DOL proposes rule to remove barriers to ESG funds in pension plans
The US Department of Labor (DOL) has proposed removing barriers put in place by the previous administration that would have limited the ability of plan trustees to consider climate change and other environmental, social and governance (ESG) issues. as risk factors affecting the financial security of workers when trustees select pension plan investments and exercise shareholders’ proxy voting rights.
The proposed rule, Prudence and fairness in selecting plan investments and exercising shareholder rights, would apply to investments included in 401 (k) plans and other defined contribution plans, as well as pension plans. defined benefit. The proposal, published in the
Federal Register on October 14, follows an executive order signed in May by President Joe Biden ordering the federal government to treat climate change as a threat to workers’ retirement savings.
In 2020, the administration of former President Donald Trump issued a final rule, later blocked by the Biden administration, that would have required sponsors of employee investment-based plans to strictly enforce fiduciary obligations of Caution under the Employees Retirement Income Security Act (ERISA) when reviewing investment plans that promote non-financial goals, such as reducing carbon emissions. A separate final rule from the Trump administration would have prohibited pension trustees from voting corporate shareholders by proxy in favor of social or political positions that do not advance the financial interests of pension plan participants.
Duties of prudence and loyalty
Under the Biden administration, the DOL considers ESG factors, and climate change issues in particular, to pose financial risks that plan sponsors should view as prudent trustees.
According to a DOL fact sheet, the proposed rule “retains the fundamental principle that the duties of prudence and loyalty require that the trustees of the ERISA plan focus on important risk-return factors and not subordinate the interests of participants and beneficiaries (eg by sacrificing investment returns or taking additional investment risk) for purposes unrelated to the provision of benefits under the scheme ”, a position similar to the previous directive.
The proposed rule, however, “also deals with the [DOL’s] concern that the 2020 [Trump administration] the rules have created uncertainty and have the undesirable effect of discouraging the consideration by ERISA trustees of climate change and other ESG factors in investment decisions, even where it is within the financial interest of the plans to take such considerations into account. “
Acting Assistant Secretary of the Employee Benefits Security Administration Ali Khawar said the new proposal “will strengthen the resilience of workers’ retirement savings and pensions by removing artificial barriers – and l ‘crippling effect on environmental, social and governance investments – caused by the rules of the previous administration. ”
He added: “A main idea behind the proposal is that climate change and other ESG factors can be financially significant and, when they are, considering them will inevitably lead to better risk-adjusted returns in the long run. term, protecting the retirement savings of American workers. “
ESG investments by default
The proposal also rescinds the previous rule’s ban on using ESG funds as Qualified Default Investment Alternatives (QDIAs), which are types of mutual funds that plan sponsors can select as the default option in 401 (k) type defined contribution plans with automatic enrollment.
QDIAs can be target date retirement funds, which automatically reset their asset mix to become less risky as the specified target retirement year approaches. Mutual fund companies have started marketing target date funds that consist of investments that meet their ESG criteria.
“It will be a huge victory, if the final rule looks like the proposal, for some asset managers who have deployed ESG target date funds in recent years,” Jason Roberts, CEO of consulting firm Pension Resource Institute at San Diego. , said the website of investment adviser RIABiz.
The comment period for the proposed rule will extend until December 13, 2021. Comments can be submitted at https://www.regulations.gov/.
Divergent views on ESG funds
Aaron Yoon, assistant professor of accounting and information management, wrote: “Providing employees with the opportunity to invest in [ESG] funds in their 401 (k) retirement savings plans is essential. If individuals make it clear that they want the ability to invest in this way, there is no good reason to deny them the ability to do so in their 401 (k) accounts.
He wrote that research he conducted with colleagues showed that companies with good ESG scores relevant to the industry in which the company operates generated superior stock returns.
In a counter-argument, Phillip Braun, clinical professor of finance and associate chair of the finance department at the Kellogg School of Management, wrote that ESG funds “tend to be more expensive than other funds” – and this according to one Morningstar study, the asset-weighted average expense ratio of U.S. ESG funds was 0.61% in 2020, compared to 0.41% for all U.S. mutual funds and 0.11% for traditional index funds. He noted that higher fund fees correlate over time with lower returns on dollars invested, compared to similar funds with lower fees.
“It is difficult to determine whether a stock or fund is actually advancing ESG goals because the investment industry does not have a comprehensive ESG measurement framework,” added Braun. “Even those who are willing to pay extra to support sustainability and a ‘green’ agenda also cannot be sure that ESG funds are getting there. “
Articles related to SHRM:
401 (k) ‘Windows’ reconsidered as portals for ESG investments, SHRM online, July 2021
The DOL will not apply the rules limiting the use by 401 (k) plans of non-financial factors, SHRM online, March 2021
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