The Labor Department proposed rule changes on Wednesday that would make it easier for retirement plans to add investment options based on environmental and social considerations — and make it possible for such options to be the default setting upon enrollment.
In a reversal of a Trump-era policy, the Biden administration’s proposal makes clear that not only are retirement plan administrators permitted to consider such factors, it may be their duty to do so — particularly as the economic consequences of climate change continue to emerge.
Martin J. Walsh, the secretary of labor, said that the department consulted consumer groups, asset managers and others before writing the proposed rule, and that the change was considered necessary because the old one appeared to have a “chilling effect” on using environmental, social and governance factors — better known as E.S.G. — 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.
The new regulations would also make it possible for funds with environmental and other focuses to become the default investment option in retirement plans like 401(k)s, which the previous administration’s rules had prohibited. Officials from the Labor Department stated that the rule does not allow plan supervisors to sacrifice returns or take on greater risk when analyzing potential investments with an emphasis on E.S.G.
Aron Szapiro from Morningstar, who heads retirement studies and public policies, stated that the proposed rule change would allow retirement plans to be more in line with E.S.G. factors.
“The Trump regulation was poorly constructed, the economic analysis was deeply flawed and I think it was really out of step with what are increasingly common practices that are designed to incorporate E.S.G. as financially material pieces of information,” he said.
Under the Employee Retirement Income Security Act of 1974, known as ERISA, retirement plan administrators must act solely in the interest of the plan’s participants. Investments that are focused on governance, social, and environmental issues have been allowed, but only if they are expected perform at least as well than alternatives that take the same level of risk.
That has become known as the “tiebreaker” or “all things being equal” standard, a guiding principle that has effectively remained the same through Republican and Democratic administrations, though they have interpreted it differently.
The proposed amendment allows plan managers to take into account E.S.G. factors in their initial analysis of investments instead of only at the very end — a change that Labor Department officials argued still maintains that principle, because managers still are not permitted to sacrifice returns for those kinds of ancillary benefits.
For example, the proposed rule said that accounting for climate change, “such as by assessing the financial risks of investments for which government climate policies will affect performance,” can benefit retirement portfolios by mitigating longer-term risks.
“If an E.S.G. factor is material to the risk-return analysis, that is something we think fiduciaries should be taking into account,” Ali Khawar, an acting assistant secretary in the department, said in an interview. “That carries different weight than five or 10 or 15 years ago,” he said, given the increase in data quantifying the risks of ignoring E.S.G. The benefits of taking it into consideration.
The investment category has experienced significant growth in recent years. Total assets in E.S.G. According to the U.S. SIF (a non-profit focused on sustainable investing), funds rose to $17.1 trillion by 2020, an increase of 42 percent over 2018. This investment amount represents one-third of all dollars under professional management.
A U.S. SIF report found that only a small percentage of these investments are held by retirement plan investors. This is despite rising interest, especially among younger investors.
The Securities and Exchange Commission has sought public comments on whether companies should be required to disclose climate risks because of the growing interest.
Other E.S.G. Some experts say it is harder to analyze certain factors. Phillip Braun, clinical professor of finance and associate chair of the finance department at Northwestern University’s Kellogg School of Management, said societal and environmental benefits were more difficult to uniformly measure.
“There are many different ways to measure E.S.G. impact, but to know if there is actually an impact is a different story,” Mr. Braun said. E.S.G. He said that while E.S.G. investments seem to perform no better overall than other funds, they tend to charge slightly greater fees.
“There is a lot of hype,” he said.
Biden’s administration proposed changes to reverse a Trump-era rule that required retirement plan administrators consider a complex list principles before casting proxy votes on shareholder propositions. This may have discouraged plans voting altogether. If fiduciaries decided to vote, and the rule makes clear that isn’t required, they must only support causes and goals in the plan’s financial interest.
The proposal would remove that language, Labor Department officials said, and largely allow plan fiduciaries to decide when “it is or isn’t appropriate to act,” Mr. Khawar said.
Already, the Biden administration had signaled its intentions: Two months after Trump-era rules went into effect in January 2017, the Biden administration stated that it would not enforce them and would soon present a new proposal.
The proposal will be published in the Federal Register. Stakeholders have 60 days to comment. After reviewing the comments, the department will usually issue a final regulation.
Source: NY Times