DOL's final ESG rule rolls back restrictions in retirement plans (some early reactions)

Plan fiduciaries will be allowed to consider environmental, social and governance factors to select retirement investments and exercise shareholder rights under a much-anticipated final rule issued on Tuesday by the U.S. Department of Labor.

The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows an executive order signed by President Joe Biden in May 2021. The order directs the federal government to identify and assess policies to protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.

After considering stakeholder input, the department concluded that two rules issued by the Trump administration in 2020 unnecessarily restrained plan fiduciaries’ ability to weigh ESG factors when choosing investments, even when those factors would benefit plan participants financially.

“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 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.”

Lazaro Tiant, sustainability investment director at Schroders, believes understanding the nuances of ESG-related factors helps give investors a fuller perspective of risk and return.

“We recognize that the DOL considered a significant number of comments, and we feel that they were able to make the appropriate adjustments to provide further clarity,” he said. “There are also new details in the rule, such as a provision that allows for the consideration of participant preferences, highlighting a potentially significant change for retirement plans going forward.”

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CEO Heather Lavallee of Wealth Solutions and president and CEO-elect of Voya Financial agrees. “With the right guidance and fiduciary evaluation, we believe the integration of material ESG considerations can play an integral role when it comes to the long-term investment portfolio of retirement savers today,” she said. “As a result, the final rule by the DOL provides a step in the right direction in ultimately supporting our customers and their workforces with their retirement savings and investing goals.”

CEO Lisa Woll of the Forum for Sustainable and Responsible Investment praised the rule. “Investors understand that it is important to take into account how a company treats its workforce, whether it pays its fair share of taxes, their political spending, its supply chain and whether the company is ready for the transition to a low-carbon economy,” she said.

The rule may create new opportunities for advisors. 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, according to Schroders data. Eighty-nine percent 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.

The rule 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.