Wall Street plans to end the Trump-era ESG fund rule for 401 (k) plans
Wind turbines operate at Gouda Wind Turbine next to a road at dusk in Gouda, South Africa on Wednesday March 3, 2021.
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Investor demand for ESG funds has risen sharply in recent years.
According to Morningstar, investors poured $ 51.1 billion in net new money into such funds in 2020, a record and more than double the previous year’s figure.
Such funds can, for example, invest 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 U.S. investors rose to nearly 400 last year – a 30% increase from 2019 and a nearly four-fold increase over a decade, according to Morningstar.
However, a small percentage of company pension plans offer ESG funding.
According to the Plan Sponsor Council of America, around 3% of the 401 (k) plans have an ESG fund. A fraction of the plan assets (one tenth of 1%) are held in such funds.
Company retirement plans – one of America’s largest wealth pools – are a huge untapped source of growth.
The Department of Labor action does not specifically encourage or directly prohibit ESG funds in 401 (k) plans. However, according to experts, it could hinder the already inadequate absorption.
The Trump-era rule requires employers making 401 (k) investment decisions when choosing 401 (k) funds only to consider factors such as a fund’s risk and return (rather than characteristics such as social or environmental good ) must be taken into account. Otherwise, employers can invite stronger legal scrutiny.
The Ministry of Labor specifically prohibited employers from automatically enrolling employees in an ESG fund. Auto-enrollment is an increasingly popular way to get workers to invest in a 401 (k).