Wall Street wants to end the Trump-era ESG rule for 401 (k) plans


Wind turbines operate at the Gouda wind power facility alongside a highway at dusk in Gouda, South Africa, Wednesday, March 3, 2021.

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ESG growth

Investor demand for ESG funds has grown considerably in recent years.

Investors invested $ 51.1 billion of net new money in such funds in 2020, a record and more than double the previous year, according to Morningstar.

Such funds can, for example, invest in energy companies that do not depend on fossil fuels or in companies that promote racial and gender diversity.

Money managers have also been offering new ESG funds to investors. The number of sustainable funds available to US investors grew to nearly 400 last year, 30% more than in 2019 and almost four times more in a decade, according to Morningstar.

Trump government

However, a small percentage of workplace retirement plans offer ESG funds.

About 3% of 401 (k) plans have an ESG fund, according to the Plan Sponsor Council of America. A fraction of the plan assets (one-tenth of 1%) is held in these funds.

Retirement plans in the workplace, one of America’s greatest riches, represent a huge source of untapped growth.

The Department of Labor measure does not explicitly call for or prohibit ESG funds in 401 (k) plans. But it could hamper already lackluster adoption, experts say.

The Trump-era rule requires that employers, who make decisions around 401 (k) investments, only consider factors such as a fund’s risk and return (rather than characteristics such as social or environmental good) when choosing 401 (k) funds. Otherwise, employers may invite further legal scrutiny.

The Labor Department also explicitly prohibited employers from automatically enrolling workers in an ESG-focused fund. Self-enrollment has become an increasingly popular way to entice workers to invest in a 401 (k) plan.

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