DOL rolls back ESG retirement investment restrictions: Time to adjust your strategy?

Thanks to a final rule issued November 22 by the U.S. Department of Labor (DOL), ESG retirement investment restrictions put in place back in 2020 by the Trump administration are being lifted.

ESG stands for environmental, social and governance. Because a growing number of investors – particularly among Millennial and Gen Z age workers – have become outspoken over the last several years about their personal values related to equity, sustainability and corporate responsibility, many employers have been feeling the pressure to account for where they stand on these issues – including their retirement plan fiduciary choices.

However until now, there were two federal rules that limited plan fiduciaries’ ability to consider ESG factors when choosing 401(k) investments, even when those factors financially benefitted plan participants.

But according to the DOL, after considering stakeholder input and the 2021 executive order by President Biden directing the federal government to identify and assess policies to protect Americans’ life savings and pensions from “the threats of climate-related financial risk,” the agency decided the restrictions were unnecessary.

Commenting in a press release, Assistant Secretary for the Employee Benefits Security Administration Lisa M. Gomez said, “Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers.”

ESG retirement investment & 401(k) engagement

Titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the DOL rule gives the green light to explore integrating ESG retirement investment options into your 401(k) program. It’ll be effective 60 days after its publication in the Federal Register, except for certain proxy voting provisions to allow fiduciaries and investment managers additional time to prepare (a delayed applicability until one year after publication).

Secretary of Labor Marty Walsh said in a statement that this move “will help America’s workers and their families as they save for a secure retirement.”

The rule could potentially boost employee engagement with your company’s retirement benefits. According to investment management firm Schroders’ 2022 U.S. Retirement Survey:

• 74% of plan participants who don’t know if they have ESG investment options in their plan would consider increasing their contribution rate if they were included (up from the 69% who said that last year)
• 87% want their investments to be aligned with their values, and
• Of the 31% of 401(k) plan participants who were aware there were ESG options in their plan, nine out of 10 participants invested in them.

If your workforce feels the same way, perhaps it’s time to run a risk assessment on ESG retirement investment considerations.