PLANSPONSOR - June/July 2020 - 13

ESG Investing: The Ante Is Raised
ENVIRONMENTAL and social issues
have been increasingly in the spotlight
this year. The latest attention was drawn
in late June, when the Department of
Labor (DOL) issued a proposed regulation
seeming to create stricter limits for
environmental, social and governance
(ESG) investing in retirement plans.
Andrew Oringer, co-chair of Dechert
LLP's ERISA [Employee Retirement
Income Security Act] and executive
compensation group, says administrations
typically bounce between subtle variations
in tone. " This [one] indicated an even more
pointed dissatisfaction with ESG principles
when it comes to retirement plan
investments, not just a change in tone. "
The proposed rule expressly notes that
an ESG fund may not be a plan's qualified
default investment alternative (QDIA) or a
component of one. Oringer says the DOL
seems to be saying that even if a plan fiduciary
can conclude an ESG-centric investment
is consistent with ERISA, if participants
will be defaulted into an investment,
the selection of that investment should be
based solely on financial considerations.
" With respect to QDIAs, it says your
ESG-themed fund with ESG named in it
is problematic in the QDIA or even in one
of its components, " says Steven Rabitz,
a partner at Dechert. " That being the
case, it doesn't necessarily mean, from
our perspective, that there isn't a place
for empirical ESG metrics within a TDF
[target-date fund] or QDIA. In other words,
much in the same way sponsors can use
ESG as a healthy empirical metric, perhaps
there's a place for that in a QDIA, as well. "
Prior guidance from the DOL
suggested that ESG factors could be
considered as a tiebreaker when evaluating
two investments similar in performance
and cost. Rabitz says there is interesting
language in the preamble to the
proposed regulation suggesting that the
DOL will keep open the " break-the-tie,
all-things-being-equal " idea, but the
agency expects that true ties rarely occur.
" They are sending a message that it will
be difficult, and sponsors better be able to
demonstrate it quantitatively, " he says.
" The DOL is skeptical that plan fiduciaries
can make the point that deciding
based on ESG factors won't hurt participants, "
Oringer says. " It's saying, 'If
you're eliminating investments by
TIDBITS
How Plans Are Fighting COVID-19
To encourage financial well-being during the pandemic,
companies have added or are considering adding the following:
24%
Financial
coaching
3%
Contributions
toward
emergency
savings
accounts
14%
Review of
retirement
plan design
3%
Retireefocused
solutions
6%
Fraudprotection
solutions
33%
More
participant-focused
communications
Statistics
are based on 483 U.S. responses.
Source: Mercer Global Survey
DB Participation on the Decline
The past decade saw a significant
drop in the percentage
of active participants in defined
benefit (DB) plans-from 44%
in 2010 to 37% this year.
44%
37%
2010
Source: 2020 PLANSPONSOR Defined Benefit Administration Survey
2020
1%
Managed
accounts
1%
Contributions
toward student
loans
looking at noneconomic factors, how can
that not hurt you?' "
Brian Pinheiro, attorney and head
of benefits and executive compensation
group at Ballard Spahr, says the proposed
rule takes a baby step forward. " It provides
a road map for fiduciaries to use objective
criteria to identify ESG investments, to
document the criteria used and document
their decisions. " -Rebecca Moore
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