Only days remain to comment on a Department of Labor rule that would require ERISA fiduciaries to put profit above social goals when considering ESG funds.
The proposed DOL rule reinforces retirement security as the guiding principle in retirement accounts, and called out ESG funds in particular. The end of Thursday is the deadline for comments. As of Monday, the DOL received 439 comments.
Environmental, social and governance funds have grown more popular over the past several years, particularly among younger investors. And although ESG funds lagged in returns in their early years, many now show respectable results – although that is hotly debated.
“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.”
The proposal would make five core additions to ERISA, according to the DOL:
- New regulatory text to codify the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
- An express regulatory provision stating that compliance with the exclusive-purpose (i.e., loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
- A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA.
- The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal adds new regulatory text on required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among truly economically “indistinguishable” investments.
- A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal reiterates the Department’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for selecting 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.
The Groom Law Group of Washington D.C., which specializes in ERISA, employee and retirement issues, said the newest rules are relatively in line with the DOL’s approach to socially responsible investing.
“DOL, regardless of the party in office, has been consistent in its position that a fiduciary cannot inappropriately sacrifice returns or take on additional risk when making investment decisions for ERISA plans and that the economic returns of an investment must be the plan fiduciary’s primary consideration,” according to the firm’s briefing.
But although the rule might be consistent with the DOL’s position, it is nevertheless an important evolution that will pose a significant impact on ESG funds, Groom said.
“Although many of the concepts are consistent with longstanding DOL interpretations of ERISA, the Proposed Rule’s changes to the regulations describing fiduciaries’ duties of prudence and loyalty could create significant challenges for ERISA plan fiduciaries considering ESG investing,” the firm said. “Interested stakeholders should consider submitting comments during the 30-day comment window.”
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]
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