Opposition to the Labor Department’s proposal to limit environmental, social and governance focused investments in 401(k) plans is growing, along with requests for a longer comment period.
Morningstar, Heartland Capital Strategies, Principles for Responsible Investment and Institutional Shareholder Services (ISS) have written comment letters opposing the proposal along with 41 Democratic members of the House, 13 Democratic members of the Senate and others.
In addition, a coalition of trade groups representing financial institutions with business in the defined contribution space are asking Labor for a 30-day extension to the public comment period on the proposal that is scheduled to end on July 30. They include the American Bankers Association, the Securities Industry and Financial Markets Association, the Insured Retirement Institute, the Investment Company Institute, the Defined Contribution Institutional Investment Association, the Investment Adviser Association and the SPARK Institute.
“The changes described in the proposal are significant and demand comprehensive review in order to properly consider their impact on plan investments and current practices,” reads their letter to the Employee Benefits Security Administration, the division that oversees retirement plans. “To help avoid unintended consequences that could include increased costs and burdens on fiduciaries for the selection of any plan investment, significant limitations on the investment choices of plan participants, and increased risk of litigation against plans, more than thirty days is need for analysis.”
The House Democrats who wrote to the department are asking that the comment period be extended for an additional 60 days.
Unusually Short Comment Period
The Labor’s 30-day comment period on its proposal to limit investments based on consideration of ESG factors for DC plans is unusually short but not unprecedented. The department’s recent fiduciary rule proposal designed to align with the SEC’s also has a 30-day comment period (ending Aug. 6) and has also been criticized by Democrats in Congress and public interest groups.
Both proposals have been developed under leadership of Labor Secretary Eugene Scalia, the agency’s head since September and son of the late Supreme Court Justice Antonin Scalia.
The DOL proposal on ESG-focused investments reverses earlier guidance from the agency under the Obama administration, which allowed retirement plans operating under the Employee Retirement Income Security Act to consider the social impact of their investments so long as those investments didn’t compromise fiduciary obligations.
The latest proposal states that ERISA plan fiduciaries may not invest in ESG vehicles if the investment strategy subordinates returns or increases risk “for the purpose of non-financial objectives,” according to a statement from the Labor Department.