Over the last few years environmental, social, and governance (ESG) has been a topic of conversation in the 401(k) industry and among employee investors alike. It is a particularly interesting topic, as the Department of Labor (DOL) has changed their position from discouraging ESG investing in 401(k) plans to encouraging their consideration.

This shift in position has been confusing for most – especially 401(k) plan sponsors who have seen an increase in employees requesting more socially responsible retirement plan investments.

Here is a brief recap of the current law and where the DOL stands.

The DOL’s Current Position on 401(k) Plan ESG Investing

On May 20, 2021, President Joe Biden issued an Executive Order on Climate-Related Financial Risk1, where he directed the federal government to treat climate change as a threat to American workers’ retirement savings.

In response to this Executive Order, the DOL issued a proposed rule called the Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights2 on October 14, 2021. This proposed rule applies to 401(k) plans and allows employers to consider ESG investments for their 401(k) investment funds.

A final DOL rule is expected later in 2022.

Employers should keep in mind that ERISA’s fiduciary obligations always apply when choosing 401(k) investment options, whether a plan sponsor is considering an ESG investment or a non-ESG investment.

As legal guidance continues to evolve, here is what 401(k) plan sponsors should consider when deciding whether to add ESG funds to their 401(k) plan investment lineup:

4 Things for Plan Sponsors to Consider About ESG Funds

  1. Determine ESG goals and objectives. Plan sponsors must define their 401(k) investment goals and objectives as they relate to ESG funds. Then, they should memorialize these goals and objectives in their 401(k) investment policy statement3.
  2. Apply Non-ESG Investment Processes to ESG Funds. Next, plan sponsors should use the same decision-making processes, whether they are choosing traditional, non-ESG funds or ESG funds. By doing this, plan sponsors apply a consistent decision-making process while fulfilling their fiduciary responsibilities4 under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
  3. Continually Monitor and Track ESG Investments for Risk. Once chosen, the plan sponsor should continue to monitor and track any potential ESG risks, just as a plan sponsor would do for other 401(k) investment funds.
  4. Communicate ESG Philosophy and Goals to Plan Participants. Plan sponsors must also communicate the plan’s ESG philosophy, goals, and objectives5 to plan participants. However, plan sponsors must be careful to educate plan participants6 and not cross over into giving investment advice, which is prohibited under ERISA.

Additional Resources


  1. White House. Executive Order on Climate-Related Financial Risk. May 20, 2021. https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/
  2. Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, 86 FR 57272 (October 14, 2021 (to be codified at 29 CFR 2550). https://www.federalregister.gov/documents/2021/10/14/2021-22263/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights
  3. Iekel, John. “Fiduciary Duty: A Refresher.” American Society of Pension Professionals and Actuaries (ASPPA). June 13, 2022. https://www.asppa.org/news/fiduciary-duty-refresher
  4. U.S. Department of Labor, Employee Benefits Security Administration (EBSA). (2021). Meeting Your Fiduciary Responsibilities [Brochure]. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf
  5. Defined Contribution Institutional Investment Association. “ESG and Participant Communications: Practical Ideas for How to Communicate the Integration of Sustainable Investing within DC Plans.” March 2022. https://cdn.ymaws.com/dciia.org/resource/collection/AD062AB9-8C8F-49C9-94F6-1156F6AB8225/DCIIA_ESG_Participant_Communications_final_2.pdf
  6. Interpretive Bulletin 96-1; Participant Investment Education, 61 FR 29586 (June 11, 1996) (codified at 29 CFR 2509). https://www.federalregister.gov/documents/1996/06/11/96-14093/interpretive-bulletin-96-1-participant-investment-education
  7. White House. Executive Order on Climate-Related Financial Risk. May 20, 2021. https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/
  8. Interpretive Bulletin 96-1; Participant Investment Education, 61 FR 29586 (June 11, 1996) (codified at 29 CFR 2509). https://www.federalregister.gov/documents/1996/06/11/96-14093/interpretive-bulletin-96-1-participant-investment-education
  9. Defined Contribution Institutional Investment Association. “ESG and Participant Communications: Practical Ideas for How to Communicate the Integration of Sustainable Investing within DC Plans.” March 2022. https://cdn.ymaws.com/dciia.org/resource/collection/AD062AB9-8C8F-49C9-94F6-1156F6AB8225/DCIIA_ESG_Participant_Communications_final_2.pdf
  10. U.S. Department of Labor, Employee Benefits Security Administration (EBSA). (2021). Meeting Your Fiduciary Responsibilities [Brochure]. https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/meeting-your-fiduciary-responsibilities.pdf

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Financial Advisors at Pensionmark may also be registered representatives of Pensionmark Securities, LLC (member SIPC), which is affiliated with Pensionmark through common ownership.

Jenny Kiesewetter — Jenny is a Retirement Plan Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline retirement plan compliance. In her free time, Jenny enjoys spending time with her friends and family, traveling, live music, and dining out.