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DOL Won't Enforce New Rules on ESG in Retirement Plans

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What You Need to Know

  • One rule would have had the effect of limiting ESG investments in 401(k) plans.
  • The other would limit ESG considerations in fiduciary proxy votes.
  • The DOL intends to reach out stakeholders to craft rules that recognize the importance of ESG integration.

The Department of Labor is abandoning two rules adopted under the Trump administration that  would have made it more difficult for retirement plans to consider environmental, social and governance (ESG) factors in their investment options and in their proxy votes.

“Until the publication of further guidance, the department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules,” it said in a statement.

“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” said Ali Khawar, principal deputy assistant secretary for the Employee Benefits Security Administration (EBSA), in a statement.

The EBSA enforces the Employee Retirement Income Security Act of 1974 (ERISA) that governs defined contribution and defined benefit plans.

Khawar said the DOL intends to reach out to stakeholders “to determine how to craft rules that better recognize the important role that environmental, social and governance integration” in the evaluation and plan investments while fiduciaries uphold fundamental fiduciary obligations.

The DOL decision follows an executive order that President Joe Biden issued on his first day in office directing federal agencies to review existing regulations issued or adopted during the Trump administration “that are or may be inconsistent with, or present obstacles to, the policies” the new president set forth ”to promote and protect public health and the environment.”

The DOL Rules 

Labor’s move affects two agency rules: the “Financial Factors in Selecting Plan Investments” rule, which requires that 401(k) plan fiduciaries select investments based on “pecuniary factors” that could have a material effect on the risk and return of investment, and the “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which requires that fiduciaries of defined benefit and defined contribution plans put the economic interest of plan participants and beneficiaries first and make voting decisions that advance those interests.

The department noted that it has heard from a variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumers groups and investment advisors who questioned the rush to adopt the new rules and the evidence that supported them.

ERISA attorney Fred Reish, partner at Faegre Drinker in Los Angeles, which represents clients who manage mutual funds and who use ESG factors for that purpose, said the rule on limiting 401(k) investments “has had a chilling effect on plan fiduciaries.” He said the department’s new position on the rule “should reassure plan fiduciaries and advisors that ESG factor investments can properly be used in tax-qualified, ERISA-governed retirement plans.”

Aron Szapiro, head of policy research at Morningstar, tweeted his pleasure “to see the Department respond to concerns that the rule could have a chilling effect on appropriate integration of ESG factors into investment decisions….good stuff.”

(Photo: Mike Scarcella/ALM)