DOL supports ESG fund use in 401(k) plans

New guidance amends old rules that had a "chilling effect" on ESG fund use in ERISA plans

Oct 22, 2015 @ 1:22 pm

By Greg Iacurci

The Labor Department wants to make it easier for 401(k) plans to use environmental, social and governance funds by issuing new guidance meant to boost plan fiduciaries' consideration of such funds.

Fiduciaries had been wary of introducing ESG investments — also known by such names as economically targeted, and sustainable, responsible and impact (SRI) investing — to retirement plans due to previous guidance from the department, according to Secretary of Labor Thomas Perez. A 2008 rule said fund consideration based on factors other than risk and return, such as ESG, should be rare, which set a higher but unclear standard of fiduciary compliance, the DOL said.

That guidance “gave cooties” to impact investing and had a “chilling effect” on its use in plans governed by the Employee Retirement Income Security Act of 1974, said Mr. Perez, speaking Thursday in New York.

According to the new guidance — Interpretive Bulletin 2015-01, which is scheduled to be published in the Federal Register on Oct. 26 — “fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social or other such factors.”


Although plan fiduciaries can't accept lower returns or take greater risk in order to add an ESG fund to the investment lineup, such a consideration can be used as a “tiebreaker,” all other things being equal, according to the DOL.

The Labor Department's move underlines the notion that fiduciaries can maintain their responsibilities under ERISA while still supporting goals such as green energy and infrastructure development, Mr. Perez said.

The DOL guidance also aligns with an ESG market that has grown substantially, including new capabilities around fund analytics, Mr. Perez said. “It's become quite mainstream,” he said.

U.S. domiciled assets under management in SRI swelled 76% over 2012-14, to $6.57 trillion at the beginning of 2014 from $3.74 trillion at the start of 2012, according to The Forum for Sustainable and Responsible Investment. In addition, research has shown that ESG principles can deliver higher risk-adjusted performance over the long term.


Earlier this year, Morningstar Inc. announced it would begin attaching impact scores to all mutual funds and exchange-traded funds based on the funds' portfolio holdings, providing investors with more transparency, for example.

Some asset managers have also been doubling down on ESG investing. This year, Bank of America Merrill Lynch has added to the number of social impact portfolios available over its investment platform, and Goldman Sachs Group Inc. bought ESG shop Imprint Capital Advisors.

Despite growth in the market, fiduciaries haven't rushed into ESG, due largely to the 2008 guidance — Interpretive Bulletin 2008-1 — which was “counterintuitive and counterproductive,” Mr. Perez said. According to a Vanguard Group analysis of defined-contribution plans for which it does record keeping, only 9% of all plans had a socially responsible domestic equity fund in 2014, for example.

The 2008 bulletin replaced a previous one from 1994, which sought to correct a misperception that ESG investments were incompatible with ERISA's fiduciary obligations. The new guidance reverts to that guidance from 1994.


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