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

Investor demand for ESG funds has increased significantly in recent years.

Investors put $ 51.1 billion in net new money into such funds in 2020, a record and more than double that of the previous year, Morningstar said.

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

Money managers are also offering investors new ESG funds. The number of sustainable funds available to US investors grew to nearly 400 last year – a 30% increase from 2019 and nearly quadrupling over a decade, according to Morningstar.

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

According to the Plan Sponsor Council of America, about 3% of 401 (k) plans have an ESG fund. A fraction of the plan’s investments (one-tenth of 1%) is held in such funds.

Workplace retirement plans – one of America’s greatest prosperity points – represent a tremendous untapped source of growth.

The Labor Department measure does not explicitly call up or outright prohibit ESG funds in 401 (k) plans. But it could hinder the already mediocre absorption, according to experts.

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).