By Pension and Benefits Editorial Staff
The Department of Labor’s Employee Benefits Security Administration (EBSA) has announced a proposed rule to update and clarify the investment duties regulation in a manner that, in light of recent trends involving environmental, social, and governance (ESG) investing, would provide clear regulatory guideposts for plan fiduciaries.
EBSA said that the Labor Department has periodically been asked to consider the application of the fiduciary duties of prudence and exclusive purpose under ERISA Sec. 404(a)(1)(A) and (B) to pension plan investments selected because of non-financial objectives, such as environment, social, and public policy goals, that the investments may further. The different iterations of sub-regulatory guidance may have created confusion with about these investment issues.
Proposed solution. The proposal is designed, in part, to make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand that an underlying investment strategy of the vehicle is to “subordinate return or increase risk for the purpose of non-financial objectives.”
The proposal would make five core additions to the regulation:
- New regulatory text to codify the DOL’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 Sec. 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 DOL’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.
“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 Eugene Scalia. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”
Source: EBSA News Release No. 20-997-NAT.
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