ESG Prohibition Lifted On Your 401(k) by Department Of Labor Ruling

credit: USACE on Flickr

The Labor Department has rolled back a rule brought in under President Trump to make it easier for employers to include impact investment funds in their retirement plans.

The Trump-era rule, which was set to go into effect in January, required employers to adhere to a "fiduciary duty" when choosing investments for 401(k)s and other retirement plans.

Under the Biden administration rule, which was also set to go into effect in January, employers are no longer required to consider ESG (environmental, social, and governance) factors when choosing investments, MarketWatch reports.

ESG funds invest in companies that make social or political decisions that have a positive impact on the world's economy.

The Trump-era rule was seen as an attempt to chill ESG investing, and it appears to have worked, with anecdotal reports suggesting that employers avoided ESG funds in their 401(k)s and related plans to avoid drawing investigations from the Trump Department of Labor.

ESG funds actually tended to outperform the market at large in 2020, and professional investors noted in public comments that in 2020, approximately 96% of all public comments opposed this change to the fiduciary duty requirement, potentially harming an employer's ability to recruit younger talent, but which also may have been the better investment at the time."

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