The U.S. Department of Labor (DOL) issued a final rule to provide regulatory guideposts for plan fiduciaries seeking to invest using non-pecuniary principles, particularly those involving environmental, social, and governance (ESG) investing.
Not everyone is completely satisfied with it.
“We are disappointed that the DOL decided to move forward with this final rule, but we recognize and appreciate the meaningful improvements they’ve made over the original proposal,” said Jason Berkowitz, chief legal and regulatory affairs officer with the Insured Retirement Institute. “We continue to believe the Department should maintain the long-standing, principles-based approach to investment selection by ERISA fiduciaries.”
The DOL rule reinforces retirement security as the guiding principle in retirement accounts, and called out ESG funds in particular. The proposal received hundreds of 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.
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.
Urged To Withdraw
IRI had urged DOL to withdraw the proposed ESG rule in June. Berkowitz said that IRI and its members are reviewing the final rule in detail to better understand its ramifications for retirement savers, plan sponsors, and the industry.
“The final rule reflects the DOL’s acknowledgment that the proposal sought to put up guardrails around the use of ESG investments in retirement plans without adequately defining the types of investments that would have been covered. We remain concerned, however, that the final rule could make the investment selection process for plan sponsors much more complicated and burdensome than is necessary to effectively protect plan participants from financial risk,” Berkowitz added.
In its June comments on the then-proposed ESG rule, IRI identified potential impacts on investment selection and successful plan financial performance, heightened risks of regulatory burdens, and inconsistencies with long-standing, Department principles-based rules.