Bloomberg Law
Dec. 7, 2022, 10:15 AM

Want ESG in Your 401(k) Plan? Labor Regulators Left You Options

Austin R. Ramsey
Austin R. Ramsey

A do-good retirement investing rule set to take effect in January will allow employers to consider “participants’ preferences” in selecting and monitoring 401(k) menu options, a first for the heavily regulated private-sector investment selection process.

The final environmental, social, and corporate governance investing rule published last week struck a largely conciliatory tone by eliminating what some retirement plan practitioners feared would become a mandate forcing ESG considerations.

The agency’s new version of the rule largely reiterates the long-held principles that the economic interests of plan participants and beneficiaries are paramount. A retirement plan decision-maker held to a strict fiduciary standard of care has a duty of prudence and loyalty to consider the financial well-being of the plan’s investors and their nest eggs, the rule states.

By including a participant-choice provision, however, the Biden administration leaves the door open for employers to squeeze in auxiliary interests such as a heavier focus on ESG factors when designing a retirement plan menu best suited for their workers and retirees. The provision risks establishing a precedent for cryptocurrency and private-equity retirement investments that Biden’s DOL has discouraged.

“The rule is pretty neutral on ESG investing until it contemplates this idea that participant interest could be a relevant factor,” said Elizabeth Goldberg, a partner at Morgan, Lewis & Bockius LLP in Pittsburgh. “That seems to undermine the neutrality the department emphasizes in the rule up to that point.”

Participant-Driven ESG

The DOL’s added language suggests that participant preferences “can be relevant to furthering the purposes of the plan,” but it could also drive home the Biden administration’s overarching interest in green investment options.

A recent T. Rowe Price Group Inc. study showed younger workers were more likely to base their level of participation in a workplace retirement plan on access to socially conscious investment options. About a quarter of total survey respondents said they were willing to prioritize ESG principles over investment performance, but those numbers were especially high for Generation Z plan participants at 35% and Millennials at 29%.

The success of a retirement plan itself can sometimes hinge on participant choice, said T. Rowe Price Vice President and Managing Counsel Margaret Raymond in a letter to the department last year.

“Participants will not use their voluntary participant-directed savings plans to save for retirement, or will leave those plans earlier, if they cannot get access to investment choices they find attractive,” Raymond wrote.

Regulators say they included the additional language to clear up what they characterized as a misunderstanding in the proposed version of their ESG rule first published last year. The Trump version that the Biden Labor Department sought to overturn had a “chilling effect” on ESG consideration in retirement plans, but it permitted investment funds that met “non-pecuniary goals” so long as investment managers sought pecuniary (or financial) interests.

“If accommodating participants’ preferences will lead to greater participation and higher deferral rates, then it could lead to greater retirement security,” the final Biden rule states.

By that logic, the Labor Department is banking on the growing interest around ESG-friendly retirement investment options to increase their uptake in workplace retirement plans without going so far as to mandate ESG consideration, said Josh Lichtenstein, a partner at Ropes & Gray LLP in New York.

“If you have a workforce that is asking for ESG investment options, this rule makes clear that a fiduciary can consider that when constructing a 401(k) investment menu,” he said.

Crypto Incorporation

Participant preferences in 401(k) plans go beyond just ESG considerations, however, and could include investment options the Biden administration has viewed less favorably.

This time last year, the Labor Department issued subregulatory guidance warning retirement plans of the dangers associated with private equity investments—especially for plan participants and beneficiaries unaware of or inexperienced with the risks associated with off-market options.

Three months later, DOL’s Employee Benefits Security Administration issued a scathing rebuke of cryptocurrency investments, saying retirement plan fiduciaries could face an “investigative program” if they included digital tokens in their 401(k) plan lineups. Since then, the agency has gone head-to-head with Fidelity Investments Inc. and ForUsAll Inc., two recordkeepers that have launched platforms that allow crypto-investments in 401(k)s.

Cryptocurrency investments have become a popular option, especially for younger investors, some of whom may be willing to ditch their 401(k)s to access tax-advantaged digital currency options.

But unlike its pro-ESG investing stance, the department won’t want its “participant preference” language to encourage that kind of investor behavior, said Lichtenstein.

Despite the ESG final rule’s endorsement of participant preference, the department also included an important rider that could stem the tide of crypto or private-equity 401(k) menus driven by participant requests: financial materiality.

The new rule is built on the underlying principle that do-good investment options are permissible because they are often financially material. Like the Trump rule, a fiduciary’s loyalty to plan participants still rests on the performance of the funds they’re invested in.

“The emphasis is still on investment metrics,” said Alex Ryan, a partner at Willkie Farr & Gallagher LLP in Washington, D.C. “What the DOL is signaling here is that there’s no reason to put ESG under a special microscope, and, in fact, that climate change and other ESG-related factors can have a significant economic impact on the investment analysis.”

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

To contact the editor responsible for this story: Rebekah Mintzer at