Congress recently adopted a Congressional Review Act resolution to block a Department of Labor (DOL) rule governing the use of environmental, social, and governance (ESG) funds as investment options to build retirement savings. In response, President Biden said that he will veto the resolution to keep the rule in place.
While Washington debates the use of ESG funds, more and more retirement savers are looking to invest in ESG options. According to the Schroders 2021 U.S. Retirement Survey of employees with access to ESG funds on their workplace retirement savings plan menu:
• 90% chose to invest in ESG investment options.
• 69% said they would or might increase their contributions if ESG options were offered.
DOL on ESG
In late 2022, DOL finalized a rule allowing employers to give workers the opportunity to select ESG investments. The rule emphasizes that all decisions about retirement plan investment options must be based on factors relevant to the risk-return analysis.
Only after satisfying the Employee Retirement Income Security Act (ERISA) standards of prudence and loyalty may a retirement plan sponsor consider ESG factors when selecting investment options for their plan. The rule strikes a neutral position and prevents the government from choosing winners and losers regarding individual investment decisions.
Tell Me the Rules
Under the rule, ERISA fiduciaries are required to ensure that potential investment selections will meet the financial needs of plan participants. These requirements come ahead of all other considerations, including the ESG status of potential options.
The DOL wisely refrained from including specific examples of ESG factors a plan fiduciary could consider. Stipulating specifics could have been interpreted as directing where or where not to invest.
Further, the rule includes a tie-breaker test that permits fiduciaries to consider collateral benefits when selecting between two otherwise equivalent investment options.
IRI on ESG – Stay Neutral
IRI supports the current DOL rule. It does not put the government’s thumb on the scale one way or another to favor or prohibit ESG investments. Furthermore, IRI’s 2023 Federal Retirement Security Blueprint calls for a neutral approach to ESG-related rules that preserves consumer choice while preventing employers from selecting investment options that align with particular ESG goals but do not serve retirement savers’ financial interests.
A neutral, impartial framework will provide certainty and stability so the industry and retirement plan sponsors can adapt appropriately as retirement savers’ preferences and priorities evolve.
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