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Congress Votes to Ban This Investment From Your 401(k): Here’s Where You Can Still Find It


ESG investing is a big trend. Citigroup is doing it. JP Morgan is doing it. Deutsche Bank is doing it. But a faction in Congress wants to make sure your retirement plan can’t do it.

ESG investing stands for Environmental, Social and Governance, a set of standards designed to foster a new approach to socially conscious investing in an era of global climate change and emerging standards of diversity, inclusion and equality. The movement has run afoul of fossil fuel interests and others claiming that so-called “woke” principles might hamper short-term investment returns.

For help managing your own investments, including how to use ESG standards, consider working with a financial advisor.

New ESG Law Proposal

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Those opponents include Senate Republicans who were joined on Feb. 28 by Democrats Jon Tester of Montana and Joe Manchin III of West Virginia to back a measure that would block a rule from the Labor Department that would allow managers of retirement plans to consider climate and social considerations in their investment choices. The House passed a similar measure largely along party lines. The Biden administration had created the rule to counter a 2020 Trump administration measure barring pension and retirement managers from considering ESG factors.

“The Biden administration wants retirement plan managers to invest people’s retirement funds based not on the best return for the money — nope — based on woke ideology,” Wyoming Republican Senator John Barrasso said the day after the vote.

Fund managers, however, have embraced the ESG concept. BlackRock operates 20 of the top 100 ESG funds, followed by DWS Group with 11 funds and Parnassus Investments with three funds. Leading funds include the Vanguard FTSE Social Index Fund (VFTAX), which is down 11.77% for the past 12 months; the iShares MSCI USA ESG Select ETF (SUSA), down 7.5%; and the Parnassus Core Equity Investor (PRBLX), down 16.5%. For comparison, the Standard & Poor’s 500 index (SPX) is down 7.59% for the past 12 years.

An analysis of ESG investing by Charles Schwab reports that, “Over the long term, ESG approaches have tended to perform very similarly to non-ESG approaches, and with similar levels of volatility.”

The Current ESG Rule

The Labor Department rule that is the focus of the measure doesn’t require investment managers to make any ESG considerations when making investment decisions but simply allows managers to make the choice on their own, whereas the earlier Trump administration rule, “Reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end,” according to then-Labor Secretary Eugene Scalia.

>Between 2020 and 2021, investments in ESG mutual and exchange-traded funds increased by 33%, to a record $400 billion, according to Barron’s. An analysis by Deloitte estimated that ESG investments could hit $34.5 trillion by 2025, or about half of all managed assets in the U.S.

With the House and Senate action, the measure now heads to the White House, where President Joe Biden has said he intends to veto the bill, which doesn’t have enough support to override a veto. It would be the first veto of Biden’s term.

A White House statement defending the Labor Department ESG allowance said, “The rule reflects what successful marketplace investors already know — there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies.”

The Bottom Line

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The Biden administration’s Labor Department created a rule allowing retirement plan managers to use ESG standards when making investment choices. Senate Republicans, joined by a few Democrats, recently passed a bill nixing this rule. The House has passed a similar bill, but President Biden has said he will veto the bill — and there is not enough support to override the veto.

Investment Tips

  • A financial advisor can help you build your own investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you have access to a 401(k), make sure you’re using it — and taking advantage of any employer match available to you.

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