By Thomas Kostigen
The Financial Factors in Selecting Retirement Plan Investments Act is about as unoriginal a name for a piece of government rulemaking as you can get, and it doesn’t even make for a good acronym. But it’s important to understand what the Act is, what it does, and how and why it can affect retirement investing.
The Act empowers financial advisors, retirement plan sponsors, and Individual investors alike because it effectively reinstates environmental, social, and governance (ESG) investment options in retirement plans. That gives what fully two-thirds of retirement plan participants want: the ability to choose an ESG financial product, such as a mutual fund, within their tax-advantaged portfolio.
The Department of Labor under the Trump administration had in all practicality nixed the ESG option for retirement plans, limiting the ability of people to invest how they so choose because it mandated that only financial considerations be allowed. ESG investments were deemed too risky, despite the lack of credible evidence proving that. The new ruling reverses the limitation.
The DOL explains, “The Department’s longstanding and consistent position, reiterated in multiple forms of sub-regulatory guidance, is that when making decisions on investments and investment courses of action, plan fiduciaries must be focused solely on the plan’s financial returns, and the interests of plan participants and beneficiaries in their benefits must be paramount. The Department has been asked periodically over the last 30 years to consider the application of these principles to pension plan investments selected because of the non-pecuniary benefits they may further, such as those relating to environmental, social, and corporate governance considerations.”
The new Act allows for those external factors to be considered.
As Chief Investment Officer magazine bottom lines, the bill seeks to provideplan sponsors with legal cover for ESG investing. “Legislators say employers are hesitant to provide ESG options in 401(k)s over fears of being sued.” Retirement plan sponsors and financial advisors became fearful that if they recommended an ESG option in a retirement account, they might be in breach of their fiduciary duty and therefore could be sued.
Because the DOL ruling wasn’t explicit, some investors may not have even been aware that they couldn’t opt for an ESG investment in their retirement account. New guidance can change that. Financial advisors also can help investors review their portfolios and readjust their holdings if they were opted out of ESG investments due to the previous rulemaking. Going forward, advisors can play an even more important role: choosing which ESG option might be best in the matrix of portfolio construction. Retirement plan sponsors can again begin to entertain a universe of ESG investment offerings.
Clearly the new thinking is that investors should indeed have an ESG investment option in their retirement plan. The Act states that retirement plan fiduciaries should consider collateral ESG or similar factors as “tie-breakers” when competing investments can reasonably be expected to serve the plan’s economic interests equally well.
Retirement plans are how a majority of people in the United States gain exposure to the stock market. They’ll soon have more exposure to ESG investments, as well. ESG funds stand to benefit.
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.