Biden used first veto to save a 401(k) investment rule. Here’s what it does

Biden’s veto on Monday preserves his administration’s stance.

It doesn’t appear there are enough congressional votes to override the veto. Doing so would require a two-thirds vote in both the House and Senate.

ESG has grown more popular in recent years, occurring against the backdrop of growing political backlash, largely from Republican lawmakers who deride it as “woke” investing.

Investors poured about $69 billion into the funds in 2021, an annual record and about triple the amount in 2019, according to Morningstar. However, inflows fell significantly in 2022 — to $3.1 billion — in a year when stocks and bonds got pummeled and the broad U.S. fund universe saw the largest investor exodus on record, Morningstar reported.

Few 401(k) plans — about 5% — offer an ESG fund, according to PSCA survey data. Employers cited lack of regulatory clarity as one of the top reasons they haven’t offered one to workers.

The Trump-era Labor Department rule doesn’t explicitly call out or forbid ESG funds in 401(k) plans. But experts say the rule stymied uptake due to a general requirement that employers only use “pecuniary factors” when choosing 401(k) funds for workers.

Those factors restrict fund analysis to purely financial measures like fund fees, return and risk, experts said. Environmental, social and governance factors are generally “non-pecuniary,” however.

“The Trump rule made it so harsh, so difficult, that it put a cold blanket over E, S and G factors,” said Philip Chao, founder and chief investment officer of Experiential Wealth, based in Cabin John, Maryland. “Whereas this one doesn’t really talk about ESG factors being right or wrong.

“It returns power back to the fiduciary,” he added.

Employers serve as a fiduciary to their company…