How you can make your 401k plan cleaner

You worry about climate change, you feel like you have done a lot to make your life greener already, and yet, you've found out that your savings are probably just as bad as your consumption. Here are some hints as to what you can do about it.

Note that this is written in a US context, specifically for individuals who have a 401k plan through their (current or past) employer. If this is not you, the concepts should still apply, but you will need to adapt them to your local context.

Mandatory disclaimer: This post should be read as an educational document. None of what follows should be considered as formal financial advice. It is important that you understand the consequences of the changes you make to your retirement plans and other investments, as these can lead to loss of financial value. This article is written from a non-financial value perspective, and while I do believe that moving away from fossil-fuel investments makes sense financially, it is up to you to figure out the financial consequences for yourself.

I will assume that you are starting in roughly the following situation:

  • you have a 401k plan (from past or current employment)
  • you worry about its climate impact (and possibly other impacts, the content of this piece applies in the same way)

How your plan contributes to climate change

It is not immediately obvious how money tucked away for your older days is connected to climate change. Here is a short summary of how a typical 401k plan functions.

The basic premise of your retirement is that each month, you put some money (and maybe your employer contributes some as well) into your plan. This money is then invested into funds, essentially big pools of money (a single fund can often hold several billions of dollars). These funds in turn invest into a set of companies, by buying shares, or bonds. The list of these companies is called the "portfolio". Your investments then grow as the value of these shares increases, or because the companies in the portfolio pay you dividends, or interest on the loans in the bonds.

If some of the companies in your portfolio make money from selling coal, your retirement plan is then funded (in part) by selling coal.

Measuring the impact of your plan

Today, unless you've taken specific measures to have a "clean" 401k plan, it is almost certain that yours includes investments into fossil fuels, probably somewhere between 5 and 10%.

You have probably heard of ESG (for Environmental, Social & Corporate Governance) ratings, a fancy way of saying "how sustainable is this money?". ESG ratings try to assess how good or bad a company (and therefore an investment) is with respect to non-financial aspects (Does it damage the environment? Does it pay its employees fairly? Does it have a strong anti-corruption policy? etc...) The biggest issue with ESG is its lack of definition. Ask 3 different providers of ESG data how good your fund is, and you will get 3 different answers.

There are several ways of getting a sense of this data, though most need some serious diving into numbers and financial jargon. One of the most accessible tools is Fossil Free Funds, run by the non-profit As You Sow.

Start by heading to your 401k plan provider's portal. When you registered for your plan (probably as you started the corresponding job), you would have been given access to this. On their site, you should be able to see the list of "options" available in your plan. Typically, these are funds, identified by a ticker, a 3-5 character code, like "MASKX", and a name (the name for MASKX is "iShares Russell 2000 Small-Cap Index Fund Institutional Shares"). The name can be misleading as it is often shortened in different ways depending on where you look.

You should also have a shorter list, with the options you have selected, and for each an amount in dollars or a percentage allocation of your funds.

You can pick any of the tickers in your plan, and input them in the search box over as FossilFreeFunds. This will give you some data about that fund, with information such as how much of it invested in coal related businesses.

Depending on your appetite for numbers and formulas, you could simply look at each of the options in your plan, or assemble a spreadsheet with each of them, and try to optimize for the criteria you care most about.

Improving your plan

Now that you have a sense of how your 401k plan is doing with respect to climate change, here are some ideas for improving it.

It's important to realise that 401k plans are heavily regulated, and therefore not the easiest thing to change in your life. There is, however, enormous potential in them, with the approximately $6.5 trillion they hold. The recent regulatory changes to limit how much 401k money can be moved away from fossil fuels also tends to show that this money plays an important role (these changes have just been reverted by the Biden administration).

There are several ways you can improve the situation.

Move your money out of your 401k plan

There are alternative ways to get your funds out of your 401k, and roll them over into other types of plans, such as IRAs or a brokerage account. They should give you more flexibility in choosing where you put your money (but also more homework to decide). How to do this goes well beyond the scope of this post.

Change your plan provider

This can only be done by your employer. Your company has a contract with a 401k provider, and replacing this contract is possible. It does not mean your money will immediately move into cleaner funds. Typically, a default "mapping" is defined by the new provider (ie: your funds in fund X will be moved to fund Y). You can however decide how you want to reallocate your investments at that time.

To actually get cleaner options with the new provider, you would still need to discuss with your employer's HR to ensure your wishes are heard. Some of the suggestions below would also apply here.

This is probably most useful if your current provider are dragging their feet to add cleaner options to your plan. Changing providers might also mean lower fees, as an added benefit.

Add a clean option to your plan

This has the benefit that an extra option does not require everyone in the plan to choose it, it's just that, a new option. The goal here would be to have a new, clean option (it's up to you to define what you mean by "clean").

For this to happen, you will need to talk to your employer's HR department, and the company's plan provider, and convince them of the value for all of adding an extra option to your plan.

This will immediately bring up the next question: what new option to add? Even if you only consider mutual funds as possible options, there are still thousands of choices. Assuming that divesting from fossil fuels is what you care most about, you could head back to Fossil Free Funds and choose from the options with the best ratings, or the highest ranking according to your preference.

It is often suggested that investments should be diversified, so as you consider your new option, it might be useful to consider what impact this has on the diversification of your portfolio. For instance, if you moved all your funds to a fund that focuses exclusively on renewable energy producers, or only on tech companies, you might become overexposed to the risks inherent to that industry.

Once that fund is identified, your 401k provider would have to validate that it can be used as an option in your plan. Your provider has a legal duty to care for your money and ensure that they only offer you options (funds) which will manage your money correctly.

Assuming this goes well, the new option will eventually be available in your 401k portal, at which point you should be able to move some or all of your funds over to it.

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