ESG Funds Easier for 401(k)s to Buy Under DOL Plan

The Department of Labor on Wednesday proposed a rule that would make it easier for investors to purchase funds focused on environment, social and governance measures in their 401(k) plans.

These types of funds have become increasingly popular in recent years as individuals seek to invest in ways more consistent with their own personal values. The proposal has been supported by many Wall Street firms, which are rolling out such offerings to meet demand.

Wall Street often charges more for these types of funds. Sustainable funds charge an average of 0.61% of assets, compared with 0.41% for traditional peers, according to Morningstar Inc.

The proposal would reverse a Trump administration rule making it harder for 401(k) plans to offer investments based on environmental, social and governance, or ESG, measures.

“ESG factors can be financially material, and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers,” said Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration at the Labor Department.

The Labor Department regulates retirement plans through the Employee Retirement Income Security Act of 1974.

Some data have shown that socially responsible investments can perform better over the long run. The MSCI KLD 400 Social Index has returned an average of 16.88% a year over the past decade, compared with 16.68% for the MSCI USA Investable Market Index.

Still, the rise of ESG as an investment product sold by asset managers has led to concerns about misleading claims by investment advisers and public companies. The Securities and Exchange Commission earlier this year established an enforcement task force to look for such misleading claims by investment advisers and public companies.

ESG funds attracted $39 billion of new money in the first half of 2021, according to Morningstar.

According to data Vanguard Group publishes on the 401(k) plans it administers, 12% offer socially responsible investment vehicles to employees.

Demand for such investments in 401(k) plans is likely to grow as “millennials become more dominant in the workforce and Gen Z starts entering the workforce,” said Lew Minsky, president of the Defined Contribution Institutional Investment Association, a research and advocacy organization for investment managers, consultants and others in the 401(k) industry.

Over time, expense ratios are likely to decrease for socially responsible funds, making them more competitive with other 401(k) offerings, said Mr. Minsky.

The Biden administration proposal will enter a 60-day comment period.

Michael Kreps, a principal at Groom Law Group who specializes in retirement plans and policy, said he expects the Labor Department to make the proposal final in the first half of 2022.

The Trump administration rule would have made it harder for plans to offer ESG investments in target-date funds and other investments used as default investments when automatically enrolling participants in 401(k) plans. Currently target-date funds attract 81% of participant and employer contributions to 401(k) plans, according to Vanguard.

A statement by the American Retirement Association, which represents retirement-plan professionals, expressed support for the proposal.

“We are pleased that the DOL has established a level playing field for ESG investment considerations in retirement programs,” the group said.

Write to Anne Tergesen at

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