Legal Alert: DOL Issues New Regulations on use of ESG Investments in Retirement Plans

The U.S. Department of Labor (DOL) has issued a new regulation to amend fiduciary standards for selecting and monitoring investments in ERISA retirement plans, particularly the environmental, social, and governance funds “ESG funds.”  The new regulation was proposed on June 22, 2020 and had specific reference to restrict the use of ESG funds.  When the regulation was finalized in the “Final Rule” on October 30, 2020, specific reference to ESG funds had been removed but the underlying meaning is clear…

Background

What is ESG?  ESG means using environmental, social, and governance factors to evaluate companies and countries on how far advanced they are with sustainability.  In recent years, investors have shown an interest in putting their money where their values are by investing in ESG funds in their retirement plans.

            What’s the issue with investing your retirement plan in ESG funds? 

Selection of ESG funds in the plan may be motivated by non-monetary objectives to advance social or environmental objectives rather than making investment decisions based solely on monetary objectives which measures the fund’s value. As a plan administrator, employers have fiduciary responsibilities to act prudently and diversify plan investments to minimize the risk of large losses to the plan and to act solely in the interest of the plan’s participants and beneficiaries while defraying reasonable expenses of administering the plan.

The Final Rule sets forth fiduciary standards for selecting and monitoring assets held by ERISA plans, and addresses the scope of fiduciary duties surrounding monetary and non-monetary issues.

What does that mean to employers?  

When selecting investment funds for the plan, employers should evaluate the fund with respect to the following monetary factors:

  • Its risk of loss and opportunity for gain;
  • The composition of the plan’s portfolio with regard to diversification;
  • The liquidity and current return of the plan’s portfolio relative to the anticipated cash flow requirements of the plan; and
  • The projected return of the plan’s portfolio relative to the funding objectives of the plan.

Employers may select investment funds with non-monetary objectives, but they must be sure that the investment fund will perform as well as alternate funds when considering the above stated factors and then weigh the non-monetary objectives to determine if the fund is right for the plan.  Lastly, employers must document how the chosen factors are consistent with the best interests of the participants and beneficiaries in the plan.

Note:  The fund selection cannot subordinate the interests of the retirement income and financial benefits to the participants and beneficiaries in the plan to unrelated objectives or goals.  Furthermore, the plan’s qualified default investment account “QDIA” cannot be an investment fund with non-monetary objectives.

The Final Rule will be effective 60 days after the date of publication in the Federal Register, but retirement plans have until April 30, 2022, to make any changes to certain QDIAs, where necessary to comply.

Contact your Alera Group representative if your plan has investments that promote non-monetary objectives and/or you would like to discuss the investment funds in your plan.

About the Author.  This alert was prepared for Alera Group by Marathas Barrow Weatherhead Lent LLP, a national law firm with recognized experts on ERISA-governed and non ERISA-governed retirement and welfare plans, executive compensation and employment law.  Contact Stacy Barrow at sbarrow@marbarlaw.com.

The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients.  This is not legal advice.  No client-lawyer relationship between you and our lawyers is or may be created by your use of this information.  Rather, the content is intended as a general overview of the subject matter covered.  This agency and Marathas Barrow Weatherhead Lent LLP are not obligated to provide updates on the information presented herein.  Those reading this alert are encouraged to seek direct counsel on legal questions.

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