As US Awaits Biden Veto to Keep ESG Rule, Advisers Shrug

Much ink has been spilled over legislation to overturn a DOL rule that allows ESG investing in retirement plans. Plan advisers say that no matter what happens, they will stick to current operations.


It’s the environmental, social and governance retirement investing rule that is shaking the political world. Legal teams are
filing lawsuits. Editorial boards are opining. TikTok videos are being posted.

In the meantime, many of the practitioners at whom the Department of Labor’s rule that allows ESG in retirement plans is largely directed—that is, plan fiduciaries—say the outcome won’t change their daily workflow.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

“As far as what’s happening in Congress, I would say, candidly, that it’s a political football,” says Steven Kaczynski, a senior financial adviser and managing director of fiduciary plan solutions with Pittsburgh-based DBR & Co. “If you are following a prudent process for monitoring investments, the process is the important thing. What informs you is risk and return and risk-adjusted performance.”

Last week, the U.S. Senate followed the House of Representatives in approving a resolution that overturns a DOL rule paving the way for the consideration, but not the requirement, of ESG factors in retirement plan investing. The resolution now sits with President Joe Biden, who has been clear that he will use his administration’s first veto on the act to keep the rule in place.

Retirement plan fiduciary Kaczynski says his firm includes an update on the DOL’s rule in every client update. It generally goes toward the same end: If a plan sponsor wants ESG-focused funds, his firm can advise on prudent options that meet the investment policy statement criteria. If the plan is not interested, ESG factors will not be considered.

“It’s something that we would refer to as a rather friendly rule for fiduciaries,” he says.

Jim Sampson, the national practice leader at Hilb Group Retirement Services, says ESG does not come up much with his clients, who are generally plan sponsors with $10M in assets or smaller. It isn’t that Sampson doesn’t follow the ESG debate or take a stance. It’s just that, in practice, whether the DOL rule stays, goes or even flips back to the President Donald Trump-era guidance that plan fiduciaries should focus on “pecuniary” factors only, it won’t change his Boston-based firm’s fiduciary approach.

We take the mindset that we’re trying to have people invest in funds that make money,” Sampson says. “If they happen to have a good intention along the way, that’s great. I just don’t have a dog in the fight.” 

For Whom the Pendulum Swings

Kevin Takinen, a 401(k) and financial wellbeing manager at Sequoia, says his firm gives regular updates to clients on the ESG rule and advises on which way regulation is moving.

“It is a conversation that comes up regularly with our clients,” Takinen says. “They want to know, ‘where is this pendulum going to land?’ It swings one way, then the other with various presidential administrations. Clients want to be ready to take action, but action that is aligned with regulation.”

Takinen says the lack of regulatory clarity over the past six years or so is why it’s so important to have an adviser guiding a plan’s ESG investing decisions. Even if that advice, to date, has remained about the same.

“Because of the constant fluctuations, they [plan fiduciaries] have held steady,” he says. “If we are going to add in a fund that has an ESG mandate, let’s make sure it meets everything else that might be one of the factors in the plan’s investment policy statement; it’s got to meet everything else in the IPS so that remains tried and true in all situations.”

The back-and-forth has made some clients more conservative in their approach to ESG funds, says Takinen, who works out of Phoenix for the San Francisco-based Sequoia, which has over $9.1 billion in assets under advisement for over 550 clients.

“A lot of times you talk with clients, they prefer to take the more conservative approach because they don’t want to run afoul of litigation or regulation,” he says. “That pendulum is there; they want to make sure they are in line with the ruling.”

Hold the ESG

Kaczynski of DBR & Co. notes that flip-flopping, while not a concern for plan sponsors, may be having a chilling effect on ESG factor’s influence, at least for individual participants.

“We are now seeing the occasional participant or private client saying something like, ‘Do I have any ESG investment? No, I don’t? Good. I wanted to make sure I wasn’t involved in that—I don’t want that in my retirement plan.’”

When it comes to larger plan sponsors, Kaczynski said the results of the current political scuffle likely will not result in any action one way or the other, barring a drastic rule change mandating or otherwise calling off ESG investing.

“In the short term, I don’t think our clients will worry about it,” he says. “The vast majority of the time, ESG is not on the forefront of our clients’ minds, nor is it something that they are formalizing as a criteria when they monitor investments.”

«