Biden proposal makes it easier to green your 401(K)
Climate friendly 401(k) options may be coming your way! Learn more about how Biden’s proposed changes to 401(k) and 403(b) plan requirements will allow you to use your retirement savings for positive environmental and social impact.
By Asiyah Choudry
Last Updated: March 21, 2023
Originally Published: November 30, 2021
Update: March 2023
At the end of 2022, the Department of Labor (DOL) passed the proposed rule allowing retirement plan fiduciaries to consider environmental and social impact factors when selecting retirement investments. The rule was set to take effect on January 30, 2023. However, on March 1, 2023, the US Senate passed a resolution (H.J. Res. 30) blocking the recent ruling. Opposition to the ruling is part of broader resistance by some political factions to consideration of ESG factors in investment decisions.
On March 20, 2023, President Biden vetoed the Senate resolution, as promised. Opposition to the rule in Congress is unlikely to receive the two-thirds vote required to overturn the veto. The now probable passing of the DOL ESG rule will enable fiduciaries to consider the full range of risks facing retirement options, including climate-related financial risk.
Original publication: November 2021
How does my 401(k) affect the environment?
Your 401(k) holdings may include some of the largest polluters. In 2018, 106 million Americans contributed to employer-sponsored retirement plans, with a total value exceeding $6 trillion. However, a lack of sustainable offerings from asset managers, coupled with regulatory restrictions have made it difficult for employers to provide their employees with sustainable funds as a retirement option.
According to the Plan Sponsor Council of America, in 2019, only 3% of 401(k) plans included an ESG option. If you are unfamiliar with ESG investing, it is an investment strategy that uses environmental, social, and governance information in addition to traditional financial metrics, to screen investments. Learn more about the differences between ESG and impact investing here.
The Financial Industry Regulatory Authority reports that mutual funds are the most common investment offered in a 401(k). The holdings of a mutual fund are at the discretion of the fund manager and often include a wide range of companies, including those which invest heavily in fossil fuels. To date, climate-conscious investors haven’t had the option of divesting their retirement savings from funds whose holdings don’t align with their values.
The current regulatory environment
In 2020, the Trump administration adopted amendments to the Employee Retirement Income Security Act of 1974 (ERISA), which imposed restrictions on the types of retirement plans that employers could offer. These amendments mandated the following:
- Plan sponsors must select 401(k) and 403(b) offerings using financial factors only.
- Qualified default investment alternatives may not include funds which integrate non-financial considerations into their investment strategy.
While the regulation still allows plan sponsors to offer ESG or sustainable 401(k) options, the decision must be based solely on material economic considerations that affect the risk and return profile of the investment. In the past, the Department of Labor has suggested that plan sponsors should not “too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision”.
This messaging has led to a lack of clarity among stakeholders who are not sure about the extent to which climate risk can be viewed as economically material when considering an investment for inclusion in a 401(k).
In March 2021, in response to stakeholder concerns, the Department of Labor decided to implement a non-enforcement policy, ceasing to pursue action against plan sponsors who failed to comply with these requirements.
Biden’s Proposal
In October, the Biden administration proposed amendments to ERISA, which would reverse the 2020 changes. The amendments to the regulation are designed to provide greater clarity to stakeholders and include:
- The recognition that environmental, social, and governance factors are economically relevant considerations in the assessment of an investment’s risk level and return.
- The lifting of restrictions on qualified default investment alternatives to include financially prudent funds which consider climate risk and ESG.
The proposal states that an evaluation of the projected return of an investment for a 401(k) “may require an evaluation of the economic effects of climate change” in certain cases. The underlying motive behind these amendments is the idea that the evaluation of climate risk factors (e.g. dependence on fossil fuels) is financially relevant and can affect the economic performance of an organization, with the potential to drive strong financial returns in the long-term. If Biden’s proposal is adopted, it is anticipated that a greater number of retirement plans will begin to offer climate risk conscious options.
The proposal is open for comment until December 13, 2021, with a final decision expected by early 2022.
Why is this a good thing?
1. Align your 401(k) with your values
If your employer already offers retirement options that include sustainable funds, they provide a great way for you to align your 401(k) with your values. If you’re passionate about addressing climate change, sustainable 401(k) plans allow you to take control over the impact of your retirement savings by investing in organizations which support a healthier, more sustainable vision for our planet. Employers interested in increasing their sustainability offerings in the workplace should check out our tips for doing so here.
2. Retirement plans should reflect the interests of the workforce
The fourth edition of the Sustainable Signals report from Morgan Stanley shows that millennial interest in sustainable investing has reached an all-time high of 99%. Since 2016, millennials have made up the majority of the US workforce, however retirement offerings haven’t catered to their interests. If Biden’s proposal passes, it will pave the way for employers to align their 401(k) offerings with the interests of their workforce.
3. You don’t have to compromise on financial returns
As more research into the performance of sustainable funds emerges, there is evidence to suggest that the consideration of environmental, social, and governance factors can lend itself to more resilient investments. However, since there is no singular standardized metric for assessing whether or not a firm has strong environmental performance, it is important to keep an eye out for greenwashing.
Take action
If your organization does not offer any sustainable retirement options, consider reaching out to your plan sponsor. If your employer knows that there is a demand for sustainable retirement options in your workplace, they’ll be more likely to offer them. You can also sign the petition developed by the Environmental Defense Fund to voice your support.
In the meantime, if you'd like to learn more about the environmental impact of your 401(k), our product is live! We’ve built a tool that evaluates the environmental risk profile and positive climate impact of your investments, bank accounts, and more. Sign up for your free account here.
Overall, Biden’s proposal has the potential to greatly improve the sustainability of your retirement savings! We look forward to the possibility of more sustainable retirement options in the near future. In the meantime, take a look at our list of our climate friendly financial products and learn more about how the rest of your portfolio can power a greener future!
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