The Equity Factor

The $25 Trillion Source That Could Help Distressed Neighborhoods

Rule change could bring 401(k) and pension investing to community development.


There are $25 trillion in retirement assets in the U.S. Getting even a tiny slice of those investment dollars could mean a huge deal for affordable housing and equitable economic development in cities.

Last week’s revising of a seven-year-old Department of Labor guideline on retirement asset management is a huge step toward making that happen.

“This change could lead to the creation of new investment vehicles that target distressed urban areas,” says Matthew Patsky, CEO of Trillium Asset Management. “CDFIs, which have a need for long-term capital, could be helped by the creation of pooled vehicles designed to serve the retirement asset marketplace that is, by its nature, very long-term.”

Trillium Asset Management has a long history of incorporating environmental, social and governance factors into its management of $2.2 billion in assets. Patsky was one of a few industry voices invited to speak at the Labor Department press conference where the announcement took place.

“Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand,” U.S. Secretary of Labor Thomas E. Perez said in a statement announcing the change to the Employee Retirement Income Security Act guidelines, which govern the management of retirement plan assets.

Essentially, until this change, investing 401(k) or pension funds, or other professionally managed retirement assets with an eye for social as well as financial benefit could have gotten retirement asset managers tangled into endless, unnecessary lawsuits accusing them of managing assets irresponsibly — despite the fact that socially responsible investments have been outperforming the S&P 500 for decades.

“We had an environment that was literally causing people to avoid investments that had potentially positive environmental or social impact, for fear of it somehow being tagged as showing poor fiduciary judgment should it go wrong,” Patsky says. “Yet in conventional private equity and venture capital, things go wrong all the time.”

At issue was a seven-year-old guideline filed quietly by the George W. Bush administration in the run up to the 2008 presidential election, which stated that “consideration of collateral, non-economic factors in selecting plan investments should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.”

The 2008 guideline caught many socially conscious investors off guard. Groups including Trillium had been working in the space for almost three decades, stretching back to the divestment movement that helped bring down Apartheid in South Africa.

“We are not familiar with any period of public comment before that went into the 2008 guideline filing,” Patsky says. “As soon as we discovered it, we started working against it.”

“We” includes socially conscious investors like Trillium and a range of impact investing or socially responsible investing groups, such as US SIF and the National Advisory Board on Impact Investing (currently chaired by Darren Walker, who is president of the Ford Foundation, which gives funding support to Next City).

In the meantime, the effect of the 2008 guideline was to stigmatize any retirement plan investments into vehicles that considered environmental and social impact — such as creating jobs or affordable housing for low-income communities — as part of their risk and return profile. Secretary Perez said it “gave impact investment cooties.”

In addition, Patsky explains, retirement asset management guidelines had a trickle-down effect into the management of other assets.

“Sadly,” he says, “I can tell you I have had more than one environmental endowment over the last seven years tell me they can’t look at environmental impact with the way they invest their endowment because [ERISA] says it’s a violation of fiduciary obligation. Which is complete bullshit.”

These latest guidelines seem to hew closer to the reality that investing with an eye on social as well as financial returns is not automatically detrimental to financial returns. This time, the Labor Department facilitated a nine-month public comment period resulting in the new guidelines, which read: “Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”

It will still take time for retirement plan options to emerge that connect retirement assets to commercially viable investment opportunities that have a social impact in spaces like equitable economic development or affordable housing.

“We shouldn’t assume that this new guidance will open the floodgates for institutional investors, ERISA funds and otherwise, to target impact investment,” writes David Wood from the Harvard Kennedy School’s Initiative for Responsible Investment.

There are plenty of socially targeted, financially viable investment products out there, such as Trillium’s mutual funds, with minimum investment as low as $5,000. Calvert Foundation has been offering its Community Investment Note since 1995, attracting 13,000 investors so far to put $20 minimum into a portfolio that includes investments in “high impact organizations creating jobs, building affordable housing, promoting education, protecting the environment, and creating numerous other social impacts.”

The ultimate impact of last week’s decision, however, still depends on demand from individual retirement plan holders around the country.

“This decision broadens impact investing to where people who are unaccredited investors, who are working class, can now look at whether there are options in their 401(k) plan or IRA that are providing them values alignment,” Patsky explains. “And if they don’t see those choices they can now go make a case for why it is they want to do it without any fear that there is any problem with fiduciary obligation.”

The Equity Factor is made possible with the support of the Surdna Foundation.

Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.

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Tags: affordable housingjobsincome inequality

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