Labor Department Won't Enforce ESG Rule in 401(k)s | ETF Trends

The Biden administration is making a clean break from Trump-era rules that made it harder for money managers to incorporate environmental, social, and governance funds into retirement and 401(k) plans.

The U.S. Department of Labor stated it will not be enforcing a Trump-administration rule that makes it tougher for 401(k) plans to hold socially responsible investment funds, the Wall Street Journal reports.

The agency has been reviewing a rule that was finalized in the fall, which prevented corporate 401(k) plans from investing in funds with nonfinancial goals for employees. The recent rule required 401(k) managers to show that ESG-focused funds can have just as strong returns as competing funds.

Looking ahead, the Labor Department will be exploring new rules that could be more friendly to ESG investments.

“We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations,” Ali Khawar, principal deputy assistant secretary at the Employee Benefits Security Administration, said in a statement.

The Trump administration pushed the Labor Department to create the rule to make sure plan overseers were rigorously screening investments in worker 401(k)s at a time when relatively untested ESG funds were exploding onto the scene.

Former Deputy Secretary of Labor Patrick Pizzella warned that the Labor Department’s latest decision could alarm some individuals using the benefit plans.

“DOL’s statement today listed a wide variety of stakeholders they heard from—but not among their list was a single beneficiary or plan participant,” Pizzella told the WSJ. “And that is who these final rules are looking out for.”

Socially responsible investments and ESG-related funds have attracted huge inflows in recent years, but they only make up a minuscule portion of employee-sponsored retirement plans. Only 2.6% of U.S. corporate plans provide ESG funds as investment options to employee-benefit plans as of 2019, suggesting that the space is a largely untapped market for fund managers.

The increase in interest for ESG-related funds has also been highly lucrative for money managers, who are able to charge a higher fee for the products associated with their more customized investment methodologies relative to traditional beta index funds.

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