It’s not everyday that a proposal from the Trump Administration unites both asset managers with small investor advocates, who often take opposite sides on regulatory issues. But that’s what’s happened with a proposal from the Department of Labor that would effectively limit investments focused on environmental, social and governance ratings in 401(k) plans.
Overall, the 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.” Also, such vehicles should only be used if they are “economically indistinguishable” from non-ESG investments and the plan fiduciary documents their use if selected for non-monetary reasons.
In addition, the proposal would ban the use of ESG-oriented fund options as a qualified default investment alternative in defined contribution plans.
Since the DOL announced the proposal at the very end of June, the department has reportedly collected about 1,500 comments, though it only posted 1,100 comments on its website — most of them negative, except for a handful from conservative political groups such as Americans for Prosperity and the Conservative Union.
Among those opposing the proposal are asset managers like BlackRock, Fidelity Investments, State Street Global Advisors and Vanguard. Sustainable investment advocates who oppose it include the Grantham Foundation for the Protection of the Environment, US SIF: Forum for Responsible and Sustainable Investment and U.S. Impact Investing Alliance.
Also, public and private private pension funds such as the California State Teachers Retirement System, as well as a number of individual investors and corporate governance advocates such as Nell Minnow and Robert Monks, oppose the measure.
Others including the Insured Retirement Institute, which represents annuity providers, went so far as to request that the DOL withdraw its proposal rather than amend it because of adequate existing regulations for plan fiduciaries and investment managers, making the proposal unnecessary.
The comments on the DOL proposal generally break down into these five categories:
1. Short Public Comment Period
Many commenters requested having longer comment periods beyond the 30 days, which was unusually short though not unprecedented for the current DOL. Its Best Interest fiduciary proposal designed to align with the recent SEC BI rule also had a 30-day comment period.
The U.S. Impact Investing Alliance called on the DOL “to suspend the rulemaking until well after the COVID-19 pandemic and economic crisis have passed.” Opponents argued that more time for comments was needed because of the complexity of the proposal and the magnitude of its effects, a response made even more challenging during the pandemic.
A group letter from the American Bankers Association, Insured Retirement Institute, Defined Contribution Institutional Investment Association, Investment Company Institute, SIFMA, Investment Adviser Association and the SPARK Institute stated that 30 days was not enough for a major overall haul to a DOL regulation that has been in place over 40 years.
Further, it could have the “unintended consequences” of increased costs and burdens on fiduciaries, including litigation risks, and significant limitations on plan participants’ investment choices, the group noted.
2. Mischaracterization of ESG
The DOL proposal distinguishes between ESG factors that can have a monetary (“pecuniary) and non-monetary (“non-pecuniary) impact on investments, noting that ERISA plan fiduciaries “may not invest” in an ESG vehicle whose strategy “is to subordinate return or increase risk for the purpose of non-pecuniary objectives.”
Many firms and individuals opposing the proposal argued that ESG investment vehicles do just the opposite: they reduce risk and rather than harm returns often boost performance, and therefore should be part of any prudent investment analysis.