ESG funds, as the name conveys, cover a fairly broad range of issues surrounding organizational impact on the natural world, relationship with employees, customers, and the public, and leadership reputation.

Holding a relatively small percentage relative to more conventional asset types of the overall asset allocation of typical plans, ESG funds were found in 2.4% of defined contribution plans in 2016.[1]

However, likely reflecting more far-reaching societal views, discussions around the use of ESG factors within a defined contribution plan’s investment lineup have ramped up in recent years. In light of this, it may be prudent to review recent Department of Labor (DOL) guidance as it relates to the selection of ESG funds for use in a Defined Contribution plan.

Recent DOL Guidelines

In April of 2018, the DOL issued Field Assistance Bulletin (FAB 2018-01), which signals a more cautious note than previous guidance regarding consideration of ESG factors with respect to plan investments. The DOL states that fiduciaries “must not too readily treat ESG factors as economically relevant” to a decision regarding an investment choice. Rather, plan fiduciaries “must always put first the economic interests of the plan in providing retirement benefits.”[2] The recent FAB does not preclude the use of ESG funds in employer-sponsored plans. It does, however, caution plan fiduciaries that the weight given to ESG factors should also be appropriate to the relative level of risk and return associated with other relevant economic factors.

FAB 2018-01 also addresses the use of ESG-themed funds in 401(k)-type plans, either as an additional option in the investment line-up or as a qualified default investment alternative (QDIA). The FAB states that a prudently-selected, diversified, and well-managed ESG fund could be added to the plan’s lineup in addition to non-ESG options. Regarding the use of an ESG fund as a plan’s QDIA, plan fiduciaries face a heavier burden.

The FAB indicates that fiduciaries may have duty of loyalty issues in favoring an ESG fund over other funds.

Even if ESG factors are shown to be appropriate in the selection of the QDIA based on the facts and circumstances regarding the particular plan, the burden will be on the plan fiduciary to “ensure compliance” with IB 2015-01, i.e., to demonstrate that the ESG-themed QDIA would provide the same or a better expected rate of return with equivalent or less risk than a non-ESG themed QDIA.

Finally, FAB 2018-1 addresses the area of shareholder activism. Specifically, it states that before a fiduciary uses plan assets to actively engage with company management on environmental or social matters, the fiduciary must perform (and document) a thorough cost/benefit analysis pertaining to the best interests of the plan’s participants.


The recent DOL Field Assistance Bulletin does provide additional guidance around the use of ESG funds.

However the primary tenet of the DOL’s stance on the topic has not changed; ERISA fiduciaries must always put the economic interests of the plan first in providing retirement benefits.

Any action not aligned with this mindset will be viewed negatively by not only regulators but the industry as a whole.