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DOL Proposes Greater Scrutiny of ESG Fund Selection in Retirement Plans

June 24, 2020

The Department of Labor wants to require retirement plans to justify their selection of environmental, social and governance-focused funds, according to news reports. 

Under a proposed rule the DOL released Tuesday, retirement plans would need to demonstrate that the chosen ESG funds are “economically indistinguishable” from other investments, the DOL says, according to Bloomberg. Choosing ESG funds that have higher fees, lower returns or present greater risk would go against the protections established by the Employee Retirement Income Security Act of 1974, senior DOL officials say in the proposal cited by the news service. The proposal is meant to reinforce ERISA protections outlined in a DOL executive order from April 2019, the DOL says, according to Bloomberg.

“Providing a secure retirement for American workers is the paramount, and eminently worthy, ‘social’ goal of Erisa plans,” the DOL says, according to the news service. “Plan assets may not be enlisted in pursuit of other social or environmental objectives.”

The Obama administration allowed plans to invest in ESG funds if all other factors remained equal, Bloomberg writes. President Donald Trump’s administration, however, specifies that fiduciaries can “break the tie” between an “alternative investment” and a “non-pecuniary” investment, according to the news service.

“The Department believes this documentation requirement provides a safeguard against the risk that fiduciaries will improperly find economic equivalence and make decisions based on non-pecuniary factors without a proper analysis and evaluation,” the DOL says, according to Bloomberg. 

The DOL says the new requirement will impact an estimated 30,000 retirement plans and cost $57,000 in compliance, the news service writes.  

The DOL has submitted the proposal to the Office of the Federal Register, after which it will be available for public inspection and may result in slight changes during the OFR review process, according to the proposal. The effective date of the new regulation would be 60 days after the date of the publication of the final rule, the DOL says. 

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By Alex Padalka
  • To read the Bloomberg article cited in this story, click here if you have a paid subscription.
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Tags:  Regulatory/legal issues , Investment strategies , Retirement planning , Portfolio management

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