While the fate of the Build Back Better initiative remains to be seen, the Biden Administration has other items on its agenda that market participants should monitor, and with 2022 being a mid-term election year, investors should stay abreast of policy-making.
One area to watch — which, fortunately, is not all that controversial — is the Department of Labor’s treatment of environmental, social, and governance (ESG) assets in employer-sponsored retirement accounts and the treatment of ESG factors when including such investments on the menu that workers have to pick from.
Translation: The Biden Administration is in favor of rolling back a Trump-era policy that made it burdensome for employers to offer ESG funds in plans such as 401(k)s. The Biden effort is arguably more notable for what it attempts to unwind than what it’s looking to put into place.
“What will this rule reversal mean for people saving for retirement? We think most people will not even notice the change initially,” says Morningstar analyst Aron Szapiro. “But if the rule is finalized, more and more participants’ investment managers will gradually come to consider lurking ESG risks as part of the effort to maximize long-term risk-adjusted returns. Further, interested participants may be better able to pick funds with specific ESG goals.”
Owing to the fact that change authored by the government is usually slow-moving, workers shouldn’t expect a spate of ESG offerings to flood their 401(k) menus over the near term. However, it could prove to be a long-term positive for adoption of ESG funds if those assets are inserted into more employer-sponsored retirement offerings.
“None of this will happen overnight, but this new regulation will start to nudge employers to take ESG into consideration in making investment selections,” adds Szapiro. “Financial professionals who recommend rollovers from 401(k) and other defined-contribution plans into IRAs may start to see more clients with ESG investments coming from employer-sponsored plans and more client interest in applying ESG analysis to their IRA investment strategies.”
A potential unintended consequence — and a positive one at that — of the aforementioned policy effort is that it could put ESG funds into the spotlight in more dramatic fashion, regardless of whether or not those assets are being deployed in retirement accounts.
If that plays out, it could be the benefit of exchange traded funds, such as the Goldman Sachs JUST U.S. Large Cap Equity ETF (JUST) and the Goldman Sachs Future Planet Equity ETF (GSFP).
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