Giant Government Retirement Plan Going Green

ESG, or sustainable investing options, are coming to the U.S. Government’s giant retirement plan.  (Photo: Ed van Duijn/Unsplash)

Over 6 million workers from government agencies and uniformed services will soon have the option of going green when it comes to their retirement plan investment choices.

The government version of a 401(k) is the Thrift Savings Plan, a giant $762 billion defined contribution plan that collects employee salary deferrals and government matches for over 6 million participants each pay period and invests them.

The Thrift Savings Plan has long been known for its rock bottom fees and pared-down plain vanilla investment options. In fact, I was a participant in the Thrift Savings Plan years ago when I was a U.S. Foreign Service Officer and served overseas at U.S. embassies.

Starting in the summer of 2022, the TSP – as it is known – is getting a major upgrade. Instead of the original menu of five or so funds, participants will be able to select from a mind-boggling smorgasbord of over 5,000 mutual funds via a special self-directed “window.”

Among those 5,000 funds will be several that incorporate ESG – or environmental, social and governance – criteria into their investment decision-making. The Board overseeing the TSP said “investor demand for more flexibility in their investment portfolios” convinced the board to offer the expanded choices.

“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,” one of the Congressional sponsors said in an interview with Roll Call.

Barron’s magazine calls the menu change the “latest sign of the growing acceptance of sustainable investing by retirement plans,” basically a signal that ESG investing has truly arrived.

Still, relatively few retirement plans offer ESG options as of yet. According to Barron’s and the Plan Sponsor Council of America, less than 3% of plans surveyed now offer an ESG/socially responsible fund option, although that number is expected to grow rapidly.

Strong performance is one of the factors behind growing ESG acceptance. Research showed that in the first 12 months of the COVID-19 pandemic, many large ESG funds outperformed the broader market, leading investors to increasingly shift their money into ESG funds.

The TSP fund’s inclusion of ESG funds in its mutual fund window will undoubtedly push that trend further, as the TSP is the largest defined contribution retirement plan in the world, according to Roll Call. 

The Takeaway: Is ESG investing high up on your list? Ask us about the ESG options we can incorporate into your portfolio.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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