The controversial Trump-era Department of Labor rule that sought to impose new limits on the consideration of ESG factors by workplace retirement plans took two more steps toward total obsolescence last Thursday.
On May 20, President Joe Biden signed a long-anticipated Executive Order on Climate-Related Financial Risk. Among other things, the Executive Order mandates that Labor Secretary Marty Walsh submit a report to the director of the National Economic Council and the White House national climate advisor within 180 days that identifies actions taken by the agency “to protect life savings and pensions of U.S. workers and families from climate-related financial risk,” and required the same of the Federal Retirement Thrift Investment Board, which administers the Thrift Savings Plan for federal employees.
That same day, U.S. Senators Tina Smith (D-MN) and Patty Murray (D-WA) and U.S. Representative Suzan DelBene (D-WA) introduced legislation in the Senate and House intended to provide legal certainty to workplace retirement plans that choose to consider environmental, social and governance (ESG) factors in their investment decisions or offer ESG investment options.
These latest developments come about two months after the Department of Labor’s Employment Benefits Security Administration (EBSA) announced that it would 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.
Biden’s Executive Order asks Walsh to consider rescinding or revising the two Trump-era rules that limited the ability of ERISA plan administrators to consider climate and other ESG factors when making investment and proxy voting decisions.
The DOL’s review will likely result in rules that are intended to do the opposite of the Trump administration’s rules, instead encouraging consideration of ESG issues in investment, says a May 24 legal brief from Vinson & Elkins LLP.
Unlike the bipartisan support being shown on Capitol Hill for “SECURE 2.0” retirement reform efforts, this issue has rankled some Republicans.
Sen. Pat Toomey, R-Pa., ranking member on the Senate Banking Committee, said in a statement that the “Executive Order demonstrates that the Biden administration is “preparing to misuse financial regulation to further environmental policy objectives. Not only would such regulation exceed the scope of financial regulators’ respective missions and authorities, but it would also distort capital allocation, raise energy costs for consumers, and slow economic growth.”
“If Congress believes current environmental laws do not adequately address risks from global warming, changes should be enacted through the legislative process by legislators who are accountable to the American people—not by financial regulators who have neither experience nor accountability,” Toomey concluded.
Bill to support sustainable retirement plans
Smith, Murray and DelBene’s legislation, titled the “Financial Factors in Selecting Retirement Plan Investments Act,” attempts to tackle the problem of few workplace retirement plans taking sustainable investing principles into account in their investment decisions or providing sustainable investment options to workers—mainly due to an uncertain regulatory environment.
“Sustainable investment options are good for retirees and good for our environment—that’s a win-win,” said Sen. Smith, a member of the Senate Banking Committee. “We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”
The bill has broad support from industry organizations, including SIFMA, Morningstar, State Street Global Advisors, Smart, and the American Retirement Association.
“Retirement plan sponsors and participants deserve the freedom to choose the 401k investments that best suits their needs. This legislation allows the ESG investments to be included on a 401k menu consistent with a normal fiduciary process without artificial and unnecessary barriers that are inconsistent with fundamental principles of ERISA,” said ARA CEO Brian Graff.
“We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance—a matter of value, not values—and we seek to capture these drivers of long-term shareholder value for our clients,” said State Street Global Chief Investment Officer Lori M. Heinel in a letter of support.
“Specifically referencing ESG factors in ERISA, as your legislation does, will allow plan fiduciaries to recognize and consider these factors in a manner consistent with their longstanding duties under ERISA, but without undue concern of litigation. Legislation, unlike regulatory guidance, will bring certainty and closure to the back and forth of the past few decades,” Heinel continued.
Catherine Reilly, Director of Retirement Solutions at Turnkey retirement solutions provider Smart, said the legislation would require fiduciaries to primarily consider investment returns, but also allow them to incorporate ESG factors both as a source of potential investment returns and as a tiebreaker when deciding between two otherwise equivalent investments.
“We believe this is an appropriate framework, as it allows fiduciaries to incorporate ESG factors into their investment decisions, including those that apply to the qualified default investment alternative (QDIA), while still prioritizing the obligation of fiduciaries to seek investment returns for beneficiaries,” Reilly said.
A summary of the bill can be found here.
SEE ALSO:
- Biden’s DOL Scraps Trump Era ESG Rule
- How Proxy Voting Could Help 401k Participants Meet ESG Priorities
- How to Increase ESG ‘Appetite’ Among Investors
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
