{"id":6858,"date":"2020-08-27T09:48:47","date_gmt":"2020-08-27T14:48:47","guid":{"rendered":"https:\/\/rixtrema.com\/blog\/?p=6858"},"modified":"2020-09-13T16:02:49","modified_gmt":"2020-09-13T21:02:49","slug":"how-the-dols-new-esg-rule-would-affect-retirement-advisors","status":"publish","type":"post","link":"https:\/\/rixtrema.com\/blog\/how-the-dols-new-esg-rule-would-affect-retirement-advisors\/","title":{"rendered":"How the DOL&#8217;s New ESG Rule Would Affect Retirement Advisors"},"content":{"rendered":"\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<ol class=\"wp-block-list\"><li><strong><a href=\"#aa1\">How ESG moves into the DOL\u2019s vision<\/a><\/strong><\/li><li><strong><a href=\"#aa2\">Will the DOL\u2019s ESG Rule scare fiduciaries?<\/a><\/strong><\/li><li><strong><a href=\"#aa3\">Generally bad for 401k accounts?<\/a><\/strong><\/li><li><strong><a href=\"#aa4\">Key Article Ideas<\/a><\/strong><\/li><\/ol>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">The Department of Labor is considering a regulation that would limit how environmental, social, and governance (ESG) investing can appear in retirement <a id=\"aa1\"><\/a>plans.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<h2 style=\"text-align: justify;\"><b>How ESG moves into the DOL\u2019s vision<\/b><\/h2>\n<p>\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Proponents of ESG investing see the DOL\u2019s ESG regulation as unnecessary scrutiny that could shudder ESG investing popularity. They argue that the DOL is assuming that ESG factors do not affect risk-adjusted-performance. Their argument is the opposite of what ESG investing intends to do &#8211; benefit from the material benefits of ESG factors and lead to higher investment performance.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">It has been a long and challenging road towards making the case that fiduciary duty should require some level of ESG investing in managing long-term market risks. The DOL\u2019s ESG rule would restrict fiduciaries from offering ESG investment options to their retirement participants. Under the <\/span><a href=\"https:\/\/www.dol.gov\/agencies\/ebsa\/laws-and-regulations\/rules-and-regulations\/public-comments\/1210-AB95\"><span style=\"font-weight: 400;\">rule<\/span><\/a><span style=\"font-weight: 400;\">, fiduciaries could not offer ESG investment options that:<\/span><\/p>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Increase fees;<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">decrease returns; or<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">increase risks for \u201cnonfinancial goals.\u201d<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">Plan advisors and sponsors would \u201cstill be able to consider <\/span><a href=\"https:\/\/www.wealthmanagement.com\/regulation-compliance\/majority-investment-industry-opposes-dol-s-esg-proposal\"><span style=\"font-weight: 400;\">ESG factors as tiebreakers<\/span><\/a><span style=\"font-weight: 400;\"> among equivalent alternative investments.\u201d Still, the rule restrictions do not seem to make sense for ESG investors. Ethically-motivated investors are often more than willing to bear slightly higher investment fees to meet their moral obligatio<a id=\"aa2\"><\/a>ns.<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<h2 style=\"text-align: justify;\"><b>Will the DOL\u2019s ESG Rule scare fiduciaries?<\/b><\/h2>\n<p>\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">The outpouring of obstinate advisors indicates that the DOL\u2019s ESG scrutiny would significantly impact the financial services industry, especially for retirement advisors. According to Morningstar, an overwhelming majority of comments on the DOL\u2019s proposed rule (95%) are opposed to the ESG focus. Most of the 8,700 comments were from individuals, but investment firms also opposed the rule. Time will tell whether these dissident comments will affect the rule, and an administration change would undoubtedly put the breaks on the ESG scrutiny.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">The DOL\u2019s simple increased focus on ESG investments may make them unattractive, already, as the most risk-averse advisors will steer clear of any ethical investments that may put attract attention from regulators. As <\/span><a href=\"https:\/\/rixtrema.com\/blog\/listen-to-the-experts-esg-industry-insights-and-advisor-advice-from-an-esg-rating-specialist-elgin-chou-of-act-analytics\/\"><span style=\"font-weight: 400;\">Yon and I learned on our ESG podcast<\/span><\/a><span style=\"font-weight: 400;\">, advisors often struggle to educate investors and retirement plan participants on how the material differences of ESG investing result in lower risk and higher returns than traditional financi<a id=\"aa3\"><\/a>ng.