The big effect of DOL’s proposed removal of the Trump-era 401 (k) ESG investment cooling is to allow ESG TDFs as the default option when BlackRock and Natixis have products.


The Ministry of Labor does not give fiduciaries carte blanche to environmental, social and governance factors, but recognizes that non-pecuniary factors are legitimate considerations.

Brooke’s Note: There is no way to do business with a person or entity without trusting them. In fact, the more you trust your business partner, the deeper and more effective the business relationship can be. Constant checking is a giant cause of friction. It takes time and is in itself a cause of mistrust. As the investment industry continues to grow rapidly, business models that assume high levels of trust, such as RIAs or ERISA-regulated pensions, will prevail. But now we’re asking the Trustees to step up their game, again, so that we can tackle chess to four or five levels after years where one or two seemed to be enough. But we cannot begin to impose this responsibility on them without trusting them. This green light from DOL to enable ESG as a key investment factor for plan sponsors is a step in this direction. Giving trustees God-like ESG powers to diagnose good and evil, on a global scale, may solve some problems, but potentially create new ones. See: Suddenly Vanguard, BlackRock, State Street not only have the strengths but the power of ESG mandates, making them a growing threat to shareholder democracy, critics say. Or start at.

Federal regulators today announced a proposed rule that makes ESG one barrier from warning plan sponsors to one that can be used with impunity as a tie-breaker with pecuniary factors.

Jason Roberts: It will be a huge win, if the final rule ends up looking like the proposal, for some asset managers who have deployed ESG target date funds

The Department of Labor (DOL), which oversees trillions of dollars in pension assets, ended an 11th rule imposed by the Trump administration days before the November 2020 presidential election.

The rule required plan sponsors to use environmental, social and governance factors to decide the makeup of the portfolio on ice skates for an audit or potential lawsuit.

“While the previous rule was only in effect for a few months, we saw a chilling effect on plan sponsors’ willingness to take ESG factors into account,” said Jason Roberts, CEO of Pension Resources in San Diego. .

“Advisors were also reluctant to introduce such factors into their analysis.

DOL’s decision to eliminate ESG factors has taken away an essential tool from asset managers, writes Aron Szapiro, analyst at Morningstar.

“We have argued for some time that the Department of Labor should not have raised barriers for plan sponsors who wish to use ESG analysis to select investments,” he said. “In fact, ESG considerations can be financially important, and many asset managers incorporate them into their analysis.

Today, the DOL unveiled its proposal. Comments are expected within 60 days, so I anticipate that a final rule will be published in early 2022 with an effective date at the second or beginning of the third. “said Roberts.

Huge victory

The key line written in the new DOL rule is: If, after considering the relevant factors, a trustee concludes that “competing investments … also serve the financial interests of the plan … the trustee is not precluded from selecting the ‘investment… on the basis of collateral advantages other than return on investment. ”

It’s a double-edged sword that plan sponsors can live with, says Roberts.

“Translation: Trustees can use ESG factors to break a tie – even if the factor is not directly related to performance; however, they may not accept the expected reduced returns or greater risks to ensure such an outcome, ”says Roberts.

Less well known but no less applauded in the industry, DOL overturned the Trump Rule ban on using ESG factors in qualified default investment alternatives, also known as QDIA. It is the product or portfolio that an employee uses to contribute to their plan when making a selection.

“Most people access retirement investments through these defaults when they are available. It is therefore essential to cancel this rule to integrate ESG, ”says Szapiro.

The importance of QDIAs is that they become a “safe harbor”, therefore the employer is exempt from any liability if the QDIA absorbs investment losses.

“It will be a huge victory, if the final rule ends up resembling the proposal, for some asset managers who have deployed ESG target date funds in recent years,” said Roberts.

BlackRock and Natixis top the list of fund companies offering products in this ESG maturity category.

Risk of zero

BlackRock CEO Larry Fink published a very ESG-focused guest essay in The New York Times today, alongside DOL’s ESG announcement.

Fink’s letter calls for a way to use finance to reduce the risk of climate change in developing countries that lack capital investment. He suggests using government grants and subsidies to supplement institutional investors, such as pension funds and insurance companies.

The objective would be to absorb the risks characteristic of emerging economies – political instability, credit risk and enforceability of contracts.

“An essential part of increasing the scale of capital needed to bring emerging market economies to net zero will be using public finances to raise more private capital. “

Essentially, governments would co-sign private loans to buy clean infrastructure.

It is based on the fact that emerging markets – particularly India and Brazil – will need at least $ 1 trillion per year to reach net zero emissions by 2050 – more than six times the investment. current.

Private finance for emerging market climate finance is constrained by a high level of country risk – a problem as these are currently “non-diversifiable risks”.

“Public funding in the form of grants and subsidies can absorb some of the risks associated with investing in emerging economies. They can make climate projects a viable option for institutional investors, ”he writes.

New game

It required trustees of private pension plans covered by the Employees’ Retirement Income Security Act of 1974 (ERISA) to avoid investing in ESG products that sacrifice investment returns or take additional risks to achieve returns. ESG objectives.

Specifically, he ordered the ERISA plan trustees to “select investments and investment action plans based only on financial considerations relevant to the risk-adjusted economic value of an investment or investment. a specific investment action plan ”.

The measure drew much criticism at the time. See: Despite only 30-day window, 8,700 people are commenting – most with scathing disapproval – on DOL’s efforts to ban ESG in 401 (k) plans on behalf of proponents of the mystery

Then, last March, the Biden administration’s DOL suggested it would not enforce this regulation. In May, President Joe Biden issued an executive order directing the DOL to consider proposing a new rule.

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