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ESG retirement investment gets boost from DOL: What plan sponsors should consider

Plan sponsors considering environmental, social and governance (ESG) factors in their investments received promising news with the U.S. Department of Labor’s (DOL) latest update in November. Although ESG investing has received increased attention over the past few years, DOL has not been transparent in defining how qualified retirement programs should incorporate ESG-specific metrics into their selection process. Until recently, the prevailing tone of DOL’s messaging has been that ESG should be secondary to financial factors.

The Biden administration had hinted at loosening restrictions on ESG investing that were implemented during the final days of the Trump administration and forgone enforcement of those restrictions in the interim.

This latest development is a realization of those earlier signals. With the announcement of DOL’s new rule, plan sponsors can, but are not required to, include ESG factors in their investment searches. Notably, plan sponsors can include ESG factors in their assessment of their qualified default investment alternative (QDIA). QDIAs have historically held a substantial proportion of retirement assets and are subject to additional fiduciary scrutiny, so this marks a distinct and potentially consequential departure from DOL’s previous stance.

The appetite for ESG options varies. Some organizations will take the recent shift as an invitation to revamp their fund menus entirely, while others will stick with the status quo. Regardless of perspective, the following basic principles can help you assess ESG or any other options within your program:

  1. Do your research – Understand the wants and needs of your constituents and the underlying components of your investment array.
  2. Refine your analysis – The proliferation of ESG methodology has created innumerable options with nuanced characteristics, so it’s important to narrow the search where possible. Plan sponsors can identify ESG factors of particular significance, choose a screening methodology (include positive elements or exclude negative elements), or apply a scoring approach.
  3. Document, document, document – As with most committee-level work, it is very important to memorialize the process, decision points and rationale along the way. Remember, plan sponsors are not expected to have a crystal ball, but they are expected to act prudently at each point in their administration of the program.
  4. Confirm program governance alignment – Program governance documents like investment policy statements establish important guideposts for plan administration, so they should reflect any novel considerations.

This list is not exhaustive, and each plan sponsor’s approach will be unique. The final rule will be effective 60 days after publication in the Federal Register, but there’s also no guarantee that a new iteration of DOL’s position (and the industry’s associated response) is not forthcoming, so engaging a trusted advisor for assistance may be beneficial.

Have questions? We’re here to help. Reach out to HBS with any questions or to discuss your program’s approach.

The above is provided for informational purposes only and should not be construed as a recommendation. HANYS Benefit Services is a marketing name of Healthcare Community Securities Corp., member FINRA/SIPC, and an SEC Registered Investment Advisor.

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