DOL Takes Strong ERISA 401k, ESG Fiduciary Stance

401k, retirement, ERISA, DOL, ESG
The ESG outlook just got more complicated.

It might be harder to “invest in your values” if a proposed rule form the Department of Labor goes through.

The regulatory body announced Tuesday that ERISA plan fiduciaries may not invest in environmental, social and governance (ESG) vehicles when an underlying investment strategy decreases return or increases risk to achieve non-financial objectives.

The DOL acknowledged that different iterations of regulatory guidance have created fiduciary confusion with respect to these ESG investment issues, and the proposed rule is intended to provide “clear regulatory guideposts.”

“The department’s proposed rule reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end,” Labor Secretary Eugene Scalia wrote in an op-ed in The Wall Street Journal explaining the rule.

“A fiduciary’s duty is to retirees alone, “he bluntly continued, “because under ERISA one ‘social’ goal trumps all others—retirement security for American workers.”

The rule makes five 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 Employee Benefits Security Administration (EBSA) developed the proposed rule.

John Sullivan
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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.

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