ESG in 401ks is OK, says the DOL—at least until another Republican administration takes office.
The U.S. Department of Labor today announced a final rule that allows retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.
The new rule reverses a pair of Trump-era regulations that made it harder for 401k plans to include ESG investments in their investment lineups, effectively tempering fiduciary interest in ESG considerations. While that regulation went into effect shortly before President Biden took office, it was never enforced as the Biden administration moved to replace it.
After extensive consultations and feedback from a wide range of stakeholders, the department said in a statement today it concluded that two rules issued in 2020 during the prior administration unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.
“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”
The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, which was signed by President Biden on May 20, 2021. The order directs the federal government to identify and assess policies to protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.
“Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers.”
Lisa M. Gomez
“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers.”
According to Vanguard, 13% of 401k plans it administers offer socially responsible investment options to employees. Many industry observers expect demand will grow, especially from younger workers.
Citing data released earlier this year, Schroders notes that 74% of defined contribution plan participants who lack or don’t know if they have ESG investment options in their plan, said they would or might increase their contribution rate if offered ESG options; 87% of plan participants said they want their investments to be aligned with their values; and of the 31% of 401k plan participants who knew their plan offered ESG options, nine out of 10 invested in those options.
Dems support, Republicans oppose
Senate HELP Committee Chair Patty Murray (D-WA), a vocal opponent of the Trump Administration’s previous rules to restrict the use of ESG investment criteria in retirement plans, was quick to voice her approval for the new rule, releasing a statement today.
“This commonsense step is a win for workers, retirees, investors, businesses, communities, the environment—everyone,” Murray said. “Financial security is about planning for the future, and you just can’t plan for the future if you aren’t allowed to consider the environmental, social, and governance factors that are shaping it. By ensuring fiduciaries can consider all these factors to make sound investment decisions, this rule will help make the futures of people in Washington state and across the country more just, diverse, sustainable, and financially secure.”
Republicans, meanwhile, have pushed back against companies that have embraced ESG commitments, rebuking what they call a “woke” investment agenda peddled by the Biden Administration. As Reuters reports, Sen. Pat Toomey (R-PA), the top Republican on the Senate Banking Committee, urged the largest U.S. banks to stop “embracing a liberal ESG agenda that harms America,” during a September congressional hearing.
With newfound control of the House, Bloomberg Law reports Republicans are expected to use hearings to “beat up” Biden administration regulators and admonish ESG-minded activity in the financial services industry.
Republican lawmakers and state attorneys general are preparing to make their most aggressive assaults on ESG investing to date after recent victories in the House and courts. Rep. Patrick McHenry (R-NC), the likely chairman of the House Financial Services Committee, and Attorney General Patrick Morrisey of West Virginia are among several Republican officials with new ammunition to fight the SEC and investment firms on ESG.
They see the Supreme Court’s recent West Virginia v. Environmental Protection Agency decision restricting federal agency rulemaking as a key tool to challenge the SEC’s climate disclosure work and other ESG efforts.
“While this new rule is more permissive of plan sponsors considering ESG factors as part of their process, there is an active political debate about the use of ESG factors, so it is possible—if not likely—that the next Republican administration may change the rules.”
Groom Law Group’s Jake Eigner
And while today’s new rule will be effective 60 days after its publication in the Federal Register (expected this week), it may be only temporary if a Republican candidate wins in the 2024 presidential election and once again decides to change the rules.
“Overall, the rule provides some additional leeway for plan sponsors to consider ESG funds, particularly if the sponsors have participant populations that have investment preferences,” Groom Law Group Associate Jake Eigner told 401k Specialist. “While this new rule is more permissive of plan sponsors considering ESG factors as part of their process, there is an active political debate about the use of ESG factors, so it is possible—if not likely—that the next Republican administration may change the rules.”
While the new rule will be effective 60 days after its publication in the Federal Register, there is delayed applicability until one year after publication for certain proxy voting provisions to allow fiduciaries and investment managers additional time to prepare.
The regulation was submitted to the White House’s Office of Management and Budget for review on Oct. 6. It was originally 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.
Learn more about the new rule.
SEE ALSO:
• Early Reactions Show Praise for DOL ESG Rule
• Final ESG Rule Now Under White House Review
• 401k Participants Largely Pass on ESG Options, Research Finds
• Top ESG Considerations for Plan Advisors: Groom Law Group