Is a 401(k) halal in Islam?
When it comes to news about American Muslims in the workplace, the focus is often centered on issues of discrimination, harassment, or misunderstandings related to Islamic religious beliefs and practices.
But like many stores and restaurants now have halal— meaning “permissible” in Arabic—offerings, companies should consider adding a halal 401(k) offering to their employees. Doing so can help foster an environment of inclusion for Muslim employees that goes beyond basic workplace accommodation.
For employers, the importance of understanding the laws specific to religious accommodation and being in compliance with those guidelines goes without saying. But viewing such compliance as simply a means to mitigate the risk of potential charges of discriminatory practices is short-sighted in today’s global environment and competitive talent market.
What’s needed is a deeper understanding of the multi-faith workforce, which can become a valuable strategy in attracting and keeping diverse talent.
With an estimated 3.45 million Muslims living in the U.S. and 1.8 billion worldwide, it is likely that you employ, manage, or work with a Muslim. It’s even more likely that your Muslim co-workers are not taking part in your company’s 401(k) opportunities, which often make up a considerable portion of an employee’s total rewards package
According to Islamic law (aka Shari'ah), it is forbidden to profit/make money from any business that sells items that are forbidden (or “haram”) for Muslims to consume. For example, Islam prohibits the consumption of alcohol, tobacco, pork products, pornography, and gambling—as well as investments tied to interest (or “riba”), risk, debt, or certain other concerns that fall under the auspices of social responsibility.
So how does this relate to 401(k)s?
Reaping financial gains from company stocks that profit from forbidden items is also not permissible. This means that adherent Muslims won’t participate in most 401(k) programs unless there is an option for the employee to direct the allocation of funds into which their money is invested.
An informal poll conducted by i4cp on this topic found that very few companies offer this option or that employees were unaware as to whether or not this option existed. This suggests that these investment prohibitions prevent a significant number of Muslim Americans and those from Arab and SE Asian countries who work for U.S. companies from reaping the benefits of 401(k)s and employer matching. Many of these employees are actively recruited on H1-B visas to work in high-tech companies or other U.S. firms with large populations of engineers.
What to do (or not do) about employer investment opportunities is one of the most common challenges and sources of frustration facing Muslims working in the U.S. and other Western countries.
How can employers create more equitable compensation options for Muslim employees and in doing so restore the value of their total rewards package? This requires organizations to first work directly with the vendor managing the company’s 401(k) plan. Begin by asking about the range of options the vendor has available and whether or not these would meet the needs of Muslim employees.
The simplest option is for employees to be able to direct their investments into funds that are permissible—a level of choice that can be appealing to other social responsibility-minded investors as well. Tools such as the Dow Jones Islamic Market World Index, the Accounting and Auditing Organization for Islamic Financial Institutions, Malaysia’s Islamic Financial Services Board and Bahrain’s International Islamic Financial Market all track and benchmark Islamic-compliant companies to aid Muslim investors in choosing their investment options.
Another possible option is to offer an existing Shari'ah-compliant choice such as Amana Mutual Funds or ShariaProtfolio, which offer several investment vehicles for both individuals and employers. Beyond that, there is also always the option of offering employees the opportunity to invest in the company’s stock.
Making these types of options available for Muslims and other conscientious investors who may have different reasons for choosing not to support certain common 401(k) stocks can make a lasting impression. It can also be a unique differentiator in a competitive talent market when so few companies currently offer Shari'ah-compliant investments.
How important is this issue to Muslims?
Nearly all (92%) of respondents to i4cp’s informal poll said they would have a more favorable view of their employer if they offered a Shari’ah-compliant option. A few poll respondents indicated that they are considering leaving their current job, in part to search for employers that do offer Shari'ah-compliant plans or to become self-employed to give themselves more freedom to control their investments completely. As one respondent commented, “I personally consider not having an option for a Shari'ah-compliant retirement contribution a disservice on the part of the company against its Muslim employees [same for any employee with a strong preference in socially aware investment preference].”
In the global competition for talent, it’s clear that greater benefit flexibility is an important way to build a positive employer brand for attracting and retaining key talent. With drivers such as religious/faith-based accommodation/inclusion and a growing social consciousness in investments by all employees, exploring these options can be a good way for an employer to make their compensation package stand out.
Does your organization offer a Shari’ah compliant investment vehicle for its employees? Does this accommodation take the form of specific mutual funds, the ability to direct the types of funds an individual invests in and/or company stock instead of a 401(k)? If yes, how is your company communicating these offerings as part of its employer brand and employee value proposition?
Making inclusive compensation a part of your company’s diversity story may be the key to increasing engagement, retention, and access to the diverse talent you’ve been looking for.
We also encourage you to read about accommodating Muslim employees during Ramadan.
This popular article was originally published by Michaela Corning in 2009 and updated in 2022.