Money Managers Want to Bring ESG Funds into 401(k)s

March 4, 2021

Money managers are urging the government to revise a Labor Department rule that essentially bars retirement plans from including socially responsible investments like those that track environmental, social, and governance principles.

The Labor Department rule, announced back in October, implemented restrictions on what can and can’t be included in company 401(k) funds. One of the consequences to the new ruling was that plans cannot use funds with nonfinancial goals as default investments for employees. Consequently, 401(k) and retirement fund managers will have to show that ESG strategies can significantly enhance returns.

“It doesn’t flatly rule out all plan investment in ESG funds, but it imposes strict conditions under which plans may select ESG funds,” Mark Iwry, who oversaw national retirement policy while a senior official in the U.S. Treasury Department during past Democratic administrations, told the Wall Street Journal.

Lobbyists representing managers, pensions, and retirees were already in talks with President Joe Biden’s transition team in the weeks after the rule was announced, the Wall Street Journal reports.

While the rule was scheduled to be implemented in January, the Biden administration has now flagged it for review.

The lobbying efforts are now raising questions over whether or not the easier access to ESG funds helps or harms small investors. Many asset managers have already argued that investments that contribute to battling climate risks or including workplace diversity help diminish losses and boost returns.

“We don’t want to have people being deterred from looking at investment options where clearly there is a lot of investor demand,” Eric Pan, chief executive of the asset-management industry’s main lobby group, Investment Company Institute, told the WSJ.

On the other hand, some warn that this could represent an overreaction to political processes, questioning whether ESG funds can actually deliver better returns.

The Trump administration’s Labor Department previously argued that investors shouldn’t assume ESG funds can generate better returns and warned that the definition of ESG remains unclear since there are no unified criteria for the asset category. ESG funds can also pursue separate goals with no end goal on returns and can charge higher fees.

For more news, information, and strategy, visit the ESG Channel.