The US Department of Labor’s Employee Benefits Security Administration (EBSA) handles the enforcement of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA states that 401(k) investments made by employers must be made in the best interest of the participants in the retirement plan.
On April 23, 2018, the EBSA released a bulletin commenting on including ESG funds as an investment option for 401(k) retirement accounts. ESG funds are funds that make fund investment decisions based on environmental, social, and governance factors. This kind of fund has increased in popularity recently, with a 60% growth in 2017.
Currently, only 2.4% of 401(k) plans offer ESG funds as an investment option. Still, the EBSA bulletin cautioned that American companies “must not too readily treat ESG factors as economically relevant.” The bulletin argued that ESG factors should not be considered an indicator that an investment is a good financial choice for a company.
In the past, the Labor Department has said that employers must not put social goals ahead of financial goals in making their 401(k) investments. This new bulletin furthers that notion by saying that absent clear financial value, mission-driven social and environmental goals should not be a driver in investment decisions. “ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.” A company's compliance with ERISA would come into question if an employer were to choose an ESG fund without sufficiently comparing its financial viability against competing options.
The full bulletin can be found here.