Among the 256 comments—received as of today, with more to come—the Department of Labor (DOL) received about its proposed rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” it might not be surprising, given the political divisions in the country, that a large share came from individuals who expressed opposition for the rule, saying it is pushing the new administration’s political agenda.
However, some individual commenters expressed support for the rule, saying they agree that environmental, social and governance (ESG) factors should be considered in retirement plan investment selection and that the rule makes clear that retirement plan fiduciaries should consider all factors in an objective analysis of investments.
On the side opposing the proposal, a group of four Republican senators and the American Securities Association (ASA) issued letters urging the DOL to withdraw its proposed rule. One of their concerns was that the language of the proposal seems to instruct fiduciaries to incorporate more ESG criteria into their decisionmaking and could be viewed as a mandate to do so.
However, other groups support the DOL moving forward with its proposal, while suggesting some updates on “neutrality” and clarifications that address the concern the senators and the ASA expressed.
In its comment letter, the American Retirement Association (ARA) suggests the DOL adopt an approach that reflects the Employee Retirement Income Security Act (ERISA)’s principle of neutrality in the application of the duties of loyalty and prudence regarding the factors for an investment analysis. They suggest the DOL do this by:
- eliminating the proposal’s inclusion of climate change and other ESG factors as required considerations under the prudence safe harbor; and
- eliminating the examples of discretionary ESG considerations under the prudence safe harbor and reformulating them as preamble discussion.
The ARA also suggests in its letter that the DOL allow ESG investments in participant investment alternatives and as qualified default investment alternatives (QDIAs), as proposed, and modify the “tiebreaker” provision to reflect the principle of neutrality “and to permit selection of investments based on non-economic criteria and not based on the untenable standard of equally serving the plan’s financial interests.”
The ERISA Industry Committee (ERIC)’s comment letter supports the proposed rule, but says that to avoid misleading plan fiduciaries, the text of the final regulation should not highlight specific examples of risk-return factors.
“Many factors affect risk and return, and it would be impossible for the department to codify every single potentially relevant factor,” says Andy Banducci, senior vice president of retirement and compensation policy at ERIC, in the letter. “ERIC is very concerned that by going to such length, especially in the operative text, to emphasize climate change and certain other social and governance factors, the department is inadvertently setting up a new ‘over and above’ standard beyond the generally applicable duty of prudence. Due to this emphasis, some plan fiduciaries may believe that they are required to consider these factors in a way that could override normal and proportionate consideration of these factors, contrary to ERISA’s general fiduciary duties. Moreover, the formulations of these factors in the text are, in some cases, ill-defined and open-ended. If they are retained, much more definition is required to provide meaningful guidance to fiduciaries.”
Further support for the proposed rule was expressed in a letter by a coalition of Democratic state attorneys general. They encouraged the DOL to adopt the proposed rule, saying “the current regulation is likely to have a chilling effect on ERISA fiduciaries’ consideration of ESG factors in their investment decisionmaking.” The attorneys general say they endorse the DOL’s proposed removal of the terms “pecuniary” and “nonpecuniary,” adding that the amended language allows ERISA fiduciaries to consider “any” factor that would be material to the risk-return analysis.
“The proposed rule is a balanced approach, addressing the current rule’s flaws while still ensuring that the focus of ERISA fiduciaries remains the financial benefit to plan beneficiaries and participants,” the letter states.