The Trump administration will replace a controversial Biden-era rule permitting companies that sponsor workplace 401(k)s to consider eco-friendly factors when picking and choosing investments on behalf of workers and retirees.
Lawyers for the government filed a status report Wednesday telling the US Court of Appeals for the Fifth Circuit it will engage in rulemaking set to appear on the US Labor Department’s spring regulatory agenda. A notice-and-comment rulemaking process would be required to rescind the rule altogether.
The Biden rule’s demise marks an escalation in Republican efforts to root out environmental, social, and corporate governance investing from the federal as well as state and local governments. The rule served as a proxy for conservative ire against “woke” Wall Street activity under Biden, who had to exercise his veto power in 2023 against a bipartisan attempt to axe the rule in Congress.
The rule was unexpectedly upheld twice by a conservative-leaning, Trump-appointed judge in Texas in the protracted legal challenge brought by more than two dozen GOP state attorneys general.
A panel of judges overseeing the case put pressure on the administration in late April to decide the rule’s fate sooner rather than later, denying Trump’s request for an indefinite pause.
The regulation Biden began enforcing in 2023 furthered regulatory ping-pong between Democratic and Republican administrations that would expand or constrict access to ESG investments in private-sector retirement accounts.
Biden’s pro-ESG retirement investing rule overturned a pair of regulations Trump promulgated during his first term that discouraged plan fiduciaries from employing ulterior motives when investing on behalf of plan participants and beneficiaries.
Like the Trump administration’s first rule, the doomed Biden-era regulation raises the notion of a tiebreaker between theoretically identical investments. In that case, collateral benefits such as ESG could “break” that tie.
Trump officials have struck a skeptical tone on ties in the context of 401(k) investing, writing in the preamble to the 2020 rule “true ties rarely, if ever, occur.” By eliminating a tiebreaker test under the code altogether or piling strict reporting requirements on retirement plan fiduciaries, the administration could nearly guarantee plans will avoid explicit ESG investing.
Very few defined-contribution retirement plans offer ESG-specific investment vehicles, although
The company’s unexpected loss sent shockwaves through the 401(k) industry, as plans and advisers scrambled to determine whether their own third-party service providers could be exposing them to class actions. That uncertainty could pave the way for the administration to clarify the rules.
