Why do we force 99% of Americans with a 401k to invest in oil and gas?

When it comes to retirement plans, putting money into an industry in decline that destroys the planet just doesn't make sense.

February 8, 2024
Shlomo Bernartzi

Smoke from a Chevron Oil refinery fire fills the sky above Richmond in 2012. Investing in the oil and gas sector generates low rates of return. Lance Iversen/The Chronicle 2012

The oil and gas sector had the lowest returns of any sector in the US economy in the past decade. It also had the highest volatility. Finance students are taught that investors trade off higher risk for better returns. Why does anyone invest in a sector that offers neither?

The answer lies in the fact that most people invest today via index funds. These let investors ride the growth and relative stability of the economy at large, rather than having to place a bet on a specific fund manager. So much data has shown that past performance has no correlation to future results that active fund managers are falling out of favor. 

More and more Americans rely on index funds like the S&P 500.

The problem with this picture is that the historical market dynamics that led to today’s mix of top 500 companies are not a good predictor of which ones will dominate the economy in the future. We are investing in today’s 500 biggest companies even though it is clear that the makeup of that top 500 list will be quite different moving forward. Nowhere is that more true than in the energy sector.

The number of oil and gas companies that qualify to be in the S&P 500 has been on the decline: where in 2011 there were 45 fossil fuel companies in the S&P 500, by 2020 there were only 19. As the cost of solar, wind, and batteries combined has become less expensive than fossil fuel power generation, and the popularity of electric cars has taken off, the oil and gas industry has been on the decline. And yet, we continue to invest in it because we continue to invest in index funds.

Nowhere is this more true than in 401(k) plans.

As one of us experienced when running a technology company, it took over three years and a lot of persistence to get a single climate-friendly investment option on our 401(k) plan. That meant for over three years, we were requiring all of our employees to invest in Exxon Mobil and Chevron.

It turns out we weren’t alone. There are entire social movements of employees at big tech firms, including Apple, Microsoft, and Google, who have been asking for climate-friendly investment options on their retirement plans for years. They have sent hundreds of letters to their HR teams. They have gotten thousands of signatures on petitions.

Why has it been so hard for employees to get an investment option that makes a lot of financial sense, and also increases the likelihood that they will have a livable planet to retire on? 

In 401(k)s and 403(b)s, generally called defined contribution plans, there is a lively culture of class action lawsuits that puts pressure on employers to offer the types of rock-bottom prices and benchmark-correlated returns that only index funds can provide. The result is that anyone who invests via a corporate retirement plan has to invest about 5% of their savings in the oil and gas industry, the worst-performing and most risky sector in the economy.

We believe it is time to question that status quo. While index funds like the S&P 500 have served us well in reducing costs, they now prevent us from protecting our life savings from the decline of the fossil fuel industry. 

In the last few years several products have come on the market that make it possible for employers to offer low-price, benchmark-correlated funds that are climate-friendly. Those options have grown in popularity as employees have requested them.

Fossil fuel companies have noticed. In the past year, they have poured money into a new anti-ESG (Environmental, Social, and Governance investing) campaign that has resulted in a majority of the House and Senate voting to pass a bill whose purpose was to outlaw climate-friendly investing in 401(k)s, and eighteen red states passing laws outlawing climate-friendly investing in state pension plans. The 401(k) bill was only prevented from becoming law by the first veto of President Biden’s career.

Ironically, these bills that oil and gas-funded politicians frame as putting investment returns ahead of values-based decision making have threatened to cost hundreds of millions of dollars  to state agencies and pensioners, and have forced investment managers to choose between making the right decision as fiduciaries and breaking the law. In one of those eighteen red states, the Oklahoma Public Employees Retirement System decided to break the new anti-ESG law rather than risk losing $10M of pensioner money. Where the fossil fuel industry would like to frame the problem as choosing between investing with progressive values or investing for good returns, the data shows that those “progressive values” and good returns more often than not go hand in hand.

When it comes to long-term retirement investing, requiring Americans to put their hard-earned savings into an industry in decline just doesn’t make sense. If politicians required Americans to invest in the horse-and-buggy industry 100 years ago when automobiles were on the rise, we would see that as insanity. We should wake up to the fact that the same is true for oil and gas companies today.

Everyone should have the option to avoid investing in oil and gas, especially in retirement plans.

Bill McKibben is the Schumann Distinguished Scholar at Middlebury College and founder of the climate campaign groups and Third Act

Alex Wright-Gladstein is the founder of Sphere and the Sphere 500 Fossil Free Index and a creator of