DOL Issues Proposed Rule for ESG Investing

On June 23, 2020, the Department of Labor (DOL) issued a proposed rule to clarify investment duties for plan fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) when it comes to environmental, social and governance (ESG) investing.

Under ERISA, plan fiduciaries are required to act solely in the financial best interests of plan participants and beneficiaries. The DOL has issued prior guidance regarding ESG investing that clarified economic returns on an investment must be a fiduciary’s primary consideration – in other words, fiduciaries cannot sacrifice returns or assume additional risk when making investment choices for ERISA plans, including ESG investments.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

With that goal in mind, the DOL’s Proposed Rule amends section 404(a) of ERISA to further establish the agency’s position on ESG investing. The Proposed Rule codifies the DOL’s long-held position that a fiduciary satisfies its duties of prudence and loyalty under ERISA when it has “selected investments and/or investment courses of action based solely on their pecuniary factors and not on the basis of any non-pecuniary factor.” It also acknowledges that ESG factors can be pecuniary, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. In addition, the Proposed Rule:

  • Prohibits fiduciaries from subordinating retirement income and financial benefit interests under an ERISA plan to non-economic goals;
  • Requires fiduciaries to consider other investments that meet the duties of prudence and loyalty under ERISA;
  • Includes a new regulation on required investment analysis and documentation requirements when fiduciaries are choosing among truly economically “indistinguishable” investments; and
  • States that, relative to ESG investments in 401(k)-type plans, a fiduciary will be considered to have met its duties of prudence and loyalty under ERISA when:
    • The fiduciary uses only objective risk-return criteria to select and monitor all the plan’s investment alternatives, including ESG investment alternatives;
    • The fiduciary documents its selection and monitoring of the investment based on that criteria; and
    • The fiduciary does not add the ESG investment as, or as a component of, a qualified default investment alternative (QDIA).

The comment period for the Proposed Rule closed on July 30, 2020. As we await the Final Rule, plan fiduciaries should determine what, if any, impact the Rule may have on current and future investment strategies.

Hall Benefits Law’s vision is to provide every client with the peace of mind that comes from the confidence that HBL has addressed all possible compliance vulnerabilities. To learn more, call our team of responsive, experienced ERISA and employment counsel at 678-439-6236.

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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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