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

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Biden administration relaxes Trump-era ESG rules for 401(k) plans
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The Biden administration released a final rule on Tuesday that makes it easier for employers to consider climate change and other so-called environmental, social and governance factors when selecting investment funds for their 401(k) plans. ).

The US Department of Labor rule, which takes effect in 60 days, reverses regulations put in place under 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 during a briefing. a call to the press on Tuesday.

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ESG investing is also known as sustainable or impact investing. There are many flavors of ESG funds; they can, for example, funnel money from investors into wind and solar companies or those with diverse board members, or divert funds from companies involved in fossil fuels.

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

The Inflation Reduction Act is expected to further boost the popularity of ESG investing. The law, which President Joe Biden signed in August, represents the largest federal investment to address climate change in US history.

What the new Biden ESG rules do

Employers have a legal obligation to carefully evaluate the risk and return of funds when selecting 401(k) plan investments; for example, they cannot subordinate the financial interests of workers in favor of a cause like climate change.

The new ESG rules do not modify these duties.

However, they do clarify that companies can “include the economic effects of climate change and other ESG considerations” when making investment choices – something Lisa Gomez, assistant secretary of labor for the United States Security Administration benefits, called “common sense”.

“While climate change is a critical issue, it is not [just] what this rule is all about,” Gomez said.

Employers are also not violating their legal duty to consider workers’ ESG interests when creating a range of 401(k) investment funds, under the new rule; this can lead to more engagement among workers and therefore greater retirement security, he said.

The Biden administration’s action on Tuesday follows a March 2021 directive that it would not enforce Trump-era rules. The administration then proposed a revision of these rules in October 2021; Tuesday’s action updates that proposal based on feedback received from the public.

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

For example, the previous rules did not explicitly mention ESG, and they required employers to choose investments based solely on “monetary” factors – a term that essentially prohibited employers from selecting funds with any sort of “moral” component. “, Labor Department officials said. .

Biden’s new administration rules erase that requirement.

“Whether E, S or G, … direct or indirect, great or small, the [ESG] This factor also promotes a moral component,” said a senior Labor Department official, who spoke only if he had a background. “ESG has an inherent duality of purpose.

The new rules also remove a restriction that prohibited employers from using an ESG fund as a default option for workers automatically enrolled in their 401(k) plans — an increasingly popular avenue for bolstering retirement security. In legal parlance, these funds are known as “Qualified Defined Investment Alternative” or QDIA.

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