ESG has the DOL’s blessing: Here’s what can happen next

Target-date funds that are sustainable or responsible are fair game, but there aren't many of them

A landmark rule recently finalized by the Department of Labor gives retirement plans the green light to use ESG-themed target date funds – at least if they are ok with one of two products on the market.

That rule, published in November, overturns a DOL rule from the Trump administration that specifically forbade ESG considerations for the qualified default investment options in plans. Although the former rule did not outright ban ESG-themed investments within 401(k)s as standalone options, it was generally considered to have a chilling effect on their use.

The new rule does not require plan sponsors to consider ESG factors, but it does allow them to be viewed as material and even used for collateral benefits to the plan.

Few options

Currently, the very limited number of such mutual fund target date series include the Natixis Sustainable Future Funds and the BlackRock LifePath ESG Index funds. And this year, Putnam Investments is incorporating ESG considerations into its RetirementReady series, which will be renamed as the Putnam Sustainable Retirement Funds.

That list does not include institutional investment options, custom products or the range of mutual fund target dates that incorporate ESG factors in a minor way. Morningstar, for example, offers an ESG-themed pooled employer plan through Plan Administrators Inc.

If interest from 401(k)s and other defined-contribution plans picks up, that could be an opportunity for asset managers to bring new funds to the market or overhaul their existing ones.

“I do think we will see some increased adoption,” said Alyssa Stankiewicz, associate director of sustainability research from Morningstar Research Services.

“The main reason I’m optimistic about this adoption is, ultimately, this puts [choice] in the hands of plan sponsors, which are often employers,” Stankiewicz said. “We’re seeing a lot of companies that are moving their corporate social responsibility stance and being more vocal on ESG issues.”

Demand from retail investors could spill over into 401(k)s as well, if participants tell their employers what investment options they want to see, she noted.

Generally, interest in ESG has been ticking up, considering the years-long sales trend of sustainable and responsible funds. And data from several surveys show that workers say they would be more likely to contribute to their 401(k) accounts if their plans included investment options that line up with their values. A survey this year from Schroders, for example, found that 74% of people would be motivated to be more involved with their retirement plans if ESG options were available.

That finding could help support plan sponsors’ decisions to add ESG funds to their menus.


Under the DOL’s rule, the social or environmental benefits of an investment option alone are not enough to justify its selection, said Jason Roberts, CEO of the Pension Resource Institute.

When vetting investment options, whether they are the default for the plan or any other fund on the menu, plan fiduciaries must primarily consider risk and return – and that can include ESG factors that are material to performance.

And in cases where ESG factors may not be financially material, plans can still opt for funds, if the risk and return characteristics are the same as other options. In those cases, the differentiating factor for ESG-themed funds can be “collateral benefits” such as increased participation in the plan, Roberts said.

With the new rule, the DOL is “very accommodating to ESG,” he said.

“The pendulum has certainly swung a long way from ‘you can’t use ESG target date funds as your QDIA.’”

It’s notable that historically, the DOL has not provided consistent guidance around ESG in retirement plans. Across different presidential administrations, the agency has gone back and forth on how friendly it appeared to be on ESG, which observers say is analogous to decades of ping pong. Until the Trump-era rule, however, the DOL addressed the topic through less formal sub-regulatory guidance. That makes the current rule extremely important for fiduciaries that have been waiting to add sustainable or responsible investment options to their plans.

“It’s hard to overstate the impact of this back-and-forth we’ve been seeing … which the DOL has acknowledged,” Stankiewicz said. “Even though it’s been consistent that plan sponsors have this fiduciary duty … the tenor of the guidance has changed a lot and created confusion.”

It is significant that the DOL has expressly said that ESG can be considered in the selection of a plan’s QDIA, as such options – usually target-date funds – are the primary investments into which plan participants’ contributions are directed. Those options get most of the new money in defined-contribution plans.

But the DOL’s stance will also benefit the inclusion of ESG-themed funds as standalone investment options, Stankiewicz noted. For sustainable investment providers, that is no small detail. There are a vast number of such funds on the market, but inclusion in 401(k)s up to this point has been minimal.


In the US mutual fund market, total assets among the two existing ESG target-date series were $136.2m as of the end of November, according to data from Morningstar Direct. Of that, $107.5m was in the Natixis Sustainable Future Funds, while $28.7m was in the BlackRock LifePath ESG Index series.

Through November, net flows were $20.2m in Natixis’ series and $4.4m into BlackRock’s.

Having launched in 2017, Natixis would appear to have an advantage in getting on 401(k) plan menus, as it is the only US fund provider with an ESG target-date series with a track record of at least five years. BlackRock added its series in 2020.

Plan sponsors tend to consider funds that have been up and running for five years. However, that is not a requirement spelled out in the Employee Retirement Income Security Act, Roberts notes.

What the DOL wants to see is plan fiduciaries considering a risk and return analysis using all relevant information, he said. For new funds from established asset managers that have strong research and portfolio management teams, “I don’t as an attorney hold a minimum track record as an impediment to considering that investment,” he said.

Natixis, which has 375 plans using its Sustainable Future Funds, was pleased with the final version of the DOL’s rule, said Liana Magner, head of the firm’s US retirement and institutional business. The agency’s focus on risk and return considerations benefits plan participants, she said.

“We though it was really important and positive that ESG factors may be considered as part of that [investment] analysis,” she said.

“There is a wide spectrum of sustainable investment solutions available in the marketplace. Plan fiduciaries should be comfortable offering ESG-oriented strategies as long as the primary objective of that strategy is financial, rather than furthering a social agenda.”

Another factor – litigation – has made plan sponsors careful about the investment options they offer, even while the focus of class action lawsuits has been on fees and performance, rather than ESG issues, she noted.

Currently, “the uptake from plan sponsors is not where we would want it to be,” although the new DOL rule would help change that over time, she said. It might be six months or longer before plans start to incorporate more ESG strategies, given that it takes time to evaluate investment options, add them to the plan and inform participants, she noted.

“You have plan sponsors who are asking the questions and saying, ‘We want to see where our own sustainability goals are aligned with what participants want,’” she said. “Now that we have that [DOL rule], I think there will be an uptick in adoption of ESG strategies in the market.”

And then there’s the SEC

If there were any asset managers thinking about rebranding target-date funds with sustainability labels but not significantly changing how the products consider ESG factors, they have by now almost certainly scrapped those plans.

Last year, the Securities and Exchange Commission proposed two rules designed to combat greenwashing. One rule applies to fund naming and another on the marketing that asset managers and advisers use.

The final versions of those rules will likely be published this year, although they may not take effect until 2024.

Asset managers considering adding ESG target-date funds are almost certainly encouraged by the DOL’s rule. But, “the SEC’s guidance – once it’s finalized – will play a big role in that decision” to add products, Stankiewicz said.

Some fund providers might continue to include ESG considerations within target-date products but avoid emphasizing that in their names.

“There’s a bit of a higher bar for funds that are going to brand themselves as ESG or sustainable products now,” Stankiewicz said.