PLANADVISER - January/February 2021 - 39

compliance consult
David Kaleda
ESG Investing Under ERISA
DOL narrows focus in final rule to pecuniary factors
ON NOVEMBER 13, 2020, the Department
of Labor (DOL) issued its final
rule Financial Factors in Selecting Plan
Investments. The regulation became
effective on January 12 and targets
advisers and other fiduciaries under
the Employee Retirement Income Security
Act (ERISA) who wish to consider
economic, social and governance (ESG)
factors when making investment decisions
or recommendations. Advisers and
other fiduciaries should consider how
they will comply with it.
The final rule
makes no
reference to
ESG or other
terms commonly
associated with
ESG investing
Looking Back
From 1994 through 2018, the DOL issued
a series of interpretive bulletins (IBs)
and a field assistance bulletin (FAB) that
explained how to comply with ERISA's
fiduciary duties of prudence and loyalty.
The issuance of the guidance tended to
follow changes in presidential administrations, particularly
changes in what party controlled the White House.
Generally, Democratic administrations have been more
open to the consideration of ESG factors than have Republican.
Regardless of the party in charge, the DOL has recognized
that ESG factors may be considered so long as fiduciaries
prioritize a plan's economic interests when making
investment decisions. The final regulation is the first codification
by the DOL of its views of how fiduciaries should
consider ESG factors.
The final rule's text makes no reference to ESG or other
terms commonly associated with ESG investing such as
" socially responsible investing " ( " SRI " ) or " economically
targeted investing. " Rather, the regulation requires that
fiduciaries consider only " pecuniary factors " when making
an investment decision.
A pecuniary factor is a factor that a fiduciary prudently
determines is expected to have a material effect on the
risk and/or return of an investment. Then, if the fiduciaries
cannot distinguish between two or more investment
options or courses of action based upon pecuniary factors,
the fiduciary may consider non-pecuniary factors as the
basis for an investment decision. Notably, the DOL states
in the preamble that it expects the latter situation to be " ...
discrete (and likely rare) ... "
such as " socially
responsible
investing " or
" economically
targeted investing. "
The Tiebreaker Concept
The final regulation allows for the possibility
that an ESG factor is a pecuniary
factor. The DOL points to " disposal of
hazardous waste " and " dysfunctional
corporate governance " as possible
examples. However, to be sure, the
agency expects fiduciaries to be able
to make such connections and to give
appropriate weight to such factors when
considered against other pecuniary
factors, e.g., risks and costs.
The provisions of the regulation
apply the same way to retirement plans
whose assets are managed by a fiduciary
on a discretionary basis and participantdirected
defined contribution (DC) plans,
with one key exception. The abovediscussed
tiebreaker concept may never
be applied with regard to a qualified
default investment alternative (QDIA).
The rule became effective before the Biden administration
was in office. Given the stance taken by prior Democratic
administrations with respect to ESG investing, we can expect
the DOL to revisit the regulation. However, advisers and
other fiduciaries should not assume the DOL will be able to
take immediate action, because of other regulatory priorities.
Additionally, participants and other parties with standing
may sue for losses resulting from a breach of fiduciary duty.
Therefore, advisers and other fiduciaries should review
their practices and procedures to determine whether their
current ESG investing activities appropriately consider pecuniary
factors and, to the extent ESG factors are not pecuniary,
whether the fiduciary properly applies the tiebreaker concept
in the regulation. For example, increasingly, advisers offer
plans and plan participants " ESG screens. " Such screens are
subject to the final regulation. Further, an adviser should
consider the impact the rule would have on any QDIA offered
in a participant-directed defined contribution plan.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C. He
has an extensive background in the financial services sector. His
range of experience includes handling fiduciary matters affecting
investment managers, advisers, broker/dealers, insurers, banks and
service providers.
planadviser.com January-February 2021 | 39
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PLANADVISER - January/February 2021

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