The Labor Department’s New Rule Levels the Playing Field for Retirement Plans

By Steven Rothstein, Managing Director, Ceres Accelerator for Sustainable Capital Markets

The new rule that the Department of Labor (DOL) issued last month that allows climate-aligned funds in 401(k) retirement plans is an important step in ensuring a more secure fiscal future is possible for America’s workers, Labor Secretary Marty Walsh explained during a virtual discussion Ceres hosted with investors, corporate leaders, and regulators in partnership with the Environmental Defense Fund on February 6.

“The objective of the DOL is to make sure retirement savings for American workers are safeguarded,” said Walsh.

The rule is a “return to neutrality” and levels the playing field for all financially relevant factors, added Assistant Labor Secretary Lisa Gomez.The new rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, followed years of contradictory and confusing rules from the Department of Labor (DOL) on how plan sponsors could take environmental, social, and governance (ESG) factors into account in their investment decision-making for retirement plans. A 2020 rule issued by the previous administration cast doubt on the financial relevance of climate and other sustainability factors when making investment decisions, having a chilling effect on fiduciaries using these factors to evaluate investments, even when doing so would be in the beneficiaries’ financial interests.

In response, the Biden administration proposed a new rule, which was adopted and took effect January 30 following a review of nearly 900 comments submitted by the public; Ceres’ analysis of the comments can be found here.

The new rule clarifies how retirement plan sponsors can include climate and other sustainability factors in their investment decisions under the Employee Retirement Income Security Act of 1974 (ERISA). The rule confirms that fiduciaries should consider ESG factors in investment decisions just as they would any other financially relevant factor. At its core, the rule reinforces the fiduciary responsibilities of prudence in evaluating risks and loyalty to people who entrust those fiduciaries with their money.

During the Feb. 6 discussion Walsh and Gomez joined other speakers from Ceres, union federation AFL-CIO, asset manager Legal and General Investment Management, and the American Retirement Association in unpacking the rule’s significance for investors, retirees, and financial markets.

WATCH THE RECORDING: Climate and 401(k) Plans: The DOL’s New Rule Levels the Field for ESG

The session took place against the backdrop of a pending lawsuit in Texas that a coalition of 25 states filed last month to halt the rule as part of broad efforts taking place nationwide to diminish investors’ ability to consider climate and other sustainability factors in their decision-making.

In her remarks, Gomez explained how the rule makes clear that fiduciaries may, but are not required to, consider the economic effects of climate change and other sustainability factors in retirement plan investing.

Gomez said the rule neither specifically promotes nor discourages consideration of factors such as climate or governance. Allison Wielobob, general counsel of the American Retirement Association, agreed that the federal government shouldn’t categorically forbid certain types of investments. With this rule, fiduciaries of ERISA funds are required to use their best professional judgement in evaluating all relevant factors to fulfill their obligations to their beneficiaries.

The rule also makes clear that fiduciary duty includes exercising shareholder rights, including proxy voting, and removes legal protection for fiduciaries who do not exercise those rights.

Brandon Rees, Deputy Director of Corporations and Capital Markets at AFL-CIO, noted how the rule will “strengthen the retirement security of working people” and provides retirement plan fiduciaries with legal certainty for considering ESG factors in their decisions.

Wielobob, Rees, and John Hoeppner, Head of U.S. Stewardship and Sustainable Investments at Legal and General, were in agreement on the importance of leveling the playing field. When climate and other sustainability factors are indeed relevant investment considerations, fiduciaries should be permitted to consider these factors too.

Climate emergencies are becoming more common and present significant threats to the nation’s financial markets, including the retirement plans of over 100 million working Americans. With the growing risks of fires and floods, it’s important that the people stewarding the retirement savings of hard-working Americans savings build these considerations into long-term retirement planning.

With this new rule in play, there is more opportunity to give Americans the options to invest in funds aligned with their values and safeguard their retirement savings from climate risks.