75% of 401(k) participants express interest in sustainable investing, but only 36% are aware of relevant plan options.
Conflicting corporate perceptions and regulatory ambiguity are limiting adoption despite renewed fund performance.
The Department of Labor’s evolving fiduciary guidelines may increase litigation risk, affecting ESG integration in retirement plans.
A new report by Morgan Stanley’s Institute for Sustainable Investing reveals that a majority of Americans with 401(k) or similar retirement plans are open to sustainable investing—yet only a fraction follow through due to low awareness, fiduciary uncertainty, and past performance concerns.
According to the study, 75% of surveyed plan participants expressed interest in sustainable investments, largely driven by the belief that ESG-aligned funds can deliver strong financial returns. However, just 36% were aware that their retirement plans offered sustainable options.
Samantha Lamas, senior behavioral insights researcher at Morningstar, highlighted a recurring theme in ESG investing: “Our reports on ESG didn’t find an overwhelming interest, even during its heyday. A lot of individual investors were more motivated by the financial benefits of ESG versus social aspirations.”
Indeed, performance concerns may be playing a role. Morningstar Direct data shows that from 2022 to 2024, 542 US-domiciled sustainable funds underperformed the Morningstar US Market Index by over seven percentage points. However, this trend has recently reversed: year-to-date, sustainable funds have posted an average return of 7.23%, outperforming the Index’s 5.99%.
In addition to underperformance, regulatory uncertainty may be hindering broader integration. Under the Biden administration, the Department of Labor updated ERISA guidelines in 2022 to allow fiduciaries to consider ESG factors in decision-making when investments are financially equivalent. The rule clarifies that fiduciary duty may include assessing “the economic effects of climate change and other ESG considerations” if material to risk and return.
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However, proposed revisions to this rule could raise litigation risks. A legal memo by Goodwin Procter LLP warns the changes might “shift the burden of proving the prudence of any such consideration to the fiduciary (instead of the plaintiff),” heightening exposure for plan sponsors and asset managers.
The corporate response reveals another disconnect. While employees report high levels of interest in sustainable investment options, 62% of surveyed companies categorized employee interest as “low or moderate.” This misalignment may further slow adoption.
Still, Lamas sees a path forward. “This ‘do-should gap’ is both a warning … and an opportunity,” she notes. The challenge, she argues, lies in execution. “You need a person holding you accountable or technology that helps you; for example, what if you could click a dial that incorporates sustainable investments into your retirement plan?”
As investor interest grows and regulatory rules evolve, the ability to translate sustainability preferences into action may depend on improving visibility, refining plan offerings, and equipping investors with practical tools to close the gap between intention and implementation.
Read the Sustainable Investment Options in Employer Retirement Plans
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