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

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The Biden administration issued 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 US labor law, which goes into effect in 60 days, undoes rules put in place during the Trump administration.

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

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ESG investing is also known as sustainable or impact investing. There are many flavors of ESG funds; For example, they may direct investor money to wind and solar firms, to companies with different board members, or away from companies involved in fossil fuels.

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

The Inflation Reduction Act is expected to boost overall popularity. The legislation, signed by President Joe Biden in August, represents the largest federal investment in combating climate change in U.S. history.

What the new Biden ESG rules do

Employers have a legal duty to properly evaluate a fund’s risk and return when choosing 401(k) plan investments; For example, they cannot subordinate the economic interests of workers to a cause like climate change.

The new ESG rules do not change these duties.

However, they clarify that businesses can “incorporate the economic impact of climate change and other ESG considerations” when choosing investments — something Lisa Gomez, assistant secretary of labor for the Employee Benefits Security Administration, called “common sense.”

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

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According to the new rule, employers will not violate their legal duty to take into account the ESG interests of workers when creating a lineup of 401(k) investment funds; This could lead to more engagement among workers and thus more retirement security, it said.

The Biden administration’s action on Tuesday follows a March 2021 directive that it will not implement Trump-era regulations. The administration proposed revisions to those rules in October 2021; Tuesday’s action updates that proposal based on comments received from the public.

The new Biden rules repeal some elements of Trump-era rules that Labor Department officials said prevented employers from using ESG funds.

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For example, earlier regulations did not explicitly mention ESG; But they required employers to choose investments based on “passionate” factors — a term that essentially barred employers from selecting funds with any kind of “ethical” component, Labor Department officials said.

New Biden administration rules eliminate that requirement.

“Whether E, S or G, … direct or indirect, large or small, the [ESG] The factor also drives the ethical component,” said a senior Labor Department official, who spoke only on background. “There is an inherent duality to the purpose of ESG.”

The new rules also remove a restriction that prevented employers from using ESG funds as a default option for workers automatically enrolled in their 401(k) plans — an increasingly popular opportunity to increase retirement security. In legal parlance, these funds are known as “Qualified Defined Investment Options” or QDIAs.


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