The idea of using your investments to promote environmental and social causes has grown quickly in recent years. Most of the action so far has been among institutional investors, but 401(k) plans were expected to be the next major area of growth – until recently.
Last month the U.S. Department of Labor (DoL) proposed a new rule clamping down on the use of social investing in workplace defined contribution plans. The focus here is on the use of mutual funds driven by environmental, social and governance factors — so-called ESG investing. The new rule would require plan sponsors to demonstrate they aren’t sacrificing financial performance for participants by adding ESG funds. Nothing wrong with that, insofar as it goes – clearly, the most important social good of a 401(k) plan is to build retirement savings for participants.
But the proposed rule doesn’t recognize that the current generation of socially-conscious funds can deliver top-notch performance along with a dose of social progress.
The new rule is in proposal form, but it is on a fast track – most likely because the administration would like to finalize it before the end of President Trump’s term. They’re going to get plenty of comments and pushback, so in all likelihood a battle is about to be joined about the future of social investing in 401(k) plans.
Joining me on the podcast this week to talk about all this is Aron Szapiro. Aron is the director of policy research for Morningstar. Before joining Morningstar, he worked on retirement and pension policy issues as a senior analyst for the U.S. Government Accountability Office.