For years, the Department of Labor (“Department”) cautioned that retirement plan investments that consider social-justice values rather than traditional measures like profits and losses, could result in a violation of a plan sponsor’s fiduciary responsibility with respect to the plan. The Department has issued numerous Interpretive Bulletins and Field Assistance Bulletins that provide plan fiduciaries must focus on the plan’s financial returns and risk to plan participants and their beneficiaries. Just two years ago, with respect to social-justice investing, the Department provided sub-regulatory guidance in Field Assistance Bulletin (FAB) 2018-01, stating that treating environmental, social and governance (“ESG”) factors as economically relevant to the particular investment choices would be a misstep by plan fiduciaries. ERISA fiduciaries, the Department wrote, must always place the economic interests of the plan at the forefront.
On June 23, 2020, the Department released a proposal to amend certain provisions of the “investment duties” regulation codified at 29 CFR 2550.404a-1, adding a new provision on selecting designated investment alternatives for 401(k)-type plans. The new regulation reflects the Department’s changing view with respect to the plan fiduciary focus solely on financial returns of investments. While the proposed regulation continues to make clear that the paramount focus must be on economic returns, it maintains that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment, and may include certain environmental, social and corporate governance considerations rather than just focusing on maximum financial returns.
The proposal describes the requirements for the selection of investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name. In addition to the numerous proposed additions to the regulation, the proposal provides that a plan may not designate an ESG fund as its Qualified Default Investment Alternative.
The proposal includes a 30-day comment period. Interested parties should consider submitting comments as the proposal will create a new rubric for ERISA plan fiduciaries.