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<h2 style=\"text-align: justify;\"><b>Perhaps generally bad for 401k accounts?<\/b><\/h2>\n<p>\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">The fiduciary responsibility is especially crucial for 40k advisors. Suppose advisors are not willing to take the regulatory risk of providing 401k participants with a sustainable investment option (like an ESG alternative). In that case, ethical investor plan participants may seek to move their retirement savings to an IRA and independent financial advisor.\u00a0\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">This DOL rule change comes as ESG investing continues to grow despite the impact of COVID-19 on markets. American sustainable funds saw <\/span><a href=\"https:\/\/www.wealthmanagement.com\/etfs\/esg-funds-shine-during-pandemic\"><span style=\"font-weight: 400;\">record inflows during the first quarter<\/span><\/a><span style=\"font-weight: 400;\">, and multiple sustainable-investing and ESG-labeled funds are \u201c<\/span><a href=\"https:\/\/www.wealthmanagement.com\/etfs\/esg-funds-shine-during-pandemic\"><span style=\"font-weight: 400;\">navigating the downturn better<\/span><\/a><span style=\"font-weight: 400;\"> than their conventional counterparts.\u201d\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">ESG Fund leaders succeed because of lower volatility and higher profitability of their business models. The investment strategy\u2019s merits may not change with the DOL\u2019s ESG Rule, but retirement advisors may see their hands tied when helping ethical investor clients.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<p style=\"text-align: justify;\"><span style=\"font-weight: 400;\">RiXtrema\u2019s blog will continue to update you on regulatory, risk, and investing news to keep you informed for your clients and save you time sifting through dense regulatory information. <\/span><b>Join our Newsletter <\/b><span style=\"font-weight: 400;\">below to receive bi-monthly up<a id=\"aa4\"><\/a>dates.\u00a0<\/span><\/p>\n<p style=\"text-align: justify;\">\u00a0<\/p>\n<h2 style=\"text-align: justify;\"><b>Key Article Ideas:<\/b><\/h2>\n<p>\u00a0<\/p>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The Pandemic is creating a new interest in ESG investing as some funds outperform traditional alternatives.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The DOL\u2019s focus on ESG investing may make it difficult for fiduciaries to propose ESG options, especially if the investment:\u00a0<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Increases fees;<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">decreases returns; or<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">increases risks for \u201cnonfinancial goals.\u201d<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">A substantial negative response from advisors may\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">401k plans may see reduced participation as risk-averse, and ethically, investors switch to an IRA.\u00a0<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><br \/><br \/><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><a href=\"https:\/\/rixtrema.net\/larkspurexecutive\/landingpage?source=Colin-08-27-2020\" target=\"_blank\" rel=\"noopener noreferrer\"><img loading=\"lazy\" decoding=\"async\" width=\"700\" height=\"128\" src=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/07\/larkspur-rixtrema-pro-and-platinum.png\" alt=\"\" class=\"wp-image-6703\" srcset=\"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/07\/larkspur-rixtrema-pro-and-platinum.png 700w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/07\/larkspur-rixtrema-pro-and-platinum-300x55.png 300w, https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/07\/larkspur-rixtrema-pro-and-platinum-500x91.png 500w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>The Department of Labor is considering a regulation that would limit how environmental, social, and governance (ESG) investing can appear in retirement plans.\u00a0<\/p>\n","protected":false},"author":9,"featured_media":6859,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1509],"tags":[258,172,27],"class_list":["post-6858","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-esg-investing","tag-esg-investing","tag-retirement-plan-advisors","tag-rixtrema"],"jetpack_featured_media_url":"https:\/\/rixtrema.com\/blog\/wp-content\/uploads\/2020\/08\/How-the-DOLs-new-ESG-Rule-would-affect-retirement-advisors-min.png","yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v15.9.1 - 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