PLANSPONSOR - December 2022-February 2023 - 10

UPFRONT
ESG Is Permissible but Not Required
THE DEPARTMENT of Labor announced
its final rule on environmental, social and
governance investment in plans governed
by the Employee Retirement Income
Security Act. This solidified long-awaited
permission to use ESG analysis in retirement
plan investing but not making it
mandatory. Even as the decision came
down, however, details remained to be
worked out for real-world implementation,
according to multiple ERISA attorneys.
As legal authority for the rule, the
DOL cites Executive Order 14030, which
directed the federal government to protect
pensions from climate risk, and Executive
Order
13990, which instructed federal
agencies to evaluate Trump-era regulations
that could impede improving the
environment.
The new rule reverses one published
at the end of President Donald Trump's
term that limited consideration of
ESG factors when making investment
choices for ERISA plans. In March 2021,
President Joe Biden's DOL announced it
would review that rule and meanwhile not
enforce it. The new rule clarifies that ESG
factors may be considered in investment
choices, among other changes.
One such change was that the
Trump-era rule did not allow qualified
default investment alternatives to take
ESG into account, whereas the new rule
permits it, says Alex Ryan, a partner in
law firm Willkie Farr & Gallagher LLP.
Plans may also consider " collateral
benefits " as a tiebreaker if both investments
in question would equally serve
the interests of the plan, whereas the
Trump-era rule required the investments
to be economically indistinguishable-a
higher standard.
This new standard allows nonfinancial
concerns to break a tie, though
Elizabeth Goldberg, a partner in law firm
Morgan, Lewis & Bockius LLP, says those
sorts of situations are relatively rare.
The new rule also lets sponsors
include investment menu options that
take participants' nonfinancial
and preferences-e.g.,
to
fight
change-into account, as long as those
menu options are still prudent. This provision
is intended to increase plan participation
by allowing sponsors to provide investment
incentive beyond economic returns.
It is unclear, however, how participant
preferences are to be measured in order to
support a prudent investment option that
might not have been included absent those
expressed preferences.
Bradford Campbell, a partner in law
firm Faegre Drinker Biddle & Reath LLP,
says it is unclear whether a sponsor should
wait for explicit requests or survey participants
to gauge their interest in certain
funds.
Goldberg says these options still
10 PLANSPONSOR.COM December 2022 - February 2023
Art by Irene Servillo
interests
climate
cannot sacrifice returns or take on additional
risks, but sponsors will need time to
be able to see what is adequate participant
demand or interest.
When
asked whether
participant
demand for certain investments could
be a defense against possible ERISArelated
litigation, David Levine, co-chair
of the plan sponsor practice at Groom Law
Group, Chartered, says all involved will
" have to see how this plays out. "
Ryan says the DOL has not spelled
out a process for sponsors to solicit or
receive participant preferences for
this
purpose, and it ultimately may vary from
employer to employer. This menu provision
might provide some cover for sponsors
that like to consider employee preferences
in investment options.
-Paul Mulholland
http://www.PLANSPONSOR.COM
PLANSPONSOR - December 2022-February 2023

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