Biden administration loosens Trump-era ESG rules for 401(k) plans

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The Biden administration released a final rule on Tuesday that would make it easier for employers to consider climate change and other so-called environmental, social and governance factors when choosing investment funds for their 401(k) plans.

The U.S. Department of Labor’s rule, which takes effect in 60 days, repeals regulations put in place during the Trump administration.

Those previous rules, issued in 2020, had a “chilling” effect that effectively prevented employers from weighing ESG factors when choosing 401(k) funds, senior Labor Department officials said in a press call Tuesday.

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ESG investing is also known as sustainability or impact investing. There are many flavors of ESG funds; they can, for example, divert investors’ money to wind and solar companies, companies with diverse board members, or companies involved in fossil fuels.

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ESG funds have become more popular in recent years. According to Morningstar, investors poured $69.2 billion into them in 2021, an annual record. However, adoption of 401(k) plans has been slow.

Anti-inflation legislation is expected to boost overall popularity. The law, signed by President Joe Biden in August, is the largest federal investment to combat climate change in US history.

What Biden’s new ESG rules do

Employers have a legal obligation to carefully evaluate risk and return when choosing 401(k) plan investments; they cannot subordinate the financial interests of workers to the interests of causes such as climate change.

The new ESG rules do not change these duties.

However, they explain that businesses can “take into account the economic impact of climate change and other ESG considerations” when making investment choices — something Lisa Gomez, assistant secretary of labor at the Office of Employee Security, calls “common sense.” .

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“While climate change is an important issue, it is not [just] That’s what the rule is about,” Gomez said.

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Under the new rule, employers will also not violate their legal obligations to consider the ESG interests of employees when developing a range of 401(k) investment funds; which could lead to greater employee engagement and therefore greater retirement security, it said.

The Biden administration’s action on Tuesday is a March 2021 directive that does not enforce Trump-era rules. The administration then proposed revisions to those rules in October 2021; Tuesday’s action will update the proposal based on comments received from the public.

Biden’s new rules repeal certain elements of the Trump-era rules that Labor Department officials say prevent employers from using ESG funds.

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For example, previous regulations did not clearly mention ESG; But they required employers to choose investments based only on “material” factors — a term that would have barred employers from choosing funds with any “moral” component, Labor Department officials said.

The Biden administration’s new rules eliminate that requirement.

“Whether E, S, or G, … direct or indirect, major or minor [ESG] the factor also raises an ethical component,” said a senior Labor Department official who spoke only on condition of information. “ESG has a unique dual purpose.”

The new rules also remove a restriction that prevents employers from using an ESG fund as a default option for employees who are automatically enrolled in 401(k) plans — an increasingly common way to increase retirement security. In legal parlance, these funds are known as “qualified defined investment alternatives,” or QDIAs.

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