Labor Department Holds Off Enforcement of ESG Rule for 401(k)s

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The U.S. Department of Labor said Wednesday it won’t be enforcing a Trump-era rule that makes it tougher for 401(k) plans to invest in socially minded funds.

The agency is reviewing a rule finalized in the fall that prevented corporate 401(k) plans from using funds with nonfinancial goals as default investments for employees. This rule also put the onus on 401(k) overseers to show that environmental, social and governance-focused funds would have just as strong returns as competing funds.

The Labor Department signaled that new rules it is exploring might be more friendly to ESG investments.

“We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations,” Ali Khawar, principal deputy assistant secretary at the Employee Benefits Security Administration, said in a statement.

The announcement is a temporary win for Wall Street, which has been lobbying the Biden administration to scrap the rule. Finance firms won’t need to spend significant money to comply with the rule—for now. Some asset managers think the Labor Department ultimately could still enforce the rule and plan to continue lobbying the Biden administration on the matter. ESG financial products have become increasingly popular with investors and lucrative for the money managers.

The Trump administration’s Labor Department created the rule to make sure plan overseers were being rigorous about investing worker 401(k) money, at a time when untested ESG funds are flooding the market.

Former Deputy Secretary of Labor

Patrick Pizzella

said the Labor Department’s decision is likely to unnerve individuals using the benefit plans.

“DOL’s statement today listed a wide variety of stakeholders they heard from—but not among their list was a single beneficiary or plan participant,” said Mr. Pizzella, who was involved in the development of the rule. “And that is who these final rules are looking out for.”

Money heading into sustainable and ESG funds has soared in recent years, though the funds remain rare in employee-sponsored retirement plans. Only 2.6% of U.S. corporate plans offered ESG funds as investment options in employee-benefit plans in 2019, according to survey data by the Plan Sponsor Council of America, suggesting a largely untapped market for fund managers.

Meanwhile, U.S. ESG funds attracted a record $51.1 billion of new money in 2020, more than double from the previous year, according to

Morningstar Inc.

Write to Dawn Lim at dawn.lim@wsj.com

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