PLANSPONSOR - April/May 2018 - 87

SAXON ANGLE
New ESG Guidance
O
ver the last 25 years, a change in the political party in
power has resulted in the Department of Labor (DOL)
changing its interpretation relating to the use of environmental,
social and governance (ESG) factors in managing
Employee Retirement Income Security Act (ERISA)-governed
plans. Specifically, the DOL has ping-ponged on the extent
to which plan fiduciaries can take noneconomic factors into
account when making investment decisions. In another round
of guidance, on this April 23, the DOL released Field Assistance
Bulletin (FAB) No. 2018-01 to provide guidance to national and
regional enforcement and address questions they may have
related to: 1) when fiduciaries may take ESG factors into account
when making economically targeted investments (ETIs), and
2) when it is appropriate to spend plan assets on shareholder
engagement activities.
Economically Targeted Investing
FAB 2018-01 provides commentary on Interpretive Bulletin (IB)
15-01's ETI investing guidance. At an elementary level, it discourages
plans from concluding that the ESG factors are economically
significant. Specifically, it suggests that, in most cases,
there will not be a tie where an ESG factor could serve as a tiebreaker,
and it suggests that the use of an ETI fund as a qualified
default investment alternative (QDIA) could raise questions
under ERISA's duty of loyalty.
First, while FAB 2018-01 continues to acknowledge that ETI
factors can be a tie-breaker, it cautions plan fiduciaries against
converting factors that could be ETI factors into economic factors
such as by concluding that the ESG factors " promote positive
general market trends or industry growth. " Instead, FAB
2018-01 states that fiduciaries must " not too readily treat ESG
factors as economically relevant. " FAB 2018-01 goes further in
discussing the use of such factors as part of a plan's investment
policy statement (IPS). This reflects the department's views
that an IPS is a plan document, and reminds plan fiduciaries to
follow plan documents only to the extent that they are consistent
with ERISA. In the ESG context, the DOL states that this means
managers may at times have to " disregard " a plan's IPS.
FAB 2018-01, at first glance, appears to provide some helpful
language regarding the addition of ESG-themed investment alternatives
to a 401(k) plan's investment lineup. However, the DOL
discourages the use of ESG-themed options as QDIAs. In fact, it
DOL continues ping pong on social investment issues
hypothesizes that plan participants could have competing views on
collateral benefits and a fiduciary thus violates his duty of loyalty
by favoring some participants' views over others. In a footnote, the
agency muddles its guidance further by noting that ESG-themed
funds should be distinguished from non-ESG-themed funds
when the latter invest in ESG funds and are engaging in activism,
in accordance with IB 2015-01 and IB 2016-01.
Shareholder Engagement Activities
FAB 2018-01 also provides new color on IB 2016-01 where the
DOL had indicated that proxy voting and shareholder engagement
can be consistent with a fiduciary's obligation under
ERISA. It reiterates that a primary factor that led it to suggest
these activities are permissible is that they " typically do not
involve a significant expenditure of funds. "
The agency further clarified its position when it states, " the
IB was not intended to signal that it is appropriate for an individual
plan investor to routinely incur significant expenses and
to engage in direct negotiations with the board or management of
publicly held companies with respect to which the plan is just one
of many investors. " FAB 2018-01 expressly states that plans should
not incur significant expense to " fund advocacy, press, or mailing
campaigns on shareholder resolutions, call special shareholder
meetings, or initiate or actively sponsor proxy fights on environmental
or social issues relating to such companies. "
As a final caution, FAB 2018-01 warns fiduciaries who
believe there are special circumstances that warrant shareholder
engagement expenditures to engage in a " documented analysis "
of the costs and benefits of engaging in such activities.
Implications
The constant changing of administrative views regarding ESG
could leave plan fiduciaries rightfully confused. We continue
to caution fiduciaries who may be interested in making investment
decisions based on ESG criteria. Plan fiduciaries must still
determine that ETIs are prudent, based on the same factors they
would apply with regard to any investment, including an identification
of the ETI's economic value.
Stephen Saxon is a partner with Groom Law Group,
Chartered, in Washington, D.C. George Sepsakos is an
associate with Groom.
PLANSPONSOR.com April-May 2018 87
http://www.PLANSPONSOR.com
PLANSPONSOR - April/May 2018

Table of Contents for the Digital Edition of PLANSPONSOR - April/May 2018
