Concerned that prior guidance has discouraged the embrace of “economically targeted investments,” the Department of Labor (DOL) has issued a new interpretive bulletin.
The DOL starts by broadly defining an economically targeted investment as “…any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.”
In the IB, the DOL reiterated its consistent stance that the focus of plan fiduciaries on the plan’s financial returns and risk to beneficiaries must be “paramount,” and that under ERISA, the plan trustee or other investing fiduciary may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries. Moreover, “…fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits.”
However, the DOL also maintained that it has consistently recognized that fiduciaries may consider such collateral goals as “tie-breakers” when choosing between investment alternatives that are otherwise equal with respect to return and risk over the appropriate time horizon. In the IB, the DOL notes that ERISA does not direct an investment choice in circumstances where investment alternatives are equivalent, and the economic interests of the plan’s participants and beneficiaries are protected if the selected investment is in fact, economically equivalent to competing investments.
However, the DOL believes that in prior guidance, and in the seven years since its publication, they have “unduly discouraged” fiduciaries from considering ETIs and ESG factors. In particular, it notes that its 2008 guidance may be dissuading fiduciaries from:
1. pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments:
2. investing in ETIs even where economically equivalent. The DOL said that some fiduciaries believe the 2008 guidance sets a higher but unclear standard of compliance for fiduciaries when they are considering ESG factors or ETI investments.
Consequently, and “in an effort to correct the misperceptions that have followed publication of IB 2008-01, the Department is withdrawing IB 2008-01, replacing it with this guidance that reinstates the language of IB 94-1.”
The DOL stated that an important purpose of this Interpretive Bulletin is to “…clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return,” and that environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. “In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
The IB goes on to note that, “Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”
When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tiebreakers. “In addition, this Interpretive Bulletin also clarifies that plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is economically equivalent, with respect to return and risk to beneficiaries in the appropriate time horizon, to investments without such collateral benefits.” Moreover, and in what the DOL said was “consistent with fiduciaries’ obligations to choose economically superior investments,” it went on to say that it does not believe ERISA prohibits a fiduciary from addressing ETIs or incorporating ESG factors in investment policy statements or integrating ESG-related tools, metrics and analyses to evaluate an investment’s risk or return.
That said, the DOL noted that the fiduciary standards applicable to ETIs are no different than the standards applicable to plan investments generally, and an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.
The DOL starts by broadly defining an economically targeted investment as “…any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.”
In the IB, the DOL reiterated its consistent stance that the focus of plan fiduciaries on the plan’s financial returns and risk to beneficiaries must be “paramount,” and that under ERISA, the plan trustee or other investing fiduciary may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries. Moreover, “…fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits.”
However, the DOL also maintained that it has consistently recognized that fiduciaries may consider such collateral goals as “tie-breakers” when choosing between investment alternatives that are otherwise equal with respect to return and risk over the appropriate time horizon. In the IB, the DOL notes that ERISA does not direct an investment choice in circumstances where investment alternatives are equivalent, and the economic interests of the plan’s participants and beneficiaries are protected if the selected investment is in fact, economically equivalent to competing investments.
However, the DOL believes that in prior guidance, and in the seven years since its publication, they have “unduly discouraged” fiduciaries from considering ETIs and ESG factors. In particular, it notes that its 2008 guidance may be dissuading fiduciaries from:
1. pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments:
2. investing in ETIs even where economically equivalent. The DOL said that some fiduciaries believe the 2008 guidance sets a higher but unclear standard of compliance for fiduciaries when they are considering ESG factors or ETI investments.
Consequently, and “in an effort to correct the misperceptions that have followed publication of IB 2008-01, the Department is withdrawing IB 2008-01, replacing it with this guidance that reinstates the language of IB 94-1.”
The DOL stated that an important purpose of this Interpretive Bulletin is to “…clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return,” and that environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. “In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
The IB goes on to note that, “Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”
When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tiebreakers. “In addition, this Interpretive Bulletin also clarifies that plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is economically equivalent, with respect to return and risk to beneficiaries in the appropriate time horizon, to investments without such collateral benefits.” Moreover, and in what the DOL said was “consistent with fiduciaries’ obligations to choose economically superior investments,” it went on to say that it does not believe ERISA prohibits a fiduciary from addressing ETIs or incorporating ESG factors in investment policy statements or integrating ESG-related tools, metrics and analyses to evaluate an investment’s risk or return.
That said, the DOL noted that the fiduciary standards applicable to ETIs are no different than the standards applicable to plan investments generally, and an investment will not be prudent if it would be expected to provide a plan with a lower rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.
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