Keep Your Eye on the Prize

For ERISA plan fiduciaries who thought they were being responsible and addressing participants’ demands by including investments in employee retirement plans that also support non-financial objectives, such as environment, social and corporate governance (“ESG”) goals, the Department of Labor (“DOL”) has weighed in. And they don’t necessarily agree.

In a proposal announced June 23, 2020, the DOL would seek to amend sections 404(a)(1)(A) and (B) of ERISA (the “Proposal”) to make clear that plan fiduciaries must focus first and foremost on maximizing potential investment returns and minimizing investment risks in the plan. All other non-pecuniary objectives must be subordinate.

The Proposal recognizes the increasing proliferation of ESG-focused investment vehicles and cites numerous concerns facing plan fiduciaries whose apparent good intentions might undermine the true objective of ERISA plans— maximizing retirement funds.  These issues include a lack of uniformity in defining an ESG investment, vague and/or inconsistent rating systems, inaccurate or incomplete disclosures, reduced returns, potentially greater risks, and higher fees. While recognizing the purported opportunity to further social causes that may be important to individual plan investors, the Proposal notes that “Providing a secure retirement for American workers is the paramount, and eminently-worthy, ‘social’ goal of ERISA plans”.[i]

The proposal seeks to codify the following points:

  • A plan fiduciary’s evaluation of an investment must be focused only on pecuniary factors that have a material effect on the return and risk of an investment.
  • Fiduciaries are prohibited from subordinating the financial interests of plan participants and beneficiaries to some other, non-pecuniary goal, either by sacrificing investment return or taking on additional investment risk.
  • Plan fiduciaries must consider alternative investments or investment courses of action.
  • When alternative investments are determined to be economically indistinguishable after thorough evaluation, and one of the investments is selected on the basis of a non-pecuniary factor or factors such as ESG considerations, the fiduciary must fully document the analysis undertaken.
  • Fiduciary standards also apply to a fiduciary’s selection of investments in 401(k) and other defined contribution individual plans which allow a plan participant to direct their investments into an array of options in the plan. The proposal explicitly sets forth the criteria that a fiduciary must consider in selecting investment options for such plans when the investment option includes ESG goals in their investment mandates, or in the fund name.

The full text of the rule proposal can be found here.

To speak with a CSS regulatory expert, email us at info@cssregtech.com.

[i] Department of Labor, Employee Benefits Security Administration, 29 CFR Part 2550, RIN 1210-AB95, Financial Factors in Selecting Plan Investments


Subscribe to CSS Blog

CSS frequently publishes blog posts which are written by our team from their observations in the field, at conferences and through experiences with compliance professionals. These posts are designed to further knowledge and share industry best practices. Topics run the gamut, including Form ADV, cybersecurity, MiFID II, position limit monitoring, technology challenges and more. Complete and submit the brief form below to receive notifications when we publish new content.

Latest Content

Breakdown of OCIE’s COVID-19 Compliance Risks Alert

The SEC’s “Office of Compliance Inspections and Examinations (“OCIE”) issued an Alert today regarding “Select COVID-19 Compliance Risks for Investment Advisers and Broker-Dealers.” OCIE shared observations regarding six broad categories: protection of investors’ assets; supervision of personnel; practices relating to fees, expenses, and financial transactions; investment fraud; business continuity; and the protection of investor and … Continued

Are Investment Managers Going to Have More KIDs?

Let us be clear…. we’re actually talking about the potential increase in production of point-of-investment disclosure documents for investment managers. The complications and stress of Brexit just got a whole lot more real for many UK- and EU-based investment management companies that are subject to rules requiring production of UCITS KIID (Key-Investor-Information-Document) and PRIIPs KID … Continued

Do You Feel Confident Your Password Hasn’t Been Hacked?

As a cybersecurity consultant, I am often asked if some of the threats we industry practitioners talk about are overstated. Hyped up fear as a sales tactic. The simple answer is no. The fear is not overstated, and the risks all too real – which helps to explain why cyber remains a top priority for … Continued