The Biden administration will not apply the Trump era ESG rule for 401 (k) plans

The Biden government said on Wednesday that it will not apply a rule issued by the Trump administration that makes it more difficult to offer environmental, social and governance funds – or ESG – in 401 (k) plans.

ESG funds can, for example, invest in energy companies that are not dependent on fossil fuels or in companies that promote racial and gender diversity. Investors injected a record $ 51 billion in ESG funds last year.

The Trump era Labor Department rule, issued in 2020, does not explicitly call or completely prohibit ESG funds in 401 (k) plans.

But this can prevent weak acceptance by changing requirements for employers to select them as 401 (k) investments, according to experts.

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In fact, the rule has already had a frightening effect on its inclusion, even in circumstances where the rules explicitly allow its use, Biden’s Department of Labor said on Wednesday.

“In this sense, the Department intends to review the rules,” said the agency. Such action can lead to an eventual retreat or rewrite.

Until such guidance is issued, Biden’s work bureau will not enforce Trump-era rules, the Department said.

The views of Biden’s work bureau were guided by input from stakeholders such as asset managers, labor organizations, plan sponsors, consumer groups, service providers and investment advisers, the agency said.

The Trump era rule requires employers – who make decisions about 401 (k) investments – to consider only factors such as the risk and return of a fund (rather than characteristics such as a social or environmental asset) when choosing 401 funds (k). Otherwise, employers may request further legal scrutiny.

The Department of Labor has also explicitly banned employers from automatically enrolling workers in an ESG-focused fund. Automatic enrollment has become an increasingly popular way to encourage workers to invest in a 401 (k).

The labor bureau is revisiting the Trump era rule according to an executive order issued by Biden in January, entitled “Protecting Public Health and the Environment and Restoring Science to Address the Climate Crisis”.

This order directs federal agencies to review regulations issued between January 2017 and 2021 that “are or may be inconsistent with, or present obstacles to,” management policies on the environment and climate. In such cases, agencies may suspend, review or terminate the rules, according to the Ministry of Labor.