Labor Department proposes reversing Trump-era rules on socially conscious investing

The Department of Labor wants to reverse a Trump-era policy that restricts 401(k) plans and other retirement savings vehicles from offering environmental, social and governance-focused assets, known as ESG, investing options.

Values-based assets have become increasingly popular, with investors funneling $51.1 billion of net new money into ESG funds in 2020, more than doubling from the previous year, according to Morningstar.

However, strict regulations have stunted 401(k) adoption, experts say, and many industry professionals have opposed the current rule.

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While the current rule doesn’t block ESG investments, the guidelines restrict how plans like a 401(k) can select assets, focusing on metrics such as risk and return over environmental or social factors.

As a result, some retirement plans have steered clear of impact-driven investments to avoid regulatory scrutiny.

“The Trump-era rule definitely had a chilling impact on interest in ESG and created concerns around the extent to which plan sponsors would have to look through all their strategies,” said Aron Szapiro, head of retirement studies and public policy for Morningstar.

While plans still must weigh returns and risk, the changes would make it easier to select ESG investments and make these assets one of the default options, according to the proposal.

Moreover, some retirement plan administrators believe that adding more ESG asset options may actually be in the best interest of investors, based on performance, but they have made other choices because of the regulatory environment, Szapiro said. 

The final rule may come by early 2022, following the 60-day comment period and any necessary revisions, he predicts.  

“I think you’re going to see almost all the comments be supportive with maybe some sort of minor constructive feedback,” Szapiro said, explaining the financial services industry largely favors the change.

If enacted, retirement plans without ESG investments may start rolling out more choices, Szapiro said, and the shifts may snowball to other companies as larger sponsors adopt these changes.

One option may include default investments, such as target-date funds, which adjust allocations based on someone’s expected retirement date, he said.

“I think people who are really interested in this will start to see more options, or at least have the ability to ask,” Szapiro said.

The American Retirement Association, a group representing retirement plan professionals and sponsors, has expressed support for the proposal. 

“We are pleased that the Department of Labor has established a level playing field for ESG investment considerations in retirement programs,” said Brian Graff, CEO of the American Retirement Association, in a statement. 

And other groups have voiced preliminary support while gathering feedback from members.

“The proposed rule appears to align with the Insured Retirement Institute’s policy that ESG investments should be permitted,” said Emily Micale, director of federal regulatory affairs at the Insured Retirement Institute, a financial services trade organization. 

“But they should be treated the same as non-ESG investments — meaning no better, and no worse,” she said.