The Department of Labor’s Employment Benefits Security Administration (EBSA) announced Wednesday that it will not enforce recently published final rules on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”
The rules caused confusion and controversy over what, and what not, fiduciaries should include in 401k and similar defined contribution plans, and possible sanctions that would result.
Until further guidance, the department said it will not enforce either the ESG or voting final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply. This includes with Qualified Default Investment Alternatives, an investment course of action, or with respect to an exercise of shareholder rights.
“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar said in a statement. “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments while continuing to uphold fundamental fiduciary obligations.”
Industry reaction
Industry reaction was generally positive:
“We applaud today’s decision by the Department of Labor, which will reduce the uncertainty that has hamstrung ESG adoption by plan sponsors since the rule was proposed,” Edward Farrington, Executive Vice President, Institutional and Retirement, at Natixis Investment Managers, said in a statement. “Natixis was among the thousands of investors who offered evidence during the comment period that ESG considerations can support higher risk-adjusted returns for plan participants. We hope the DOL will provide additional guidance for plan sponsors that supports the use of ESG factors in retirement plans, which we believe can lead to investment options with a more complete picture of risk and opportunity. Our research also indicates ESG investing options can encourage more participation in retirement plans.”
“We strongly support today’s decision by the DOL to temporarily forgo enforcement of the ESG and proxy voting rules,” Jason Berkowitz, Insured Retirement Institute’s (IRI) Chief Legal and Regulatory Affairs Officer, added. “This will provide an opportunity for the Department to re-evaluate and possibly revise or withdraw them.”
Reg reversal
On Nov. 13, 2020, the department published a final rule on “Financial Factors in Selecting Plan Investments,” which adopted amendments to the “Investment Duties” regulation under Title I of ERISA.
The amendments generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.”
On Dec. 16, 2020, the department published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.
The department said it heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers that have asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries.
Stakeholders have also questioned whether the department rushed the rulemakings unnecessarily and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social, and governance considerations in improving investment value and long-term investment returns for retirement investors.
The department has also heard from stakeholders that the rules, and investor confusion about them, have already had a chilling effect on the appropriate integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow. Accordingly, the department intends to revisit the rules.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
