The Department of Labor says its final ESG rule released Oct. 30 “intends to provide clear regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social and governance (ESG) investing,” per a DOL statement announcing the final rule.
“The Department expects the final rule will result in higher returns by preventing fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions on financial factors,” the statement continues.
Critics of the rule—and there are many—say it provides anything but clear regulatory guideposts, and will lead to unintended consequences that will result in additional costs for and set a double standard by forcing more scrutiny on ESG funds than on non-ESG alternatives.
“The rule will create confusion in the entire retirement market about the ability to offer funds that utilize ESG criteria. We realize that this is the intention of the Department of Labor, but it is wrong and most importantly, shortsighted,” said Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment.
“In the proposed rulemaking, the Department of Labor provided no evidence that plan fiduciaries have been inappropriately selecting ESG investments or that ESG focused funds have given up returns in exchange for ‘non-pecuniary’ benefits, Woll said in a statement criticizing the final rule.
“In an analysis of more than 8,700 comments submitted in response to the proposal, 95% of commenters opposed the proposal and 94% of comments from investment professionals opposed it,” Woll continues. “This final rule simply reflects the problems evident in the proposed rulemaking. It is an effort to limit the use of ESG criteria in investments. Abundant data debunks the premise that utilization of ESG criteria is problematic.”
The US SIF statement also said the final rule would effectively prohibit ESG considerations in default investment options for plans (Qualified Default Investment Alternatives, or QDIA).
The Insured Retirement Institute, which had urged DOL to withdraw the proposed ESG rule via a comment letter in June, said it is still reviewing the final rule in detail to better understand its ramifications for retirement savers, plan sponsors, and the industry. But that didn’t stop IRI from releasing a statement about it.
“We are disappointed that the DOL decided to move forward with this final rule, but we recognize and appreciate the meaningful improvements they’ve made over the original proposal,” said Jason Berkowitz, IRI Chief Legal and Regulatory Affairs Officer. “We continue to believe the Department should maintain the long-standing, principles-based approach to investment selection by ERISA fiduciaries.”
Berkowitz said the final rule reflects the DOL’s acknowledgment that the proposal sought to put up guardrails around the use of ESG investments in retirement plans without adequately defining the types of investments that would have been covered. “We remain concerned, however, that the final rule could make the investment selection process for plan sponsors much more complicated and burdensome than is necessary to effectively protect plan participants from financial risk.”
The final rule is likely to be challenged in court, or could be vacated before it is enacted if Joe Biden ends up winning the presidential election, still undecided as of mid-day Nov. 4.
Jon Hale, director of ESG research for the Americas at Morningstar Inc., told Bloomberg in October the proposed rule is so “shoddily constructed” that it’s unlikely to withstand legal scrutiny.
“It has significant implications for the retirement savings of millions of Americans, yet the DOL saw fit to allow only the shortest possible time for comment,” Hale said. “In a normal process, such overwhelming opposition would send regulators back to the drawing board.”
The final rule is currently set to become effective 60 days after publication in the Federal Register, but retirement plans would have until April 30, 2022, to make any changes to certain qualified default investment alternatives, where necessary to comply.
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.