What You Need to Know
- The agency proposed a new rule that would undo the restrictions imposed under the Trump administration.
- It provides greater latitude for fiduciaries to consider ESG-focused investments in retirement plans.
- It also allows ESG investments within plans' QDIAs and eliminates restrictions on fiduciary proxy voting.
The U.S. Department of Labor has proposed a new rule that will make it easier for 401(k) plans to choose investments based on environmental, social and governance (ESG) factors.
The rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, follows an executive order signed by President Joe Biden in late May that, among other things, directed the Labor secretary to reconsider rules enacted under the Trump administration limiting ESG investments in retirement plans.
Biden gave the secretary the option of rescinding, suspending or revising the former administration’s rule. The DOL, led by former Boston mayor Martin Walsh, apparently chose the last option.
Two months before he was confirmed, the department had already decided it would not enforce the standing regulation or pursue any enforcement action against a plan fiduciary based on a failure to comply.
The New DOL Proposal
The new DOL proposal amends the existing rule, which, according to the Labor Department, had the “undesirable effect of discouraging ERISA fiduciaries’ consideration of climate change and other ESG factors in investment decisions even when such consideration might have been in the financial interest of retirement plans and their participants.”
Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration, said the proposed rule “will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments — and chilling effect on environmental, social and governance investments — caused by the prior administration’s rules.
“A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”