The US government is developing retirement plan regulations that take ESG into account


Retirement and ESG
Retirement and ESG 

I- Employees Are Now Allowed To Place Their Retirement Savings in ESG-Compatible Investments

Charlie Nelson, Voya Financial’s chief growth officer, believes the company’s menu design will help them attract competitive candidates. Many younger people seek ESG-informed retirement options.

Since climate change impacts business profitability, investing in environmental sustainability is a positive thing.

This is what the new rules make easier, according to Ceres. It's easy to build a portfolio with ESG investments— plus more than ever.

This is because you have many ESG investment options.

And how to build your portfolio. A Morgan Stanley Institute for Sustainable Investing white paper from 2019 concluded that the performance of mutual funds and exchange-traded funds was nearly the same as traditional funds from 2004 to 2018.

Both types of funds invest in sustainable stocks and bonds.

Other studies have shown that ESG investing outperforms traditional methods.

II- Employees Have The Option To Receive a Financial Benefit If Their Retirement Plan Investments Do Not Satisfy Certain ESG Criteria

Rules from the Labor Department have added ESG funds to the list of considerations for retirement account fiduciaries.

Regardless of the requirement, a program trustee must still adhere to ERISA's core standards.

They must consider the risk-reward factors that determine key decisions.

Plan trustees can't increase investment risk or decrease investment returns without the benefit of the plan.

Confirming that the rule reversal was needed in line with pension plan participants, the Schroeder 2022 Survey of American Retirement noted American pensioners’ desires.

If participants in a defined contribution plan don't have ESG investments available to them or don't know if ESG investments are available, 74% say they could increase their taxable contributions by choosing to use ESG options.

More than 401,000 member of the plan chose ESG investment options when offered.

Over nine out of every ten members chose to invest in these options.

New rules being considered by the U.S. Department of Labor would significantly alter how investments are made.

Currently, investment decisions made by fiduciaries are based on multiple factors related to retirement income and financial well-being.

Some of these rules would be changed in order to help fiduciaries make clearer ESG-related investment decisions.

This change would be appropriate since fiduciaries already have no discretion in choosing investments unrelated to these factors.

Furthermore, ERISA mandates that fiduciaries invest in prudence and fidelity when making investments on behalf of their clients— which would not be possible if they were allowed to choose investments based on non-ESG factors.

Since ESG funds are treated as a separate asset class, there's no need for trustees to create a "safe haven" for ESG investment and funding sources.

They can simply add these funds to other 401(k) or 403(b) funds for additional coverage.

When investing with the benefit of hindsight, trustees run the risk of making investments that incorporate ESG principles if they underperform.

III- The Department Of Labor Establishes Guidelines For The Consideration Of Environmental, Social And Governance (ESG) Factors In Retirement Plan Investments

The US Department of Labor reversed a Trump-era rule on Wednesday that restricted trustees from considering environmental, social and governance factors when making investment choices.

This was due to the fact that Trump officials had considered these factors to be too much of a risk.

The new rule is considered final and was put in place by the Labor department.

It allows trustees to consider climate change in their selection process. The Department of Labor, or DOL, published a final rule on November 22 regarding the way pension plan trustees must consider environmental, social and governance, or ESG, factors when making investment decisions.

This was needed to better align with ESG ideas. ESG, or environmental, social and governance factors, are used by plan trustees to protect American employees.

The Department of Labor proposed this rule in October 2021. This means that trustees can consider ESF in their investment and voting decisions.

They can also protect workers' rights through the exercise of their savings rights, including the right to vote on shareholder resolutions and nominate trustees for new board positions.

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