Bloomberg Law
Nov. 28, 2022, 9:45 AM

Biden’s Climate-Friendly 401(k) Rule Unties Hands on Wall Street

Austin R. Ramsey
Austin R. Ramsey

Workplace retirement plan asset managers stand to gain more regulatory freedom under the Biden administration’s new approach to 401(k) climate change investing, even though the regulation’s immediate effects on actual plan offerings may be less dramatic.

A new US Labor Department rule announced last week will let employers consider environmental, social, and corporate governance factors when choosing and monitoring the investments their workers use to save for retirement.

Wall Street asset managers such as Vanguard Group Inc. and BlackRock Inc. for years have been integrating ESG criteria into their institutional and retail investing wings. They can now level the playing field by treating all their accounts the same when it comes to ESG, without carving out special conditions for retirement plan customers.

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“To the extent this rule gives retirement plans an ESG green light, it gives asset managers more of a green light,” said Elizabeth Goldberg, a partner at Morgan, Lewis & Bockius LLP.

Asset managers don’t face the same legal pressures as their retirement plan clientele because they don’t act as fiduciaries to the plans they serve, which carry this burden under the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406).

For 401(k) investors, this means the fallout of the new rule will likely translate into status quo retirement plan investment options on the surface but a gradual realignment for the kinds of underlying stocks and bonds that comprise those funds.

Let Loose

Outside the retirement industry, the fight over ESG investing ended years ago, and “woke” investing won, said Ethan Powell, CEO of Impact Shares Corp., an exchange-traded fund provider that tracks companies’ performance on racial equity, women’s empowerment, sustainable global development, and minority housing initiatives.

Knowing their clients faced regulatory uncertainty, however, asset managers have historically treated their retirement businesses differently, under-emphasizing ESG-specific criteria and burying blatantly climate-friendly securities.

With one of several mitigating factors out of the way, asset managers can let loose a bit, said Michael Kreps, a principal and co-chair of the retirement services practice at Groom Law Group Chartered in Washington.

“Think of funds that aren’t specifically ESG-branded but, without a doubt, managers are taking into account ESG factors,” he said.

That’s the most likely outcome of the Labor Department’s rule, according to benefits attorneys—a behind-the-scenes messaging campaign that emphasizes new and improved mutual funds and ETFs that appear unchanged to participants, as well as potential plaintiffs.

This saves cash for money managers who may not have to segregate their retirement accounts in the same way, and it introduces exposure to untapped areas of the market for retirement participants who have been left out of the green investing wave.

Read More Practical Tips for Plan Sponsors and ESG Investments

But not everyone in the retirement industry has been keen on broad changes to ESG investment frameworks.

Plan sponsors that were initially concerned the administration’s ESG rule amounted to a mandate were reassured when the pared-down final rule last week struck a more neutral tone, said Andy Banducci, senior vice president of retirement and compensation policy at the ERISA Industry Committee.

Republican opposition to the final rule remains, which could spell more regulatory wavering on the horizon.

Rep. Virginia Foxx (R-N.C.), ranking member of the House Education and Labor Committee, said in a statement with Rep. Rick Allen (R-Ga.) that the final ESG rule “jeopardizes” retirement savers’ financial security.

“The Biden administration is choosing its climate and social agenda over retirees and workers. This is bad news,” the statement said.

Other Pressures

The DOL’s rule takes one pressure off retirement plan sponsors considering ESG investing, but there are other causes for concern.

US retirement plans have been cowering under a growing mountain of participant-driven lawsuits that take aim at investments employers offer their workers in 401(k)s. Hundreds of suits since 2020 have challenged employers for failing to rein in the excessive fees participants and beneficiaries pay. Newer cases call into question less-than-optimal returns on “safer” investment options that charge below-market fees.

Meanwhile, state governments are cracking down on ESG-specific investing in public pension plans. Although those accounts don’t fall under the Department of Labor’s jurisdiction, private-sector retirement plans already spooked by the threat of litigation are fearful they could be next.

With that in mind, a green light on green investing from Labor regulators will only do so much to calm the nerves of jittery workplace 401(k) plan sponsors, said Kreps.

“Plan sponsor fiduciary behavior is driven by what they believe to be the lowest risk—what is prudent and what will keep them out of litigation,” Kreps said. “Those are the driving concerns. The DOL’s views on the relevance of certain investment-related factors is certainly something they think about, but regulators aren’t the driver of which investments are chosen and which are not.”

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editors responsible for this story: Rebekah Mintzer at; Martha Mueller Neff at

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