Some saw this as a sea change (or maybe you could say it was because of seas rising).
In May 2021, President Biden signed an executive order directing “the federal government to implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families. “
Biden’s order intentionally reversed rules enacted by the Trump administration that effectively prohibited including Environmental, Social and Governance (ESG) investments as options in 401(k) plan lineups. Most recently, the U.S. Department of Labor (DOL) issued a news release announcing it was proposing to enact a rule to “remove barriers” to ESG Investments in retirement plans. You can read the full news release here.
ESG is an incredibly hot topic in investing and many investors are moving their money into ESG focused investments. These investors are making a choice from many other investment options. When it comes to retirement plans, however, the plan sponsor along with their advisors choose the investment options to offer plan participants. Then the participant chooses investments from those options.
This is where things get tricky. Retirement plan advisors follow behavioral financial studies that tell us that we need to be careful when creating an investment fund lineup for a retirement plan. Too many options are not good nor is too few. Because one of the main goals of the lineup is to allow participants to create a broadly diversified portfolio of investments, we know that it takes about 20-22 different options to achieve that goal. So, it is conceivable that to avoid having too many options, sponsors would have to choose to offer either ESG based investment options or options that do not include ESG considerations.
This binary choice becomes particularly difficult because of the fiduciary obligation of the sponsor to the participants to offer what is in their best interest. ESG or non-ESG? The appropriate number of investment options or too many? Assuming sponsors had to choose one or the other, they would be taking that choice out of the hands of the employees investing in the plan.
I am looking forward to learning exactly what the DOL’s rule says when it is released. After all, the DOL provides guidance to plan sponsors and advisors to help fulfill fiduciary responsibility. Perhaps we will have the ability to provide dual paths. That way the participant could make the choice between ESG or non-ESG, which might be optimal.
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