October 30, 2020

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Department of Labor Proposal Would Curtail ESG Investing

On June 23, 2020, the U.S. Department of Labor (the “DOL”) issued a proposed rule (which was published in the Federal Register on June 30, 2020) that would amend its “investment duties” regulation set forth at 29 C.F.R. § 2550.404a-1.  The DOL states that the proposed rule is intended to “eliminate confusion” and limit when and how ERISA plan fiduciaries may (i) consider non-pecuniary factors, such as environmental, social and corporate governance (“ESG”) factors (also referred to as “socially responsible investments” or “economically targeted investments”), when making plan investment decisions for a defined benefit plan, or (ii) offer an ESG-themed investment option under an individual account defined contribution plan (e.g., a 401(k) plan).  In particular, the proposed rule would:

  • codify what the DOL describes as its longstanding position that ERISA plan fiduciaries of both defined benefit and defined contribution plans must make investment decisions based solely on the risk-adjusted value to plan participants and beneficiaries and may not subordinate the interests of the plan to unrelated goals or objectives;

  • provide specifically that ERISA’s exclusive purpose rule and duty of loyalty prohibit fiduciaries from considering any non-pecuniary factors over the financial and retirement income interests of plan participants and beneficiaries;

  • provide that ESG factors can be pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories;

  • require ERISA plan fiduciaries to consider how an investment or investment course of action compares to available alternatives;

  • require specific documentation in the “rare circumstances” where, after appropriate investment analysis, fiduciaries consider ESG factors as a “tie-breaker” in choosing between economically “indistinguishable” investments; and

  • without limiting ERISA’s general rules, confirm that an ESG fund may be added to a 401(k)-type plan only if (i) the fund is well managed and adequately diversified, (ii) the fund is selected and monitored through a prudent process, based only on objective risk-return criteria, (iii) the relevant factors are documented, and (iv) the fund is not used as the plan’s qualified default investment alternative (or a component of the QDIA).

In its commentary, the DOL noted the confusion that persists for ERISA plan fiduciaries in regards to its ESG-investing rules, which the DOL acknowledged may be a result of varied statements it has made over the years in past guidance.  In short, the proposed rule would codify the DOL’s view that the sole focus of ERISA plan fiduciaries must be the financial returns and risk to participants and beneficiaries.  ERISA plan fiduciaries must not sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.

The DOL invited comments from the public on all facets of the proposal (which are due by July 30, 2020, 30 days after the date of publication in the Federal Register).  If finalized, these rules would become effective 60 days after publication of the final rule.

© 2020 Proskauer Rose LLP. National Law Review, Volume X, Number 183
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About this Author

Ira G. Bogner, Tax, Employee Benefits, ERISA, Attorney, Proskauer, Law firm
Partner

Ira G. Bogner is Chair of the firm’s Tax Department and a member of the Employee Benefits, Executive Compensation & ERISA Litigation Group.

Ira has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and severance arrangements.

212-969-3947
Russell L Hirschhorn ERISA Litigation, employee benefits attorney, Proskauer
Senior Counsel

Russell Hirschhorn is a Senior Counsel in the Labor & Employment Law Department, where he focuses on complex ERISA litigation and advises employers, fiduciaries and trustees on ERISA benefit and fiduciary issues. 

Russell represents employers, plan sponsors, plans, trustees, directed trustees and fiduciaries in all phases of litigation, arbitration and mediation involving employee benefits, including class action and individual claims relating to ERISA’s fiduciary duty and prohibited transaction provisions, denials of claims for benefits, severance plans, ERISA Section 510,...

212.969.3286
Seth Safra, Proskauer Law Firm, Employee Benefits, Executive Compensation and ERISA Litigation Attorney
Partner

Seth Safra is a partner in the Employee Benefits & Executive Compensation Group, where he counsels clients on all aspects of employee benefits and executive compensation.

Seth advises clients on ERISA and other related laws with respect to the design and administration of qualified and non-qualitied retirement plans, including defined contribution (including 401(k) and ESOPs) and cash balance plans. In addition, Seth counsels clients on their health & welfare plans, including advising on issues related to health care reform.

...
202-416-5840
Steven Weinstein, Employee Benefits Attorney, Proskauer Rose Law Firm
Partner

Steven Weinstein is a partner in the Employee Benefits & Executive Compensation Group and co-head of the Strategic Corporate Planning Group. He has been practicing in the employee benefits field since 1984, representing clients sponsoring single employer and Taft-Hartley pension and welfare plans.

Steven advises clients in all aspects of pension plan tax qualification and plan administration, including drafting of plan documents and employee communications; providing advice relating to corporate acquisitions and mergers; and negotiating investment management agreements, trust...

212-969-3362
Adam W. Scoll, Tax, Private Investment Funds Attorney, Proskauer, law firm
Senior Counsel

Adam W. Scoll is a senior Associate in the Tax Department and a member of the Private Investment Funds Group. He has been practicing in the field of employee benefits and executive compensation law since 2001.

Adam has provided guidance to clients on a wide variety of matters in the areas of employee benefits and executive compensation, including the investment of plan assets, the implementation of employee benefit plans, employee benefit issues in mergers and acquisitions, the awarding of equity-based compensation, and the negotiation and drafting of employment agreements and...

617-526-9486
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