Periodically over the last 30 years, the Department has been asked to consider the application of the fiduciary duties of prudence and exclusive purpose under section 404(a)(1)(A) and (B) of the Employee Retirement Income Security Act of 1974 (ERISA) to pension plan investments selected because of non-financial objectives, such as environment, social and public policy goals, that the investments may further. Different iterations of sub-regulatory guidance may have created confusion with respect to these investment issues. The proposal is designed, in part, to make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives.
"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
"This proposal ensures that fiduciaries act with a single-minded focus on the interests of beneficiaries," said Acting Assistant Secretary of Labor for the Employee Benefits Security Administration
The proposal would make five core additions to the regulation:
* 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 mission of the