NAPA Net - Polling Places 120222

What's Your Take on the New ESG Regulation?

Just ahead of the Thanksgiving holiday, the Labor Department issued its final regulation on environmental, governance and social issues with regard to investments in defined contribution plans. The bottom line is that the new position allows “plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.” The operative word for plan fiduciaries is MAY, not must consider ESG factors—a concern that had arisen in the wake of the proposed regulation previously issued.

The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” specifically and pointedly sets aside the “pecuniary-only” standard at the center of the regulation set out in the waning days of the Trump Administration—a standard that Assistant Secretary of Labor Lisa Gomez said had had a “chilling effect” on plan investment decisions, even when those considerations were deemed to be in the best interests of participants and beneficiaries—causing them to miss out on opportunities, and failing to guard against risks.

Now – that’s likely not the end of the matter. Concerns remain around the definition of ESG, and its specific application for these purposes, benchmarks remain – well, fluid – and after a period where the returns on these type investments looked pretty favorable, they – like pretty much everything else in the markets – have fallen on hard(er) times.

Still – the Labor Department has arguably provided some new clarity, if not new direction[i] on these considerations – and while we’ve asked several times in the past how you’re feeling about ESG, with a new (and different) regulation in sight – well, we’re curious how, if at all, it may have changed your thinking?

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* 1. What's your current take on the suitability of ESG options on a defined contribution/401(k) plan menu (please only pick one)?

I'm open to the idea, but not really committed.

I'm completely on board!

I've got my doubts.

I think it makes sense as a consideration, but not a controlling consideration.

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* 2. Quick take on the new ESG regulation?

I didn't have a problem with a pecuniary standard.

Haven't read it yet.

Well, it's better than their proposed rule.

I wish they would have been kept the emphasis on ESG that was in the proposed regulation.

They nailed it!

comments?

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* 3. It's early yet, but - generally speaking - what effect do you think the DOL's new ESG regulation will have on DC plan adoption of ESG options?

It may encourage those already inclined, but I don't see much movement.

It may encourage those already inclined to add those options.

It will encourage those who have already adopted those options.

I don't see it having any impact at all.

It may actually discourage some from adopting those options.

comments?

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* 4. Will you be talking about ESG and the new regulation in your quarterly plan sponsor meetings?

Yes.

No.

With some clients, not with all.

With most clients.

With a few clients.

Not sure yet.

comments?

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* 5. In that new ESG regulation there's a provision that “clarifies” that fiduciaries “do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, as suggested by commenters, then it could lead to greater retirement security." Do you think this will matter in terms of adoption?

It may encourage those already inclined, but I don't see much movement.

It may encourage those already inclined to add those options.

It will encourage those who have already adopted those options.

I don't see it having any impact at all.

It may actually discourage some from adopting those options.

comments?

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* 6. Other comments about ESG, your feelings about ESG, plan sponsor perspectives on ESG, the impact of the Trump Administration's proposed (and then final) rule on ESG adoption, the Biden Administration basically moving to undo the Trump Administration's actions, the enthusiasm (or lack thereof) among participants for the option, the amount of action versus interest in the alternative, the recent pushback by some state agencies on ESG factors, or life in general?

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* 7. What is your role working with retirement plans?

Advisor

Provider

TPA

Plan sponsor

Recordkeeper

Wholesaler

Consultant

Other (please specify)

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* 8. What size plans do you PRIMARILY work with?

Under $10 million in assets

$10-$20 million

$20-$50 million

$50-100 million

$100 million - $250 million

$250 million - $500 million

Above $500 million

Other (please specify)

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* 9. Suggestions for future survey questions? Seriously - what would you like to know about/from your fellow NAPA-Net readers? Or what would you like to be asked?

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* 10. All responses are confidential, of course - but just in case you would like a response - or want me to know you responded - or just want to say hi - here's your chance to do so (don't forget your email)!