DOL Creates More Hurdles for ESG Adoption in Retirement Plans

The Department of Labor published a proposed rule that is intended to “update and clarify” investment requirements for environment, social and governance, or ESG, investing. However, the new regulation could make it harder for the ESG theme to be included in retirement plans.

The DOL’s Employee Benefits Security Administration (EBSA) sent letters to plan sponsors requesting information “to better understand the plan fiduciaries’ selection of ESG funds for inclusion in the plan’s investment options and compliance with their duty to administer the plan prudently and solely for the purpose of providing benefits to participants and beneficiaries, and defraying reasonable expenses of administering the plan,” PlanSponsor reports.

“My understanding is the letters were sent to those who mentioned ESG strategies in articles in the press. It appears to be an effort to enforce the current administration’s views on ESG investing even before the proposed rule is finalized,” Patrick Menasco, co-chair of the ERISA + Executive Compensation practice at Goodwin Procter, told PlanSponsor.

“I’m not aware of any compliance effort by the DOL on ESG. In my experience, it’s the first effort to target ESG investing and it’s hard to view this as anything other than regulatory pressure on plan sponsors and CIT providers to adhere to the current administration’s views on ESG,” Menasco added.

Menasco argued that this regulatory may give the current administration more leverage to further diminish the use of ESG by making it imprudent and requiring sponsors to provide further evidence that it benefits more than other types of investments.

“I think the hope of this administration is to do what it can to dampen the use of ESG-themed investments or those with ESG components in retirement plans,” Menasco said.

Loreen Gilbert, Founder and President of WealthWise Financial Services, believes that the issue of whether ESG investments or factors can be used in retirement plans is among key trends on clients’ minds since the DOL seems to go back and forth on the subject. Participants, mostly millennials, want ESG investment options, so plan sponsors are beginning to consider the idea of having them available.

“I think the DOL has eyes on whether plan sponsors are making decisions based on marketing materials—or words only. A fund company can say we’re ESG, but what is ESG? Plan sponsors need to scrutinize investments,” Gilbert told PlanSponsors. “Rely on a prudent process for analyzing investments, so you can say, ‘All things being equal, here’s our decision.’”