Predicting a ‘Busy, Active Time’ at the DOL and EBSA

As several pieces of retirement-related regulatory guidance issued during the administration of former President Joe Biden now have uncertain futures, speakers at the PLANSPONSOR National Conference in Chicago described the Trump administration’s plans to move forward as “a mixed bag” on issues such as using environmental, social and governance factors when selecting plan investments and including cryptocurrency or private assets in defined contribution plans.

Lisa Gomez, the former assistant secretary of labor for the Employee Benefits Security Administration, said at Thursday’s “Washington Update” that she expects it will be a “busy, active time at EBSA” in the coming year, but it is unclear how the administration’s preference for “deregulation” will take shape.

“This administration has been notably, very vocally indicative of their deregulatory [agenda] and in fact, asking the public which regulations [they] don’t like and that [they] would like to see gone,” Gomez said. “But with EBSA, it will be interesting, because there are so many things that they have to do through regulation.”

The DOL announced on Monday a program of opinion letters, to be released by five of its agencies, including EBSA, intended to provide clearer and more accessible guidance on federal labor laws. EBSA will release advisory opinions and information letters, from which practitioners governed by the Employee Retirement Income Security Act have historically drawn legal advice. DOL opinion letters are not legally binding, but they can provide helpful guidance, particularly for plan sponsors, on how the DOL applies the law to the circumstances at hand.

On the same day Gomez spoke in Chicago, Daniel Aronowitz, Trump’s nominee to be the next head of EBSA, was addressing the U.S. Senate Committee on Health, Education, Labor and Pensions in his confirmation hearing.

ESG Rule

A filing with the U.S. 5th Circuit Court of Appeals revealed last week that the DOL will publish a new rule concerning retirement plan fiduciaries’ consideration of ESG factors when selecting plan investments. The new rulemaking will appear on the department’s spring regulatory agenda, and the DOL “intends to move through the rulemaking process as expeditiously as possible,” according to a filing the DOL made in a case originally filed as Utah v. Walsh, which challenged the rule.

George Sepsakos, a principal in Groom Law Group, said it is likely that the new ESG rule will revert back to something similar to the one issued during the first Trump administration, which explicitly stated that fiduciaries need to consider only “pecuniary factors” when making investment decisions.

“Trump 1.0 was very clear: If you’re going to be [considering ESG factors], you need to document the reasons why,” Sepsakos said. “You need to be very comfortable that these [offer] the same [investment performance]. If you can’t get comfortable from an economic perspective, this is not the administration to be [piling] up plan lineups with ESG-type funds.”

Sepsakos added that a possible way around this, for participants particularly interested in accessing investments focused on ESG, is to offer a self-directed brokerage window, in which participants have more freedom to pick the investments they want.

Gomez said when EBSA issued the final ESG rule under Biden, it was more “friendly” to ESG investing, as it allowed plan sponsors to consider ESG factors in making investment decisions when deciding between options that provide similar risks and returns.

“At the end of the day, you had to be a fiduciary,” Gomez said. “But if there were two investments and one was a little bit more environmentally friendly than the other, but they both equally serve the participants, then you could make a choice between the two.”

Crypto, Alts in DC Plans

Gomez said EBSA was attempting to “take [its] thumb off the scale” and let plan sponsors make decisions as the fiduciaries they are, which is the same language used when the DOL last week rescinded guidance that directed fiduciaries to take “extreme care” before adding cryptocurrency to investment menus.

U.S. Secretary of Labor Lori Chavez-DeRemer said in a statement on that topic that “the Biden administration’s Department of Labor made a choice to put [its] thumb on the scale” and that that the Trump administration is now “rolling back this overreach and making it clear that investment decisions should be made by fiduciaries, not D.C. bureaucrats.”

Gomez reacted to the regulatory back and forth, saying, “one of the most unfortunate things right now is things are a bit chaotic … and [there’s] a lot of unknowns. One administration says X, another administration says Y, then the next administration says Z. … I personally wish that there would be a little bit more stability and not so much of this ping-ponging back and forth.”

Gomez added that Aronowitz has taken a “practical” approach when it comes to ESG investing, placing an emphasis on ensuring that fiduciaries are making practical financial decisions.

The Trump administration is also rumored to be formulating an executive order that would allow for the inclusion of private assets in DC plans.

Sepsakos explained that the Securities and Exchange Commission has certain rules governing how private funds can be offered, and these rules would need to be revised to allow alternative assets in 401(k) plans.

“I also think with some of these private products, you’re likely going to see potential exemption requests that are issued,” Sepsakos said. “That might be an area where the Labor Department issues [either] individual or class exemptions to allow the asset class to be more readily available within retirement plans. I certainly see some groundswell, and I think this has been a priority with this administration.”

If an executive order is issued, Sepsakos said he expects the DOL would also produce guidance on factors to consider when evaluating investment options that have allocations to private equity or other alternative assets.