ESG Investment Options Accepted in Retirement Plans by the DOL

Fiduciary GuideESG investment options are back in the spotlight as the DOL has just issued a final ruling.  The ruling permits ESG investment options to be included in workplace retirement plans. (ESG stands for “environmental, social and governance,” a category of funds that incorporates these factors into the investing process.)  ESG investment options are often labeled as “socially responsible” or “impact” investments.

The final ruling states that retirement plan fiduciaries are allowed to consider ESG factors in the investment selection process and exercise shareholder rights, according to a recent article in BenefitsPro.  The latest rule effectively overturns two prior rules restricting fiduciaries’ ability to use ESG factors in investment selection.  The rules were implemented by the previous executive administration.

“‘Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,’” Secretary of Labor Marty Walsh, who was quoted in a BenefitsPro article, said. “‘Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.’”

The latest DOL rule provides clarity for plan fiduciaries on ESG investment options.  It also creates potential for retirement plan advisors. According to a recent survey from asset manager Schroders, nearly three-quarters 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. And 89% want their investments to “‘be aligned with their values.’” Of the 31% of 401(k) plan participants who were aware of ESG options in their plan, nine out of 10 participants invested in them.

Alternative investment options, such as ESG funds and cryptocurrency, are especially appealing to younger generations.  It’s clear that employees want and value the ability to invest in ESG funds for retirement, so it behooves plan sponsors and advisors to consider adding them to investment menus to entice additional participation and offer a competitive retirement plan benefit.

The DOL rule on ESG investment options will be effective 60 days after its publication in the Federal Register except for a delayed applicability until one year after publication for certain proxy voting provisions to allow fiduciaries and investment managers additional time to prepare, according to BenefitsPro.


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