Politics and Retirement Fund Options

In the United States, the political leanings of judges are impacting some individuals’ 401K retirement plan options, according to research by Jane Danyu-Zhang , assistant professor of finance at the University of Oregon Lundquist College of Business.

In particular, access to environmental, social, and governance (ESG) funds—funds that prioritize environmental sustainability and other social issues—may be impacted by the political leanings of the federal judges that interpret the law. In a 401k retirement plan, employees are offered a menu of options from which to select their investments—some 401k plans include an ESG option on the menu, though most do not. Interestingly, employers located in regions with conservative judges are less likely to offer an ESG option on the menu.

Why would an employer’s choice to include an ESG option depend on judges in their region? The reason is that if an employer is sued by an employee, they will face a judge in court. Because conservative judges often have less favorable views of ESG, employers in conservative regions worry that they face higher litigation risk by including an ESG option. It may seem surprising that an employer would be sued for offering the option to invest in ESG funds, but this is precisely what happened in a recent lawsuit against American Airlines.

Litigation Risk

Danyu-Zhang explained that the reason employers can be sued over 401k menus is a legal duty, called fiduciary duty, to act in the best financial interest of the client.

Some judges will interpret that best interest as avoiding ESG funds, while others view that providing ESG offerings can be in the interest of clients who wish to prioritize environmental and social issues with their investments.

“I'm interested in the political environment and how this legal environment influences investors and financial decisions—and how they allocate their assets,” Danyu-Zhang said. “It’s surprising to me, in terms of the trillions of assets in the ESG mutual fund market, that there are very limited ESG options in people’s retirement saving, specifically 401K plans. Less than 15 percent of offerings include ESG options. And a large concern for the fiduciaries in not offering ESG is because they are worried about getting sued.”

More Options = More Investment

Danyu-Zhang also found when supplying more options that include ESG funds, employees tend to contribute more to their retirement fund. Employees who choose to invest in an ESG fund aren't just reallocating existing investments—they are increasing their total payroll contributions.

According to Danyu-Zhang’s paper, “With a decrease in judicial discretion, which reduces the influence of judges’ political orientations, retirement plans face more uniform treatment between judicial circuits. This closes a substantial share of the gap in the ESG market between jurisdictions, and employees in conservative areas increase their ESG investments more than employees in liberal areas.”

“The rise in ESG investments in conservative circuits is driven by environmentally conscious firms operating in liberal counties within conservative district circuit courts.” she said. “Adding ESG options to the menu leads employees to save more.”

Danyu-Zhang has presented “How Anti-ESG Pressure Affects Investment: Evidence from Retirement Savings” at the UChicago Booth Stigler Center-CEPR Political Economy of Finance Conference 2024: Corporate Democracy, NBER-Pension Finance Conference, New York Fed and NYU Summer Climate Finance Conference, SFS Cavalcade, 16th Annual Alliance for Research on Corporate Sustainability (ARCS) Research Conference, Wellington Finance Summit, SIF, Adam Smith Sustainability Conference, Financial Market Solutions for Funding Green Transition and Climate Resilience (invited), NFA, FMA, CEAR-RSI Household Finance Conference, SFA, and the Pacific Northwest Finance Conference.

—AnneMarie Knepper-Sjoblom ’05, Lundquist College Communications