Shareholder Activist Targets Target-Date Funds

The BlackRock Lifepath target-date funds have been targeted again—not in litigation, but by a shareholder activism group for their inclusion on a 401(k) menu.

Noting that “Microsoft uses BlackRock LifePath funds as its 401(k) Plan’s default retirement options, resulting in the vast majority of the $38 billion employee retirement dollars of its 401(k) Plan, as of December 31, 2020, invested in funds that hold companies that create substantial climate risk. A recent scorecard, produced by investor representative As You Sow, shows that the Microsoft 401(k) default option is rated Poor due to significant investments in fossil fuel companies and companies that cause deforestation risk.” 

The resolution goes on to state that, “Given the threat that climate change poses to workers’ life savings, Microsoft should demonstrate that it is safeguarding employee financial security over time by mitigating climate change-related financial and economic risks as part of a prudently constructed lineup of funds. Failing to satisfy this basic duty could be a liability for the Company, creating reputational risk and making it more difficult to retain employees increasingly concerned about catastrophic climate impacts.”

The Proposal

The specific shareholder proposal expected to be introduced says:

Shareholders request the board provide a report assessing how the Company’s 401(k) retirement funds manage the growing systemic risk to the economy created by investing retirement plan funds in companies contributing significantly to climate change.

SUPPORTING STATEMENT: Such analysis should include, at Board discretion, whether plan decisionmakers have considered:

1) Climate risk in portfolio offerings;

2) Whether inclusion of high carbon companies in plans contributes to greater economic volatility over time, and the impact of such volatility on retirement fund performance over time;

3) Whether inclusion of high carbon companies contributing to climate change puts younger plan participants’ retirement funds at greater economic risk than plan participants nearer retirement age.

Board Recommendation

Perhaps not surprisingly, Microsoft’s board of directors is recommending a vote AGAINST the proposal. In their statement in opposition, they note “This proposal mischaracterizes the operation of Microsoft’s 401(k) plan, over-simplifies or disregards the strict fiduciary framework to which the plan is subject under applicable law, and minimizes the efforts made to offer plan participants a broad range of investment options, including those that account for Environmental, Social, and Governance (‘ESG’) factors, within that framework. We do not believe the request for Microsoft’s Board to provide a report assessing how available funds within the Microsoft 401(k) plan are addressing risks of climate change is the appropriate mechanism to ensure the prudent ongoing stewardship of the plan, in accordance with applicable law.”

It then proceeds to note that the plan is overseen by a “management-level fiduciary committee, which utilizes several investment advisors, including a third-party fiduciary investment consultant,” a committee that “has worked diligently to offer participants a broad range of investment strategies across different asset classes and investment styles, to allow participants to diversify their investments and pursue their individual retirement objectives based on their own risk tolerance,” including access to investment options that take into account “or specifically focus on green energy and climate solutions, in accordance with the committee’s fiduciary duties.” They note that “almost all new participants in the plan are required to affirmatively elect their investments, and indeed most plan assets currently are not invested in the BlackRock LifePath funds,” that the Microsoft 401(k) plan offers a carefully curated and closely monitored investment lineup,” and take note of the recent Labor Department ESG proposal (it hadn’t been finalized at the point of the proxy), explaining that those rules “may allow fiduciaries additional flexibility in the fund selection process in the future.” 

It further explains that “nearly all of the investment managers for funds offered in the Microsoft 401(k) plan’s core lineup are signatories to the UN Principles on Responsible Investment, and already incorporate ESG factors into their investment process and practices, to varying extents.” They also cite the existence of the plan’s self-directed brokerage window, and work with the plan’s recordkeeper “to facilitate a one-click search tool to identify the numerous “Socially Responsible Investment” options that are available, and regular email communications to plan participants specifically call out that tool as a resource.”

In essence, the board argues that participants have access to a broad range of options, that “nearly all of the investment managers for those offerings account for ESG factors in their investment process and practices,” and that they have access to even more via the self-directed brokerage window. “The requested report does not clearly relate to the current operations of the Microsoft 401(k) plan or the strict fiduciary framework under ERISA, nor would it affect the funds actually available for selection in the plan.”

Similar votes at Amazon (9.1% of the overall vote supported it) and at Comcast (just 6% backed it) came up short. Now we’ll see what Microsoft shareholders have to say on the subject.

Microsoft’s annual shareholders meeting will be held virtually on Dec. 13, 2022, at 8:30 a.m., PT.