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Beyond alphabet soup: Plan sponsor’s guide to ESG investing

July 08, 2024 - 3 min read

ERISA. DOL. QDIA. ESG. Retirement plan sponsors have plenty of alphabet soup to contend with as the requirements of plan regulators – and the preferences of plan participants – continue to shift.

Demand for sustainable investments in workplace retirement plans is growing, and investments based on ESG factors have become more widely available in the past few years. Fortunately, Department of Labor guidelines on using these types of funds in retirement plans have also become clearer. Even so, many plan sponsors may feel unprepared to adapt to these changes while also maintaining strong fiduciary best practices.


Decoding the alphabet soup

DOL – Department of Labor
US agency responsible for enforcing federal labor standards, including qualified retirement plans offered by employers.

ERISA – Employee Retirement Income Security Act
Protects workers’ retirement plan savings by ensuring that plan fiduciaries do not misuse plan assets.

QDIA – Qualified Default Investment Alternatives
Broadly diversified funds suitable for plan participants who don’t select their own investment options.

ESG – Environmental, social, governance
Investment criteria for company operations that can be used as screens and guidelines for potential investors.

Sustainable investing focuses on investments in companies that relate to certain sustainable development themes and demonstrate adherence to environmental, social and governance (ESG) practices; therefore the universe of investments may be limited and investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. This could have a negative impact on an investor’s overall performance depending on whether such investments are in or out of favor.

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Resource

This brief guide provides clarity on using sustainable investment options in retirement plans that complies with both ERISA and DOL requirements for investment fiduciaries. Key topics include:

  • Understanding fiduciary obligations
  • Identifying and applying ESG factors
  • Determining roles and responsibilities
  • Action steps to help you get started