Biden Could Roll Back DOL Rule on ESG Funds in 401(k)s | ETF Trends

The Biden administration could be rolling back a controversial Department of Labor rule that curbed the investments of environmental, social, and governance funds in retirement plans.

The new administration could be walking back the Trump administration’s push to keep ESG investments out of 401(k) retirement plans, but the drawn out process could take 18 months before the red tape is finally cut through, Barron’s reports.

In November, the DOL finalized a rule that made it more difficult for retirement plans to include ESG funds. The rule, which took effect Jan. 12, requires fiduciaries “to separate the legitimate use of risk-return factors from inappropriate investments that sacrifice investment return, increase costs, or assume additional investment risk to promote non-pecuniary benefits or objectives.” While the rule does not single out ESG funds, it does refer to pecuniary and non-pecuniary factors.

In his first few days in office, President Joe Biden has already ordered an immediate review of federal regulations passed in the last four years that conflict with the new national direction of battling climate change, which may include ESG funds that focus on companies avoiding environmental risk and fund solutions to climate change.

The DOL is expected “to issue guidance to clarify that ESG criteria is pecuniary under the definition of the rule,” Bryan McGannon, director of policy and programs at US SIF, told Barron’s, adding the DOL can do that without the cumbersome notice and comment period.

McGannon, though, warned that the process could take at least 18 months before the rule can be revised completely so that ESG investments are formally considered pecuniary, or the language regarding pecuniary and non-pecuniary can be removed.

Sustainable funds that track factors like ESG principles could be a popular play in retirement accounts as the ongoing trend magnifies. According to Morningstar data, new investment flows into sustainable funds of $51 billion in 2020 were over double their total for 2019 and almost 10 times more than in 2018, accounting for almost a quarter of all stock and bond fund flows last year.

For more news, information, and strategy, visit the ESG Channel.