The Labor Department released a final rule on Oct. 30 that updates and clarifies its plan to provideclear regulatory guideposts for fiduciaries of private-sector retirement andother employee benefit plans in lightof recent trends tied to environmental,social and governance investing.
The amendments, according to Labor,require plan fiduciaries to select investments and investment courses of actionbased on pecuniary factors — i.e., any factorthat the responsible fiduciary prudentlydetermines is expected to have a materialeffect on risk and/or return of an investment, based on appropriate investmenthorizons that are consistent with the plan’sinvestment objectives and funding policy.
Labor’s “rulemaking is controversialbecause many have viewed it as treating ESG investments as being suspect,when in fact more and more data point to[their] material benefit to investment performance,” George Michael Gerstein, apartner at Stradley Ronon in Washington,told Investment Advisor in an email.
The final ESG rule “appears to providefiduciaries greater flexibility in utilizingESG strategies, including selecting ESGfunds in 401(k) plan lineups,” Gersteinsaid. “DOL attempted to address someof the concerns raised in the commentletters but compliance risk will remainan issue” with this final rule.
Aron Szapiro, Morningstar’s director of policy research, said the researchfirm “did not think there was a problemthat needed to be solved by putting morehurdles on plan sponsors from considering ESG investments,” according to astatement sent via email.
To the contrary, he said, “we wanted
to see clarifications that would encour-
age plan sponsors to consider ESG data
as they set their plan lineup.”
Szapiro added: “We don’t think this
rule addresses any issues investors face.
Although it does not bar plans from consid-
ering including ESG strategies, it will make
it harder for investors to access strategies
that consider long-term sustainability.”
Furthermore, “Since this is an increas-
ingly mainstream consideration, the rule
creates risks that 401(k) investors will
be left behind,” he explained.
“Finally, the DOL retained the QualifiedDefault Investment Alternative provisions,” Szapiro said. “While the changesthey made are somewhat helpful, this partof the rule is also out-of-step with embracing ESG considerations many professionalasset managers now view as material.”
MORE DOL DETAILS
Labor’s final rule amends theDepartment’s longstanding investmentduties regulation, first issued in 1979, tocodify a clear regulatory structure forconsidering investments for ERISA plans.
During the last 30 years, Labor stat-
ed that it has periodically considered
the application of the fiduciary duties
of prudence and loyalty under the
Employee Retirement Income Security
Act (ERISA) to plan investments that
promote non-financial objectives, such
as furthering environmental, social and
public policy goals.
According to Labor, “The Department
has issued different iterations of sub-reg-
ulatory guidance during this period that
may have created confusion about these
investment issues, and the rapid increase in
so-called ESG investments has also raised
important and substantial questions about
shortcomings in the rigor of the prudence
and loyalty analysis by some participating
in the ESG investment marketplace.”
Acting Assistant Secretary of Labor
for the Employee Benefits Security
Administration Jeanne Klinefelter
Wilson said in a release: “Our goal is to
ensure that retirement security remains
the top priority of those who manage
the retirement assets that millions of
Americans have worked so hard to earn.
“Retirement plan fiduciaries vindi-
cate the public policy behind ERISA —
and comply with the law — when they
manage plan assets with a clear and
determined focus on participants’ finan-
cial interests in receiving secure and
valuable retirement benefits,” she said.
“Plan fiduciaries should never sacrifice
participants’ interests in their benefits
to promote other nonfinancial goals.”
The final rule and a summary of the
rule’s key provisions are available on the
The rule will be effective 60 daysafter publication in the Federal Register,but plans will have until April 30, 2022,to make any changes to certain qualified default investment alternatives,where necessary to comply with thefinal rule.
Labor Finalizes Controversial ESG Rule
Plans will have until April 30, 2022, to make changes to certain
qualified default investment alternatives.