(1) [Except as otherwise specified under ERISA,] a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and –
(A) for the exclusive purpose of:
(i) providing benefits to participants and their beneficiaries; and
(ii) defraying reasonable expenses of administering the plan; [and, among other things,]
(B) with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims . . .
The “solely in the interest” and “exclusive purpose” language may be thought of as imposing a duty of loyalty on the ERISA fiduciary. One court famously characterized ERISA’s duty of loyalty as requiring the fiduciary to look with “an eye single” to the interests of plan participants and beneficiaries. 2
As to the duty of prudence, the ERISA rule, while sounding to some extent in the language of traditional negligence, uses the words “under the circumstances that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” ERISA thereby encourages fiduciaries to become familiarized with the applicable considerations – expertized, one might say – and to take into consideration all relevant facts and circumstances. Some colloquially refer to the ERISA prudence standard as a “prudent expert” standard, in contrast to a mere “prudent person” standard.
ERISA does not generally specify approved lists of investments or specific investment criteria that the ERISA fiduciary must use in furthering the interests of plan participants and beneficiaries. Once the expertized fiduciary has given appropriate consideration to all applicable facts and circumstances, ERISA tends to encourage deference to the judgment of that fiduciary, rather than the substitution of the judgment of regulators and judges. Indeed, ERISA’s deferential approach to the judgment of responsible expert fiduciaries is arguably regarded as a model for modern approaches to fiduciary regulation. The DOL regulations provide that ERISA’s prudence requirements “are satisfied if the fiduciary . . . (i) [h]as given appropriate consideration to those facts and circumstances that, given the scope of such fiduciary’s investment duties, the fiduciary knows or should know are relevant to the particular investment or investment course of action involved, including the role the investment or investment course of action plays in that portion of the plan’s investment portfolio with respect to which the fiduciary has investment duties; and (ii) [h]as acted accordingly.”3 The regulations go on to say that “appropriate consideration” will include “a determination by the fiduciary that the particular investment . . . is reasonably designed, as part of the portfolio . . . to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain (or other return) associated with the investment.”4
Given the foregoing, there tends to be substantial focus on the process employed by fiduciaries in furtherance of their exercise of their fiduciary duties. Because of ERISA’s deferential approach, the ability of a fiduciary to show that it has employed an appropriate process can forcefully support and validate the fiduciary’s decision-making. As a result, ERISA practitioners often have been known to refer colloquially to “procedural prudence” in connection with a fiduciary’s pursuit of the fiduciary’s duties under ERISA.
Early in the development of the law under ERISA, the DOL issued a number of advisory opinions and information and other letters concerning a fiduciary’s ability to consider the collateral effects of an investment.5 In responding to these various opinion requests, the DOL established certain broad principles. The DOL stated that arrangements designed to bring areas of investment opportunity that provide collateral benefits to the attention of plan fiduciaries will not, in and of themselves, violate ERISA where the arrangements do not restrict the exercise of the fiduciary’s investment discretion.6 The DOL emphasized, however, that the existence of such collateral benefits may be decisive in evaluating an investment only if the fiduciary determines that the investment containing the collateral benefits is expected to provide an investment return to the plan commensurate to alternative investments having similar risks.7
Later, but still before ESG, as such, emerged as a mainstream topic of the discussion, the DOL crystallized its thinking regarding these matters in Interpretive Bulletin (“IB”) 94-1. In IB 94-1, the DOL considered how general ERISA principles should be applied in the context of ETIs and addressed issues relating to ETIs and their role in an ERISA plan’s portfolio.
IB 94-1 defines an ETI as “any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.” In IB 94-1, the DOL explained that prudence and other general fiduciary principles under ERISA noted above do not prevent plan fiduciaries from investing in ETIs if “the ETI has an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics that are available to the plan, and if the ETI is otherwise an appropriate investment for the plan in terms of such factors as diversification and the investment policy of the plan.” This standard was recognized by the DOL in later guidance (specifically, IB 2015-01) as being referred to by some commenters as the ‘‘all things being equal’’ test.8
The DOL expressly stated that the bedrock principle under ERISA is that the focus of plan fiduciaries must be on the plan’s financial returns and risk to beneficiaries. Under ERISA, the plan trustee, investment manager or other responsible fiduciary, as applicable, may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries. Fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits.
