Ethics, ESG, and ERISA: Ethical-Factor Investing of Savings and Retirement Benefits Part 2

Abstract

Ethical-factor investing is investment decision-making that takes into account ethical factors. Part 1 described the three prudent approaches to ethical-factor investing: (1) the Incorporation approach, which does the right thing only if it improves financial returns; (2) the Tie-Breaker approach, which does the right thing if there no financial cost to doing so; and (3) the concessionary approach, which does the right thing if it does not reduce financial returns too substantially.

Fiduciaries making investments on behalf of ERISA plans, other than Top-Hat plans, may use the Incorporation approach, and must use it, to the extent it is part of prudent investing. They may use the Tie-Breaker approach, but not the Concessionary approach. The latter would violate the fiduciary duty to act for the exclusive purpose of providing benefits to plan participants and beneficiaries for ERISA plans, other than Top-Hat Plans.

Participants and beneficiaries of individual retirement arrangements or of self-directed ERISA savings and retirement plans, such as most 401(k) plans, may use any of the three ethical-factor investment approaches. Sponsors of Top-Hat plans may do the same. Fiduciaries choosing an investment option for most self-directed ERISA plans, other than Top-Hat plans, must use the Incorporation approach to the extent that it is prudent. They may also choose an option that uses the Tie-Breaker approach, but if it was also chosen by the Tie-Breaker approach it may only supplement rather than replace another investment option, such as an S&P 500 Index® fund.

Keywords: ESG, 401(k) plans, sustainable investing, self-directed plans, faith-based investing, responsible investing, socially beneficial investing, ethics, ethical-factor investing, ERISA, retirement plans, savings plans, corporate governance, fiduciary responsibilities,

JEL Classification: J32, K19, K22, K34, G11, G34