Biden used first veto to save a 401(k) investment rule. Here's what it does

Photographer: Samuel Corum/Bloomberg via Getty Images

President Joe Biden used his first veto to preserve a recent U.S. Department of Labor rule about investment choice in 401(k) and other workplace retirement plans.

The regulation, which took effect in January, applies to so-called "environmental, social and governance" funds.

These ESG investments — also known as sustainable or impact funds — come in a variety of flavors. Fund managers might funnel money into green-energy firms or companies with diverse corporate boards, for example.

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The Biden administration rule unwound a regulation issued by the Trump administration, which effectively barred employers from selecting ESG funds for their company 401(k) plans, experts said.

"The simplest way to describe [the Biden rule]: It took a Trump-era rule that said 'You shall not have ESG' and said 'You may have ESG,'" said Will Hansen, chief government affairs officer at the American Retirement Association and executive director of the Plan Sponsor Council of America, a trade group for employers.

Biden veto preserves Labor Department's ESG rule

The [Biden] rule doesn't force you to consider ESG. It says 'you may' do that.
Philip Chao
chief investment officer of Experiential Wealth

Employers serve as a fiduciary to their company 401(k) plans under the Employee Retirement Income Security Act of 1974.

Broadly, that fiduciary duty means they must operate the plan — including investment choice — solely in workers' best interests. Under the Biden rule, employers must still consider ESG within the context of what is in investors' best interests.

The Labor Department in November clarified that employers wouldn't breach their legal duties by considering workers' non-financial preferences in their final fund choice. Accommodating those preferences might encourage more plan participation and boost retirement security, for example, the agency said.

"The [Biden] rule doesn't force you to consider ESG," Chao said. "It says 'you may' do that."

The veto may not change behavior much


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