IB 94-1 was not the final word from the DOL on these matters. While the basic principles identified by the DOL have to some extent generally remain unchanged, there have, however, been changes at the margins in tone and emphasis, as additional guidance has been issued by successive administrations of alternating political parties.
Thus, while IB 94-1 was issued under a Democratic administration, in 2008 the DOL under a Republican administration modified and superseded IB 94-1 with IB 2008-01. IB 2008-01’s stated purpose was to clarify that “fiduciary consideration of non-economic factors should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.”
In encouraging fiduciaries to be careful when considering ETIs, IB 2008-01 noted that ERISA “does not permit fiduciaries to make investment decisions on the basis of any factor other than the economic interest of the plan.” IB 2008-01 emphasized that, where under “limited circumstances” investment alternatives may indeed be of equal value, plan fiduciaries prior to selecting an ETI must have “first concluded that the alternative options are truly equal, taking into account a quantitative and qualitative analysis of the economic impact on the plan.”
In 2015, with a return to a Democratic administration, the DOL issued IB 2015-01. There, the DOL expressed concern that its prior guidance “unduly discouraged fiduciaries from considering ETIs and ESG factors.” IB 2015-01, which replaced IB 2008-01, began to cast ESG considerations in a more affirmatively positive light as compared with the presentation in the previous IBs, stating that ESG issues “may have a direct relationship to the economic value of the plan’s investment” and that in such instances, ESG issues “are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” The preamble to IB 2015-01 also stated that, “if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from [ESG] factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.” The DOL specifically stated that “fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors. When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tie-breakers.” The DOL also noted that it did not construe consideration of ETIs or ESG criteria as “presumptively requiring additional documentation or evaluation beyond that required by fiduciary standards applicable to plan investments generally.” IB 2015-01 expressly permits ERISA fiduciaries to address ETIs or incorporate ESG factors in investment policy statements, integrate ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among otherwise equivalent investments, and consider whether and how potential investment managers consider ETIs or use ESG criteria in their investment practices.
In 2016, still under the same (Democratic) administration, the DOL issued IB 2016-01. IB 2016-01 addressed, among other things, proxy voting with respect to securities held by ERISA plans. The DOL expressed concern that prior guidance from the DOL had been “misunderstood and may have worked to discourage ERISA plan fiduciaries . . . from voting proxies and engaging in other prudent exercises of shareholder rights.” Instead, the DOL encouraged plans to maintain a statement of proxy voting policy, which would be “an important part of any comprehensive statement of investment policy.” Such a proxy voting policy could include “proxy voting decisions as well as policies concerning economically targeted investments or incorporating [ESG] factors in investment policy statements or integrating ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among equivalent investments.” IB 2016-01 also encouraged fiduciaries to maintain an investment policy that “contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock.”
The DOL explained that active monitoring and communication activity would generally concern such issues as:
the independence and expertise of candidates for the corporation’s board of directors and assuring that the board has sufficient information to carry out its responsibility to monitor management. Other issues may include such matters as governance structures and practices, particularly those involving board composition, executive compensation, transparency and accountability in corporate decision-making, responsiveness to shareholders, the corporation’s policy regarding mergers and acquisitions, the extent of debt financing and capitalization, the nature of long-term business plans including plans on climate change preparedness and sustainability, governance and compliance policies and practices for avoiding criminal liability and ensuring employees comply with applicable laws and regulations, the corporation’s workforce practices (e.g., investment in training to develop its work force, diversity, equal employment opportunity), policies and practices to address environmental or social factors that have an impact on shareholder value, and other financial and non-financial measures of corporate performance.