‘Values’ Investing May Get Easier If Rule Passes

DOL seeks to loosen restrictions on green, socially conscious funds for 401(k)s

Engineer setting up wind turbine

Andriy Onufriyenko/Getty Images

Investing with your conscience may get easier because of a new government proposal involving employer-sponsored retirement plans.

The Department of Labor on Wednesday announced a plan to make it easier for employers to offer funds focused on environmental, social and governance measures in their 401(k) plans. The proposal, which is subject to a 60-day comment period, would reverse a Trump-era rule that required employers to do extensive analysis before offering so-called ESG funds and blocked them from being default options, a frequent feature in retirement accounts.

As awareness of environmental and social issues has increased, so has the desire for people to put their money where their mouths are. But some industry experts believed the additional analysis requirements deterred employers from offering ESG investments in their retirement plans. If the proposed rule goes into effect, more people would have a vehicle for investing their retirement savings that matches their values.

Investor interest has grown even though investors in sustainable funds generally pay what Morningstar calls a “greenium” relative to investors in conventional funds because their average expense ratio—what you pay for your fund to be managed and marketed, among other things—was about 0.2 percentage point higher at the end of 2020. Last quarter, net new investments in ESG funds totaled roughly $17.5 billion, up from  net inflows of $10.4 billion in the year-ago period, according to Morningstar.

“Such designated investment alternatives could bring in a new set of investors, furthering the overall goal of enhancing U.S. retirement security,” wrote Aron Szapiro, Morningstar’s head of retirement studies and public policy, in a commentary. He said he expects this new rule to be finalized, more or less in its current form, by early next year.

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  1. Department Of Labor. “US Department Of Labor Proposes Rule To Remove Barriers To Considering Environmental, Social, Governance Factors In Plan Management.”

  2. Federal Register. “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.”

  3. Morningstar. “U.S. Sustainable Fund Assets Reach a New Milestone in 2021’s Second Quarter.”

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