The Proposed DOL ESG ERISA Regulation and the Public Reaction

48 Comp. Plan. J. 201, 2020

14 Pages Posted: 13 Aug 2020 Last revised: 14 Nov 2020

Date Written: August 7, 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 DOL describes ESG investments as including socially responsible investing, responsible investing, and sustainable investing (ESG/sustainable investing). The DOL proposed regulation would direct those fiduciaries to look askance at ESG/sustainable investments. In particular, the proposed regulation would provide that

(1) ESG/sustainable investments are only permitted if the plan fiduciary overcomes burdens not applicable to other investing approaches regardless of the economic value of the investment, and

(2) ESG/sustainable investment alternatives for self-directed plans, regardless of their economic values, may not (a) be a qualified default investment alternative or a component of such an alternative, or (b) include alternatives if the fiduciary acknowledges having used any ESG/sustainable investment considerations that are not “objective risk-return criteria.”

Many commenters suggested that the proposed regulations be significantly revised, and there appeared to be broad agreement on two revisions:

• The regulation should permit an investment alternative may be a qualified default investment alternative for a self-directed plan regardless of whether the alternative makes any use of ESG/Sustainable consideration, such as using the S&P® index; and

• The regulation should distinguish between the use of ESG/Sustainable considerations to determine the economic value of an investment, i.e., the incorporation approach, which may be judged in the same manner as any other valuation tool, and cases in which consideration are used for other purposes.

There was a strong factual disagreement about whether ESG/sustainable considerations are only used to value investments, including as a risk-management tool, in which case there is no reason for any special scrutiny of those considerations. If those considerations are ever used for other purposes, such as to have positive effects for the environment, society, or enterprise governance, some argue ERISA not only prohibits such consideration, but special scrutiny is needed to avoid these so-called abuses. even if the pursuit of those goals does not reduce the economic value of the plan’s investment or plan’s choice of an investment alternative to make available to plan participants and beneficiaries.

There was also a strong legal disagreement about whether the regulation should, as it does in very narrow circumstances, ever permit fiduciaries to use any ESG/sustainable considerations that do not determine an investment’s economic value to decide between direct investments which have the same expected economic value.

The paper argues that 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 to reflect not only the commenters' broad consensus but also :

• Delete any additional reporting or review requirements on ERISA plan fiduciaries that the rule would impose only if the name of the investment and/or the investment approach includes an ESG/Sustainable reference;

• State that because multiple options often have the same best expected economic value, ERISA plan fiduciaries making investments need not, and often may not, consider only the investment’s expected economic value ; and

• Permit, but not require, ERISA plan fiduciaries to choose and retain “ethically beneficial” investments that do not sacrifice any economic value by using any non-pecuniary consideration to select or monitor investments if such consideration is not illegal, and does not reduce the expected economic value of the investment.

Keywords: ERISA, DOL, ESG, Fiduciary, Sustainable Investing, Responsible Investing, Socially Beneficial Investing, Public Comment, Retirement Plans, Investments, Economic Value,

JEL Classification: G11,G!2, G34, J32, K19, K22, K31

Suggested Citation

Feuer, Albert, The Proposed DOL ESG ERISA Regulation and the Public Reaction (August 7, 2020). 48 Comp. Plan. J. 201, 2020, Available at SSRN:

Albert Feuer (Contact Author)

Law Offices of Albert Feuer ( email )

New York, NY
United States
718-263-9874 (Phone)

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