Commentary: New DOL rule should accelerate sustainable investment options in retirement plans

When Americans contribute to their 401(k) plans, they may not be thinking about potential issues that could impact their savings decades down the road. However, the fiduciaries responsible for those assets are thinking about exactly that in order to help ensure the best possible retirement for these investors.

A new rule from the Department of Labor clarifies that those stewards of retirement savings may consider long-term factors like environmental, social and governance issues along with other financial considerations. It recognizes that the consideration of ESG criteria can help protect the long-term interests of retirement beneficiaries and should be treated like any other investment criteria used by plan fiduciaries under the duty of loyalty and care. It effectively reverses the rule released under the prior presidential administration and should help ameliorate the gap between the growth of sustainable investment overall and the much more limited growth of sustainable investment options in retirement plans.

As a result of the new rule, fiduciaries are likely to be more comfortable including funds that consider ESG factors in their retirement plan lineup. Additionally, the new rule should further accelerate uptake of sustainable investment funds as it allows funds that consider ESG criteria to be included in qualified default investment alternatives.

This is critical because QDIAs are the default investment option for defined contribution employer-sponsored retirement plans.

In reality, the rule is catching up to where the marketplace has been for years. Financial firms, large and small, now use ESG information and offer a diverse range of these products. Investors understand that it is important to take into account how a company treats its workforce, whether it pays its fair share of taxes, its political spending, supply chain, and whether the company is ready for the transition to a low-carbon economy.

Demand for sustainable investment options in retirement plans is strong. According to a recent survey by Natixis Investment Managers, 66% of millennials would be more likely to contribute for the first time or increase contributions to their workplace retirement plan if they knew that their investments were doing social good.

Yet, while the DOL rule is an important achievement, more needs to be done. Over the past two decades, and largely based upon the political persuasion of the White House, the DOL has produced seesawing guidance and rules regarding the ability of private sector retirement plans to utilize ESG criteria in their selection of funds.

This lack of consistency has made the retirement industry wary of adding ESG-oriented funds for fear of being sued. The new rule should go a long way towards assuaging these litigation fears.

Ultimately, though, the next step is for Congress to amend ERISA with language that clarifies the ability for fiduciaries to consider ESG issues. This is the only way to give true long-term clarity to fiduciaries and plan participants.

Sustainable investment options are here to stay, and we should expect a continued growth of funds that focus on ESG criteria. The new rule will make these options more widely available to retirement savers and that's good news.

Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment, based in Washington. This content represents the views of the author. It was submitted and edited under P&I guidelines but is not a product of P&I's editorial team.