The Labor Department proposed rule changes Wednesday that would make it easier to add investment options based on environmental and social considerations to retirement plans — and make it possible for such options to have a default setting on enrollment.
contrary to Trump-era policyof the Biden administration Proposal It makes clear that not only are retirement plan administrators allowed to consider such factors, they may have a duty to do so – especially as the economic consequences of climate change emerge.
Labor Secretary, Martin J. Walsh said the department consulted with consumer groups, asset managers and others before writing the proposed rule, and the change was deemed necessary because the old one had a “chilling effect” on its use environment. , social and governance factors – better known as esg – When evaluating investments.
“If these legal concerns were keeping fiduciaries on the sidelines, it could mean worse outcomes for workers and retirees,” Mr Walsh said in an interview.
New rules also make it possible for environmental and other focused funds to default Investment options in retirement plans Such as 401(k)s, which were prohibited by previous administration rules. Labor Department officials said the rule would not allow plan supervisors to sacrifice returns or take on more risk when analyzing potential investments with a focus on ESG.
Aaron Szapiro, head of retirement studies and public policy at Morningstar, said the proposed rule change would help retirement plans move more closely to how the broader investment industry considers ESG factors.
“The Trump regulation was poorly made, the economic analysis was deeply flawed and I think it was really increasingly out of step with common practices that tend to include ESGs financially as physical pieces of information. are designed for,” he said.
Under the Employee Retirement Income Security Act of 1974, known as ERISA, retirement plan administrators must act solely in the interests of plan participants. Investments that focus on environmental, social and governance are permitted, but only if they are expected to perform at least as well as alternatives with a similar level of risk.
This is known as the “tiebreaker” or “all things being equal” standard, a guiding principle that has effectively remained the same through Republican and Democratic administrations, although they have interpreted it differently.
The proposed change indicates that plan managers are only allowed to consider ESG factors in their initial analysis of end-of-life investments – a change that Labor Department officials argued that still maintains that principle, as managers are now Also those are not allowed to sacrifice returns. Types of ancillary benefits.
For example, the proposed rule states that accounting for climate change, “such as assessing the financial risks of investments for which government climate policies will affect performance,” benefits retirement portfolios by mitigating long-term risks. can.
“If an ESG factor is important to a risk-return analysis, that is something we think the fiduciary should take into account,” said Ali Khawar, an acting assistant secretary. Department, said in an interview. “It carries a different weight than it did five or 10 or 15 years ago,” he said, noting the increase in data measuring the risks of ignoring ESG and the benefits of noticing it.
The investment category has seen significant growth in recent years. Total assets in ESG funds rose to $17.1 trillion in early 2020, up 42 percent from the beginning of 2018, according to US SIF, a nonprofit focused on sustainable investments. That investment represents one in three dollars under total professional management.
A report by US SIF noted that only a small fraction of those investments are with retirement plan investors, even though interest is rising, especially among younger investors.
Growing interest has prompted the Securities and Exchange Commission solicit public comment On the need for companies to disclose climate risks.
Other ESG factors are harder to analyze, some experts said. It was more difficult to measure social and environmental benefits equally, said Philip Braun, MD, clinical professor in the Department of Finance and associate chair of the Department of Finance at Northwestern University’s Kellogg School of Management.
“There are many different ways to measure the ESG effect, but knowing whether there is actually an effect is a different story,” Mr. Braun said. Although ESG investments don’t perform as well or worse than other funds overall, he said, they do charge slightly higher fees.
“There’s a lot of hype,” he said.
The Biden administration also proposed changes that would reverse another Trump-era rule that requires retirement plan administrators to consider a complex list of principles before casting proxy votes on shareholder proposals, and which Can discourage schemes from voting outright. If fiduciaries have decided to vote, and the rule makes clear that it is not required, they should only support causes and goals in the financial interest of the plan.
Labor Department officials said, the proposal would remove that language, and largely allow planning assistants to decide “whether it is appropriate to act,” Mr Khawar said.
The Biden administration had already indicated its plans: just two months after the Trump-era rules went into effect in January, the Biden administration said it would won’t enforce them And a new offer is about to come.
Stakeholders will have 60 days to comment after the proposal is published in the Federal Register. A final regulation is usually issued after the department has reviewed the comments.