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The Biden administration said Wednesday it won’t enforce a rule issued by the Trump administration that makes it harder to proffer environmental, social and governance — or ESG — funds in 401(k) plans.
ESG funds may, for example, invest in energy firms that aren’t reliant on fossil sustains or in companies that promote racial and gender diversity. Investors poured a record $51 billion into ESG scratches last year.
The Trump-era Labor Department rule, issued in 2020, doesn’t explicitly call out or outright hinder ESG funds in 401(k) plans.
But it may stymie already lackluster uptake by changing requirements for employers to select them as 401(k) investments, mutual understanding to experts.
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Still, the rule has already had a chilling effect on their inclusion, even in circumstances when the rules explicitly allow for their use, Biden’s Labor Division said Wednesday.
“Accordingly, the Department intends to revisit the rules,” the agency said. Such an action could convince to an eventual pullback or rewrite.
Until such guidance is issued, the Biden labor bureau won’t enforce the Trump-era rules, the Unit said.
The Biden labor bureau’s views were guided by input from stakeholders like asset forewomen, labor organizations, plan sponsors, consumer groups, service providers and investment advisors, the agency said.
Trump ESG hold sways
The Trump-era rule requires employers — who make decisions around 401(k) investments — to only consider factors go for a fund’s risk and return (rather than characteristics like social or environmental good) when choosing 401(k) stores. Otherwise, employers may invite more legal scrutiny.
The Labor Department also explicitly disallowed employers from automatically cataloguing workers into an ESG-focused fund. Automatic enrollment has become an increasingly popular way to nudge workers to invest in a 401(k).
The labor chest is revisiting the Trump-era rule according to an executive order Biden issued in January, titled “Protecting Public Condition and the Environment and Restoring Science to Tackle the Climate Crisis.”
That order directs federal agencies to review adjustments issued between January 2017 and 2021 that “are or may be inconsistent with, or present obstacles to” administration policies on medium and climate. In such cases, agencies may suspend, revise or rescind the rules, according to the Labor Department.