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Asset Managers Ignore DOL Proposal to Limit ESG Assets in Retirement Plans

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Many asset managers appear to be ignoring the Department of Labor’s proposal that would limit envirnmental, social and governance focused investments in defined contribution plans.

(Related: DOL Proposes Limit on ESG Investments in Retirement Plans)

According to a new report from Cerulli Associates, 56% of DC investment-only (DCIO) asset managers expect to increase their marketing and distribution of products focused on ESG factors during the next 12 months.

“The regulation is not slowing down marketing and distribution efforts promoting DC-focused ESG products,” according to a press release from Cerulli.

DCIO asset managers offer investments through platforms of nonaffiliated recordkeepers and control most of the $6 trillion-plus 401(k) market.

“Many asset managers stand behind the financial merits of ESG,” says Shawn O’Brien, senior analyst at Cerulli. “Some asset managers tell us they employ ESG screen processes or incorporate ESG factors into their investment analysis across all of their funds.” 

About three-quarters of those managers cite risk mitigation as the key reason for using ESG  criteria as part of their investment analysis, and two-thirds cite improved alpha opportunities.

Morningstar has reported that through the first half of this year 72% of sustainable equity funds ranked in the top half of their respective Morningstar categories, including strong performance in the first quarter when the U.S. stock market tanked.

Forty-four percent of ESG-focused funds ranked in the top quartile in the first quarter and 11% placed in the bottom quartile (for comparison, by definition, one-quarter of all funds in a particular category place in each of four quartiles).

In the second quarter the outperformance was more muted, with 28% of ESG-focused funds in the top quartile and 19% in the bottom as sustainable funds “more than held their own,” said Jon Hale, director of sustainable investing at Morningstar.

Labor’s Plan

The Labor Department’s proposal, which has been criticized by many asset managers including BlackRock, State Street and Vanguard, as well as many sustainable investment advocates such as the U.S. Impact Investing Alliance, requires plan fiduciaries to provide extensive documentation if they include ESG options in retirement plans. 

(Related: DOL’s ESG Proposal Blasted in Public Comments)

The proposal would also prohibit 401(k) plans from using ESG-oriented target date funds as qualified default investment alternatives, which are the investment used when plan participants don’t choose their investments. The department is still considering the hundreds of public comments it has received on the proposal before it proceeds with any final rulemaking.

In a separate policy change, the Labor Department has given the green light for 401(k) plans to include private equity strategies within diversified investment options such as target date, target risk or balanced funds, according to an information letter the department sent to a law firm representing clients who provide private equity investment options to retirement plans. 

(Related: DOL Gives Green Light for Private Equity in 401(k)s)

The Cerulli report showed that very few asset managers currently include private equity within their multi-asset class products, such as target date funds, though about one-third would  consider PE investments if requested by clients.


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