For those with an eye on ERISA and its fiduciary rules, the past few years have caused whiplash when it comes to environmental, social, and corporate governance (“ESG”) investments in retirement plans. With a new rule from the Department of Labor imminent, let’s review where we are, how we got here, and what’s next.
ERISA generally requires those making investment decisions for retirement plans to do so solely in the best interests of plan participants, taking into account pecuniary factors like fees, and risks and returns. Guidance issued during the Obama administration indicated an openness to non-pecuniary factors, such as ESG, as a “tie-breaker”. The tide turned during the Trump administration, with additional guidance and a final rule eventually issued, which required plan fiduciaries to “select investment and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”
In an unsurprising twist, the Biden administration soon reversed course, blocking the Trump administration’s final rule and issuing its own proposed rule to “remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights.” A DOL fact sheet seeks to address concerns that the rule fundamentally changes a fiduciary’s duties, by highlighting the fact that the proposed rule “retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on material risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan.”
The final rule is now under review with the White House and is expected to be released soon. We will provide an update when that occurs.
Meanwhile, four House Republicans recently introduced the Safeguarding Investment Options for Retirement Act, with the stated purpose of protecting “investors from having politically motivated ‘woke’ environmental, social, and governance (ESG) issues put ahead of hardworking Americans’ investment return.”
What is a plan sponsor or committee to do? Whatever happens in the upcoming midterms, we expect the rules regarding ESG funds in retirement plans to remain a contentious subject, potentially changing with each presidential administration. It is imperative for plan fiduciaries to work closely with the plan’s financial advisors and legal counsel to ensure that all relevant factors—including the latest guidance on ESG—are being considered when making plan investment decisions.
