The Premises of the Proposed Regulation for Selecting ERISA Plan Investments
The Premises of the Proposed Regulation for Selecting ERISA Plan Investments, 61 TAX MGMT. MEMO. 227
13 Pages Posted: 3 Aug 2020 Last revised: 10 Aug 2020
Date Written: August 3, 2020
ERISA plan fiduciaries select investments to make (1) directly on behalf of plan participants and beneficiaries, or (2) indirectly on behalf of plan participants and beneficiaries by selecting investment options to offer them. The proposed regulation directs those fiduciaries to look askance at ESG investments, which the DOL describes as including socially responsible investing, responsible investing, and sustainable investing (ESG/sustainable investing). In particular, ERISA plan fiduciaries would not be able to choose (1) an ESG/sustainable investment, regardless of the economic value of the investment, unless the fiduciaries overcome burdens not applicable to other investments and (2) an ESG/sustainable investment for a self-directed plan, regardless of its economic value, as (a) a qualified default investment alternative (QDIA)or a component of such a QDIA, or (b) an investment alternative if the fiduciary applied any ESG/sustainable investment considerations, such as ESG ratings, that are not “objective risk-return criteria.”
Participants and beneficiaries, like other investors often want their ERISA plans to seek and make (or offer) ESG/sustainable investments, not only because such investments, like other investments, are perceived as good economic investments, but because, unlike other investments these investments are also perceived to have positive effects for the environment, society, or enterprise governance. Thus, the proposal would no longer permit fiduciaries to choose or retain an ESG/sustainable-friendly version of an asset classes that provides at least the economic value of the other available members of an asset class, such as the selection of an S&P 500® ESG Index fund rather than an S&P 500® Index fund.
The proposed regulations rely on incorrect premises.
The most important incorrect premise is that careful, prudent, skillful, and diligent ERISA plan fiduciaries will, like the DOL and unsophisticated investors, rely on slogans, such as those denigrating or praising ESG/sustainable investing, to make direct or indirect plan investments. Instead, plan fiduciaries fulfilling their ERISA obligations review the economic value of the options in the relevant asset class, regardless of the name of the investment or the investment approach, to determine the investment option or options with the greatest economic values.
The second most important incorrect premise is that plan fiduciaries may only use pecuniary factors to select and monitor investment options for participants and beneficiaries. None of the court decisions cited in the proposal made such a holding. Instead, as suggested in the proposal’s preamble, plan fiduciaries would determine the economic value of the options in the relevant asset class and thereby identify the alterantive or alternatives with the greatest economic value.
Thus, it is advisable for the DOL to revise the proposed regulation to be consistent with ERISA, the usual practice of prudent ERISA fiduciaries exercising due diligence in making plan investment decisions, prior DOL guidance, and the reasonable preferences of many ERISA plan fiduciaries, participants, and beneficiaries.
Keywords: ERISA, DOL, ESG, fiduciary, sustainable investing, responsible investing, socially beneficial investing, retirement plans, investments, economic value,
JEL Classification: G11,G!2, G34, J32, k19, k22, k31
Suggested Citation: Suggested Citation