Seek advice from an ERISA attorney. As a participant in a 401(k) plan, you have every legal right to seek legal protection if you believe your financial interests are not being served. 

Zach Stein is the cofounder of Carbon Collective Investing, the first online investment advisor 100% focused on solving climate change and the author of the Ultimate Guide to Sustainable Investing.