PLANSPONSOR - December 2022-February 2023 - 39

INSIDE ANGLE
The Department of
Labor OKs ESG
The agency's revised regulation warms to 'green'
T
he Department of Labor has again
changed the rules regarding how plan
fiduciaries are permitted to invest for
... the DOL
stated that
environmental, social and governance principles.
This is in line with trends and changes
in administrations. When conservatives have
been in office, ESG investing tends to come
with additional protections and documentation
requirements. When liberal administrations
are in control, ESG investing rules suggest
a more permissive position. The Biden
administration followed this trend when it
issued its final rule " Prudence and Loyalty in
Selecting Plan Investments and Exercising Shareholder Rights. "
This rule permits plan fiduciaries to take into account ESG factors
and other, ancillary factors if the fiduciary determines that the
investment including the ESG or other factor " equally serve[s] the
financial interests of the plan over the appropriate time horizon "
without creating " expected reduced returns or greater risk. " It also
eliminated a recordkeeping requirement that the prior rule, issued
under the Trump administration, had imposed.
Whether and when the consideration of ESG factors may be
QDIAs should
be evaluated in
the same way
other investment
options are.
serve the financial interests of the plan "
rather than when the investments are " indistinguishable. "
Thus,
more inclined to find " ties, " given the DOL's
more permissive language.
The rule also describes that " fiduciaries
do not violate their duty of loyalty solely
because they take participants' preferences
into account when constructing a menu ... "
Thus, an option must also be prudent-and,
thus, fiduciaries must carefully evaluate any
investment option that participants request,
before placing it on a plan investment lineup.
Lastly, the rule repeals the Trump administration's blanket
ban on ESG-themed funds being considered as the qualified
default investment alternative or included within it. Instead, the
DOL stated that QDIAs should be evaluated in the same way other
investment options are.
part of a prudent process by a fiduciary of a plan governed by the
Employee Retirement Income Security Act has been the subject of
many formal and informal rulemaking processes by the DOL over
the previous decades. This is the latest chapter.
The new rule amends the previous version in a few material
respects. First, it states that a fiduciary may, but is not required
to, consider " climate change and other environmental, social or
governance factors " when they are economically relevant to the
consideration of an investment or investment course of action.
Plan fiduciaries still must act prudently when making plan-related
investment decisions, but the rule clarifies that fiduciaries may
accept ESG-related factors that may be material to the risk and
return profile of an investment and thus appropriate to take into
account when making such decisions.
The DOL has long stated that noneconomic factors may be
considered only in case of a " tie. " Under the Trump administration,
the department described a tie as being when investment options
are indistinguishable in terms of risk and return. However, the
Biden administration has taken a different tack and stated that a
tie may occur when " competing alternative investments equally
The Outlook
As stated above, the rule represents the latest in a decades-long
back and forth spanning five presidential administrations.
However,
the conversation about ESG investing in retirement
plans is likely far from finished. The strategy will remain an area
where upcoming administrations are likely to seek to revise rules.
That said, plan fiduciaries can find some comfort in the consistency
of the tie-breaker test. The DOL has retained its position
that plan fiduciaries ought to consider factors that the fiduciary
believes to be relevant to investment risk and return regardless
of whether those factors are ESG factors or not. Similarly, it has
suggested that fiduciaries shouldn't sacrifice returns or take on
additional risk to pursue ancillary goals.
The rule is likely to generate interest from participants and
others in the retirement industry and does provide for an arguably
less demanding framework than under the Trump administration.
Still, fiduciaries should remember that the DOL has been
clear that these investments are appropriate only where participant
returns aren't sacrificed and risks aren't increased.
Steve Saxon is a partner in Groom Law Group, Chartered,
and George Sepsakos is a principal in Groom. Offices for
Groom are in Washington, D.C.
fiduciaries may be
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