ESG Fund Rules for Retirement Plans Under Review

Plan Participant DataESG fund rules for retirement plans are being scrutinized by the current administration.  The fate of using environmental, social, and governance (ESG) funds in retirement plans may be decided before year-end.  A new executive order from President Joe Biden has requested that the secretary of labor submit a report within 180 days.  That report should identify actions needing to be taken by the Department of Labor.  Protecting U.S. workers’ savings and pensions from climate-related financial risk, is a priority according to a recent BenefitsPro article.  The review is part of a larger order from the President regarding the government’s response to climate change.

Previous administrations had given the OK to using ESG as the tie-breaker when ESG funds and non-ESG funds were producing the same results.  Biden’s Labor Department overturned the rules in March and issued an announcement that they were not going to enforce those rule.  They also agreed to not penalize retirement plan committees and plan fiduciaries for failing to comply until the DOL could revisit them.

The same day President Biden issued the executive order, a bill was introduced in the House that would allow retirement plan committees and other plan fiduciaries to consider ESG factors for retirement plan investments.  President Biden’s executive order reflects concerns about climate change and its potential impacts on the country’s financial assets, including workplace retirement plans.

According to BenefitsPro, “Biden’s order focuses on the physical and transition risks of climate change to financial assets, companies, communities, and workers.”  The concern is for the failure of financial institutions to appropriately and adequately account for and measure risk.  “Doing so, threatens the competitiveness of U.S. companies and markets as well as the savings of workers and families.”  ESG funds in retirement plans are included due to their potential implications for retirement savers.

The executive order also requests the treasury secretary and members of the Financial Stability Oversight Council (FSOC) to assess the risks of climate change.  The stability of the U.S. financial system and the country as a whole, could also impact a ruling on ESG funds in retirement plans.

As government policy shifts, it is prudent for retirement plan committees and plan fiduciaries to keep a close eye on developments for ESG funds in retirement plans.  The executive order calls for action within four to six months, so plan fiduciaries should expect additional information and guidance from the DOL.  There could also be other government agencies involved in reviewing ESG funds in retirement plans before the end of the year.


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