Personal Finance

Biden administration won't enforce Trump-era ESG rule for 401(k) plans

Key Points
  • The Biden administration won't enforce a Trump-era rule that made it harder to use ESG funds in 401(k) plans, the Labor Department said Wednesday.
  • The agency is reviewing the rule and may ultimately suspend, revise or rescind it.
  • The Trump-era measure is inconsistent with a Biden executive order on climate and the environment, the labor bureau said.
Kevin Dietsch/UPI/Bloomberg via Getty Images

The Biden administration said Wednesday it won't enforce a rule issued by the Trump administration that makes it harder to offer environmental, social and governance — or ESG — funds in 401(k) plans.

ESG funds may, for example, invest in energy firms that aren't reliant on fossil fuels or in companies that promote racial and gender diversity. Investors poured a record $51 billion into ESG funds last year.

The Trump-era Labor Department rule, issued in 2020, doesn't explicitly call out or outright forbid ESG funds in 401(k) plans.

But it may stymie already lackluster uptake by changing requirements for employers to select them as 401(k) investments, according to experts.

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Indeed, the rule has already had a chilling effect on their inclusion, even in circumstances when the rules explicitly allow for their use, Biden's Labor Department said Wednesday.

"Accordingly, the Department intends to revisit the rules," the agency said. Such an action could lead to an eventual pullback or rewrite.

Until such guidance is issued, the Biden labor bureau won't enforce the Trump-era rules, the Department said.

The Biden labor bureau's views were guided by input from stakeholders like asset managers, labor organizations, plan sponsors, consumer groups, service providers and investment advisors, the agency said.

Trump ESG rules

The Trump-era rule requires employers — who make decisions around 401(k) investments — to only consider factors like a fund's risk and return (rather than characteristics like social or environmental good) when choosing 401(k) funds. Otherwise, employers may invite more legal scrutiny.

The Labor Department also explicitly disallowed employers from automatically enrolling workers into an ESG-focused fund. Automatic enrollment has become an increasingly popular way to nudge workers to invest in a 401(k).

More and more shareholders are demanding a focus on ESG, Smurfit Kappa CEO says
More and more shareholders are demanding a focus on ESG, Smurfit Kappa CEO says

The labor bureau is revisiting the Trump-era rule according to an executive order Biden issued in January, titled "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis."

That order directs federal agencies to review regulations issued between January 2017 and 2021 that "are or may be inconsistent with, or present obstacles to" administration policies on environment and climate. In such cases, agencies may suspend, revise or rescind the rules, according to the Labor Department.