DOL's ESG Rule & 401K's

The DOL issued a much anticipated rule on the use of ESG investments in retirement plans. The E stands for environmental, the S stands for social and the G stands for governance. At issue has always been whether these factors can be used as a "tie-breaker" when evaluating financial factors in selecting plan investments.

The proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, signed by President Biden on May 20, 2021. The order directs the federal government to implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families.

“The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments – and chilling effect on environmental, social and governance investments – caused by the prior administration’s rules,” said Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar. “A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”

For Plan Sponsors with employees who would like ESG options, the next step is to figure out what that means for your plan and how to evaluate them. Codifying this in your investment policy statement and seeking guidance from your plan's advisor are key to implementing an ESG factor to your plan.