The Department of Labor’s final rule on socially conscious retirement investing has been submitted to the White House’s regulatory office for review, indicating that final rule could be released before the end of the year.
Bloomberg Law and the National Association of Plan Advisors (NAPA) report that the proposed regulation, drafted to ease Trump-era restrictions on considering environmental, social and corporate governance (ESG) factors when making decisions about retirement plan investments, was submitted to the White House’s Office of Management and Budget on Oct. 6.
The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” was released by the DOL’s Employee Benefits Security Administration in Oct. 2021, in response to Executive Order 14030, signed by President Biden on May 20, 2021. That order directed the federal government to “implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families,” according to a statement from the DOL.
The proposed rule effectively reverses the Trump-era rule on the issue and provides legal certainty to ERISA plans that choose to consider ESG factors in their investment decisions or offer ESG investment options to plan participants.
“We were quite concerned that the outcome of the Trump Administration’s rules was actually going to lead to less retirement security because fiduciaries would feel like they need to stay on the sidelines, and not incorporate these kind of factors into their decision-making,” EBSA Acting Assistant Secretary Ali Khawar said at the time. “Having that hand tied behind their back, we were concerned would ultimately lead to worse financial outcomes.”
The Trump-era rule, which was never enforced, sought to limit investments and related decisions to “pecuniary” factors, raising doubts about whether climate change and environmental factors would qualify.
The Biden Administration’s rewritten rule that would remove barriers to plan fiduciaries’ ability to consider climate change and other ESG factors when they select investments and exercise shareholder rights has been controversial.
The Wall Street Journal referred to the proposed rule as a “backdoor rewrite of ERISA, one of the better laws of the last 50 years.”
The editorial, titled “Your New Woke 401(k),” went on to say, “Retirement plan sponsors won’t merely be allowed to prioritize climate and social factors in how they invest. They could be sued if they don’t. Workers won’t get much say because plans won’t be required to ‘solicit preferences’ on ESG.”
The American Retirement Association, of which NAPA is a member organization, is also not a fan. In a comment letter submitted to the DOL in response to its Request for Information, ARA said the Labor Department shouldn’t call out climate-related risks for special attention.
“ARA is concerned that undue emphasis on climate-related financial risk would expose the plan fiduciary to unwarranted liability and litigation risks. The Department should instead rely on existing ERISA principles and practices,” the comment letter stated.
Once a rule is submitted to the OMB, reviews are generally completed within 90 days, which would clear the way for a potential December release of the final rule.
SEE ALSO:
• DOL’s Proposed ESG Rule ‘A Backdoor Rewrite of ERISA’: WSJ
• New ESG Guidance from DOL Seeks to Reverse ‘Chilling Effect’ of Trump-Era Rules
• Top ESG Considerations for Plan Advisors: Groom Law Group
• ESG Under Fire: Why Things Went Wrong
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
