The U.S. Department of Labor gravely erred in its proposal to limit ESG investing, which will hurt both participation levels and contributions in retirement plans, Massachusetts-based ratings giant Dalbar said in a comment letter.

All evidence indicates employees want environment, social and governance (ESG) investments in their plans. If the DOL tries choosing the investments employees can select, it ultimately will dictate how many employees participate in a workplace plan and how much they contribute, the company argued.

“For over 25 years, Dalbar’s research has shown that behavior has the greatest impact on an investor’s long-term outcome,” the company’s chief marketing officer Cory Clark said in a statement. 

“Ignoring factors that impact participation and contributions in the definition of ‘pecuniary’ was a giant blind spot for the DOL in this proposal. We hope our comment letter will shed light on what is currently a glaring omission,” Clark added.

In fact, 76% of employees told Dalbar in a new survey that they were more likely to participate in plans that included ESG Investments. Furthermore, 32% said they were very likely to participate in such plans.

Dalbar's criticism of the DOL's approach to controlling plan participants' investing decisions extends beyond the ESG issue. While the DOL’s proposed rule would limit the factors fiduciaries can use in selecting plan investments to what the department defines as “pecuniary” factors or those relating to money, Dalbar recommends that the definition be broadened to  include "retirement income" and to add the effect including an investment will have on participation and contribution.

“An ERISA plan’s singular focus should be to fund participants’ retirement income. That notion was cited as the driving force behind this proposal, but ironically retirement income is nowhere to be found in the definition of pecuniary factors,” Clark added.

The DOL’s proposal confirms that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment strategy.

Dalbar wants the DOL to broaden its “financial considerations” definition to  include any factor that will predictably influence the “economic value” of a “course of action.”

The proposal’s investment selection standards for advisors should also be modified to require that “financial considerations must include courses of action that lead to increased economic value,” the company said.

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