Divesting from Russia: What Private Employers Need to Know

The Russian invasion of Ukraine has led to a wave of public pension funds making divestment pledges from Russian investments. These public pension funds included some of the largest in the country, such as the state pension funds of New York and California. Private employers managing pension plans subject to ERISA should not follow divestment trends without solid financial reasons. 

The overall asset holdings of public pension funds, and private pension funds, are tiny. Nonetheless, employers with private pension funds subject to ERISA must take extra steps when considering divestment, even if they opt to divest from all Russian investments. Unlike public pension funds, which can make investment decisions solely based on social issues, the financial interest of the plan must be the primary consideration for ERISA plan sponsors. 

A Valid Business Reason Must Justify Divestment

Any actions that ERISA fiduciaries take to sell investment holdings must be in the best interests of the plan. For instance, as a preliminary step, in response to American sanctions on Russia, many fiduciaries advised their business managers to monitor any Russian investments. Evidence of instability or devaluation of these assets could lead to a valid business decision to sell off Russian holdings and pull out of that market. 

In the unlikely event that a plan has a large concentration of Russian investments, the plan may have the opposite obligation. Divestment in this situation likely would cause a sale of the assets at an abnormally low price, which is not financially beneficial to the plan members. 

Regular Monitoring of Investments is Critical

Monitoring plan investments is one of the most basic fiduciary duties under ERISA. The Russian invasion of Ukraine is a stark reminder of the crucial need for all plans, whether big or small, to regularly review investments with their investment advisors. Employers can and should advise their investment advisors to minimize risk, which, in some cases, may lead to divestment of certain assets. Employers might consider amending their investment guidelines to include divestment of Russian assets according to their desire to minimize risk. However, any such amendments should include language that the disposition of assets should occur only prudently and according to their fiduciary responsibilities. 

ESG Factors Can Give Employers Options

Public pressure also is growing for employers to base investment decisions on environmental, social, and governance (ESG) factors. For example, under the Biden administration, the U.S. Department of Labor (DOL) has established policies based on ESG factors in selecting investments, whereas the previous administration did not. 

Utilizing ESG factors also can allow companies to demonstrate and communicate their core values to the public more effectively. Historically, companies have not sought to divest from Russian assets until the recent invasion. However, American companies have a long history of divestment in antidemocratic countries, such as apartheid protests in South Africa, in the 1980s.

ESG factors can have political, social, and economic pressure points. So long as they act within the bounds of ERISA, employers can use these factors to pursue divestment if they choose. 

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.
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