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New Department of Labor Regulations Will Greenlight the Use of ESG Funds in Retirement Plans

Photo of author, Monica Garver, CPA, CFP®, AIFA®, CDFA®.
Monica Garver, CPA, CFP®, AIFA®, CDFA®
Director of Retirement Plan Services and Financial Strategist

In August, the Department of Labor submitted new proposed ESG rules to the White House's Office of Management and Budget - the last step before publishing regulations. The proposed rules should be published before the end of this year. There is no doubt these rules will be favorable to ESG investing.

ESG investing, which considers environmental, social and corporate governance criteria, in addition to traditional financial criteria, has greatly increased in popularity in recent years. Money invested in ESG funds at the end of 2020 was estimated at about $17 trillion. Retirement plans have followed this trend and many now offer an ESG option.

For many years, the Department of Labor has gone back and forth in its position regarding ESG investing. Democratic administrations tend to favor ESG investing while Republican administrations have been skeptical. At the very end of the Trump Administration, in December of last year, the Department issued new ESG rules that make it difficult for retirement plans, subject to ERISA, to offer an ESG option. The essence of these rules is that nonpecuniary factors may not be considered in selecting investment options. In effect, the fact that a fund employs ESG criteria may only serve as a tie breaker.

Early this year the Biden administration announced that it would walk back these rules and promulgate regulations more favorable to ESG investing.

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