The Future of ESG Investments in Retirement Plans

August 18, 2020 | Authored by Chad R. O’Connell AIF

August 18, 2020 – One of the most popular investment trends over the last few years has been the emergence of ESG or Environmental, Social and Governance investment funds. Like most investment mutual funds, these funds are a collection of various equity securities of different companies, packaged together and sold to investors. What makes these funds different is that the investments chosen typically have a common theme, such as focusing on companies who have good environmental operations, friendly corporate governance or social standing in the community.  Previously these funds were referred to as SRI or Socially Responsible Investment funds. Whatever you call them, they currently represent over $30 trillion in investable assets as of 2018 according to Global Sustainable Investment Alliance.

Currently ESG funds are very popular with Millennials and Generation Z. With the explosion of ESG funds across the investment spectrum, obvious questions arise as to their place in qualified retirement plans. This is not a new discussion. The Department of Labor (DOL) has addressed ESG funds several times in the past, but the guidance has left many asking more questions than getting answers.  Recently the DOL issued proposed regulations concerning ESG funds and their use in retirement plans.  The new proposed rules try to outline the process plan fiduciaries should follow when investigating ESG funds inclusion in the investment menu for retirement plans.

The DOL’s rules have always guided fiduciaries that when selecting investments for inclusion in the plan, their focus must be on the plan’s financial returns and that furthering the interest of plan participants and beneficiaries in financial benefits under the plan must be paramount.  Guidance has stated that ESG investments could be consistent with ERISA’s fiduciary obligations, but that fiduciaries need to make sure that the ESG investment has an expected rate of return that is commensurate to the rates of return of alternative investments with similar risk characteristics that are available to the plan, and that the investment is otherwise an appropriate investment for the plan in terms of such factors as diversification and the investment policy of the plan.

The DOL’s aim is to assist ERISA fiduciaries by establishing clear regulatory guidelines for plan fiduciaries in light of recent trends involving ESG investing that the DOL is concerned may lead ERISA plan fiduciaries to choose investments or investment courses of action to promote environmental, social, and public policy goals unrelated to the interests of plan participants and beneficiaries in financial benefits from the plan and expose plan participants and beneficiaries to inappropriate investment risks.

Specifically, the DOL has outlined five additions to the existing regulation.  They include:

  1. New regulatory text to codify the DOL’s longstanding position articulated in interpretive bulletins (IBs) published in 1994, 2008, and 2015 that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.*
  2. An express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.*
  3. A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA in furthering the purposes of the plan.*
  4. The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. New regulatory text sets forth required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among economically “indistinguishable” investments (related to the so-called “tiebreaker rule” in the 1994, 2008, and 2015 IBs). The documentation requirement is intended to provide a safeguard against the incentive for fiduciaries to improperly find economic equivalence and make decisions based on non-pecuniary benefits without a proper analysis and evaluation. Fiduciaries already commonly document and maintain records about their investment selections. The provision in the proposal would make that general practice required where a fiduciary determines that alternative investment options are economically indistinguishable and where the fiduciary chooses one of the investments on the basis of a non-pecuniary factor.*
  5. A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal states the DOL’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for the selection of investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name.*

Some have commented that the proposed rule seems to make existing regulations tighter and, therefore, less likely that plan fiduciaries would be willing to include ESG funds in their investment menus.  Although that remains to be seen, it is clear that the DOL is indicating that fiduciaries should not forgo the potential financial benefits to participants in lieu of a more social investment policy when making fund selections.  It is also very clear that, as it always has been, plan fiduciaries need to have a solid documented process when it comes to the selection and monitoring of the plan’s investment menu.  That is even more important if a plan fiduciary is considering an ESG investment to the plan.

Early feedback from industry and congressional parties indicates that many feel the DOL has gone too far in overly regulating the investment selection process for retirement plan sponsors and providers.  The comment period is scheduled to end on July 30, 2020.

*Per Department of Labor Notice of Proposed Rulemaking on Financial Factors in Selecting Plan Investments Fact Sheet dated June 23, 2020.

This article is an excerpt from Dopkins Employee Benefits Newsletter.  To read the complete content, please click here.

For more information, contact Chad O’Connell at


* Dopkins Wealth Management, LLC is a registered investment advisor owned by the partners of Dopkins & Company, LLP.


About the Author

Chad R. O’Connell AIF

Chad manages Dopkins’ retirement plan services group, which focuses on investment management, consulting and fiduciary governance services to corporations and not-for-profit entities. In addition, Chad also provides financial services to high net worth individuals and business owners.

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