Proposed legislation making its way through Congress could limit the types of investments employer-sponsored retirement plans can offer. Republicans in the House of Representatives submitted four bills that would reverse a rule permitting retirement plan fiduciaries from including environmental, social and governance (ESG) considerations when selecting investments for plan participants.
Do you have questions about the pros, cons and other considerations surrounding ESG investing? Speak with a financial advisor today.
The proposals, the latest in a series of conservative political efforts to limit ESG investing, have advanced from committees and can now be voted on by the full House. However, chances of the bills actually being enacted are uncertain, given Democrat control of the Senate and President Biden’s previous veto of similar anti-ESG initiatives.
Motivation Behind the Proposals
ESG investing considers a company’s impact on the environment, its treatment of employees and customers and governance practices alongside financial factors when making investment decisions. The strategy has become controversial, as critics say the core concept is not well defined, consistent metrics don’t exist and, most contentiously, advocates use it to enforce liberal political agendas.
Former President Trump acted to restrict the use of ESG considerations by fiduciaries who oversee retirement plans governed by the Employee Retirement Income Security Act (ERISA). This 1974 federal law sets standards for employer-sponsored retirement and health plans and empowers the Department of Labor to enforce them.
In November 2022, a Biden administration rule overturned the Trump-era restrictions and allowed ERISA plan fiduciaries to consider financially material ESG factors when selecting investments. The Labor Department has clarified that the rule permits, but does not require, consideration of ESG factors and still requires financial concerns to be paramount.
However, Republican legislators view this as enabling fiduciaries to prioritize political goals over participants’ financial interests. A statement from the members of Congress who introduced the four bills said they would amend “the Employee Retirement Income Security Act of 1974 (ERISA) to ensure financial institutions are focused on maximizing returns in retirement plans rather than on woke environmental, social, and corporate governance (ESG) factors.”
In September 2023, the proposals advanced out of the committee stage after following strict party-line votes. Assuming approval by the Republican-controlled House, before becoming law the bills must pass the Democrat-controlled Senate and then be signed by President Biden. This is unlikely, since Biden vetoed a previous anti-ESG measure that made it through the Senate and could do so again if it comes to that.
How the Proposals Could Limit ESG Investing
The four bills take different approaches to restricting ESG investing. They are as follows:
- Roll back ESG to Increase Retirement Earnings (RETIRE) Act would require fiduciaries to select investments based solely on pecuniary or financial factors rather than ESG criteria. Investment managers could only consider ESG factors if they were unable to distinguish options based on financial merits alone. The bill also prohibits any ESG vehicles from being included in target-date funds offered as default investment selections for plan participants.
- The Retirement Proxy Protection Act mandates that proxy votes align with financial interests. This could limit voting on shareholder proposals addressing ESG issues like climate change or diversity.
- The No Discrimination in My Benefits Act prohibits plans from selecting service providers based on race, color, religion, sex or national origin. This may block retirement plans from considering minority- and women-owned firms as investment managers and other plan service providers.
- The Providing Complete Information to Retirement Investors Act would require defined contribution plans to notify plan participants about the differences between “choosing from investments selected by ERISA fiduciaries and choosing from investments through a brokerage window.”
Potential Impact on Retirement Savers
The proposals could reduce exposure to ESG strategies, limiting options for savers who prefer aligning their retirement portfolios with their values. Another effect would be to decrease access to investments incorporating ESG criteria that data and research suggest can enhance returns and mitigate risks. Fiduciaries would have a high bar for including these vehicles.
If the bills are eventually signed into law, savers may also see fewer climate change risk management strategies as well. This could leave portfolios vulnerable if carbon-intensive assets pose material financial risks.
The bills could most affect participants less engaged with investing decisions. That’s because plans could no longer offer default target-date funds that follow ESG approaches.
What You Can Do
If you want your retirement savings aligned with ESG principles, the proposals underscore the importance of being an active, engaged investor. In light of continuing efforts to block retirement plans from considering ESG, you may want to consider the following steps:
- Review your plan’s investment lineup and identify ESG options. Understanding current offerings can inform future decisions if the legislative landscape shifts.
- Voice your preferences to your employer and plan administrator to demonstrate your interest in ESG choices.
- Contribute to a Roth IRA on the side. IRAs offer flexibility to invest in line with your values outside workplace plans. To date, no political movement has arisen seeking to block individuals from considering ESG when making investment decisions.
A series of bills proposed by Republicans aim to curb ESG investing in employer retirement plans by requiring a focus on financial returns over other goals. While the legislation is unlikely to pass the Democratic-controlled Senate, the measures could reduce ESG options and shareholder advocacy through plans. Savers who favor these strategies may need to look beyond work plans or become more proactive investors.
Retirement Investing Tips
- Talk to a financial advisor about steps you can take to invest your nest egg in line with your principles. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- SmartAsset’s retirement calculator can help you estimate how much you’ll need to retire and how much income your nest egg may generate.
- Get retirement planning and investing tips Tuesday through Friday with the SmartMoney Minute newsletter. It’s 100% free and you can unsubscribe at any time. Sign up today.
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