The Department of Labor is making it easier to invest in ESG funds in your 401(k)

 

The Department of Labor is making it easier to invest in ESG funds in your 401(k)

The Biden Administration announced on Wednesday that it will no longer enforce a rule put into place in the last days of Donald Trump's presidency that would have largely precluded funds that take environmental, social and governance (ESG) issues into account from 401(k) plans.

That's a welcome development for everyday investors, according to financial experts.

The Trump-era rule did not disqualify ESG funds from being included in 401(k) plans outright. But because it required 401(k) plans and pension funds to make investment decisions based solely on "pecuniary," or economic, factors rather than any other considerations, it made funds that took ESG factors into account less attractive to more risk-adverse plan providers.

But the rule was not supported by many asset managers or financial advisors: More than 95% of public comments the DOL received about the rule were opposed to it, according to an analysis from major players in the sustainable investing field, including the Forum for Sustainable and Responsible Investments.

Now, Biden's DOL says that after hearing from asset managers, labor organizations, consumer groups and other stakeholders, it will revisit the rule. Until then, the DOL will not enforce it.

There was not a real rationale for that rule in the first place, says Aron Szapiro, head of policy research for Morningstar, an investment research firm. In fact, he said it was the opposite of what many investors want: Sustainable investments have been increasingly popular every year outside of workplace retirement plans. Precluding them from 401(k)s and other retirement accounts doesn't make sense.

"This is basically a good news story for investors," says Szapiro. It's actually beneficial for long-term investors when companies take climate change and other issues into consideration, he adds.

Is sustainable investing just a marketing ploy?

Not only did investors put a record $51 billion into sustainable investments in 2020, Morningstar found in a recent analysis, but funds that take ESG factors into consideration have actually out-performed other conventional funds, on average. There is no real conflict between good investment returns and promoting ESG practices, Szapiro says.

The DOL's move will not change anything for investors right away, but means that the department can now take its time reconsidering the rule to see if it makes sense for investors, rather than rushing something that could be so consequential for so many, says Szapiro.