The Biden Administration Won’t Enforce Trump-Era ESG Rule On 401 (k) Plans

The Biden administration said on Wednesday it will not enforce a rule enacted by the Trump administration that makes it more difficult to offer environmental, social and governmental – or ESG funds in 401 (k) plans.

For example, ESG funds can invest in energy companies that do not rely on fossil fuels or in companies that promote racial and gender diversity. Investors put a record $ 51 billion in ESG funds last year.

The Trump-era Labor Department rule, enacted in 2020, does not explicitly call for or outright prohibit ESG funds in 401 (k) plans.

But it could hinder already moderate adoption by changing the requirements for employers to select them as 401 (k) investments, experts said.

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Indeed, the rule has already had a chilling effect on their inclusion, even in circumstances where the rules explicitly allow their use, Biden’s Labor Department said Wednesday.

Accordingly, the ministry intends to review the rules, the agency said. Such action could lead to a possible withdrawal or rewriting.

Until such guidelines are issued, Biden’s Labor Office will not enforce Trump-era rules, the ministry said.

The positions of job agency Biden were guided by input from stakeholders such as asset managers, labor organizations, plan sponsors, consumer groups, service providers and investment advisers, the agency said.

The Trump-era rule requires employers – who make decisions around 401 (k) investments – only consider factors such as a fund’s risk and return (rather than attributes such as social or environmental good) when choosing 401 (k) funds. Otherwise, employers can ask for more legal scrutiny.

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

The Labor Office is reviewing Trump-era rule according to an executive order issued by Biden in January entitled “Protecting public health and the environment and restoring science to address the climate crisis.”

That order directs federal agencies to review regulations issued between January 2017 and 2021 that “conflict or may conflict with, or create obstacles to” government environmental and climate policies. In such cases, agencies can suspend, revise or revoke the rules, according to the Labor Department.