Congressional opposition to 'neutral' ESG rule misguided, DOL official says

The political backlash to the Department of Labor's new rule permitting retirement plan fiduciaries to consider ESG factors when selecting investments and exercising shareholder rights distorts what the rule actually does, according to a senior Labor Department official.

"I think this is all very unfortunate," said Ali Khawar, principal deputy assistant secretary of the Labor Department's Employee Benefits Security Administration, at Pensions & Investments' Defined Contribution East Conference in Orlando on Monday. "It's unfortunate because there's a huge amount of misinformation out there about what the final rule actually did. The final rule is quite neutral. It does not mandate the consideration of ESG, it does not mandate that everyone has to buy Amazon rainforest property and make sure that they do everything to stem the cause of climate change or anything else. What it does is say that you have to be a prudent fiduciary."

The new rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — took effect Jan. 30 and allows ERISA fiduciaries to consider environmental, social and governance factors. It also maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.

Led by Republicans with help from a handful of Democrats, the House and Senate on Feb. 28 and March 1, respectively, approved a joint resolution under the Congressional Review Act to nullify the rule.

Sen. Mike Braun, R-Ind., who introduced the resolution in February, said at a March 1 press conference that the Labor Department rule jeopardizes retirement savings for millions of Americans for a political agenda.

Mr. Khawar said the rule simply allows fiduciaries to consider ESG factors as any other material consideration while maintaining a prudent fiduciary process. "I think it's really unfortunate because we should be encouraging fiduciaries, who have a really hard job, to do the best that they can, not to take risk factors off the table," he added.

President Joe Biden has promised to veto the resolution passed in Congress so the rule will remain in effect.

"The focus remains: What is the financial risk and return?" Mr. Khawar said. "And the question still is: How are you maximizing your risk-adjusted return for the participants and beneficiaries?"

While the efforts in Congress to overturn the rule will end with Mr. Biden's veto, the rule is also facing legal challenges, including one filed in January by Republican attorneys general from 25 states.

Separately, Mr. Khawar discussed EBSA's work in implementing key provisions under a bipartisan retirement security package known as SECURE 2.0 that was signed into law in December as part of a year-end spending bill.

SECURE 2.0 includes more than 90 provisions, but Mr. Khawar highlighted two provisions that focus on emergency savings and student loans.

On emergency savings, starting in 2024, SECURE 2.0 allows employers to offer participants an emergency savings account as part of their retirement plan. Participants can be automatically enrolled at up to 3% of their pay — with the ability to opt out — and after-tax contributions are capped at $2,500. Contributions to emergency savings accounts must be eligible for the same matching contributions that apply for elective deferrals, but the employer matching contributions are made to the retirement plan instead of the emergency savings account.

And on student loans, employers can make matching contributions to an employee's 401(k) plan, 403(b) plan or SIMPLE IRA based on qualified student loan payments beginning in 2024.

"One of the main reasons people don't save for retirement is they don't make enough money and have too many other obligations," Mr. Khawar said.

But the emergency savings and student loan provisions will allow more people to save more for retirement, he added.

"What are the ways we can think about the whole person that actually end up driving better retirement outcomes?" he said. "That's how I think about those two provisions and why they're so important."