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‘Razing’ the Bar

Practice Management

In late June, the Labor Department issued a proposed rule innocuously titled “Financial Factors in Selecting Plan Investments.”

While the proposed rule itself was relatively short and largely uncontroversial, the preamble and supporting analysis of costs left little doubt that the authors saw a problem looming on the horizon, and wanted to “nip it in the bud.” 

The preamble cited a concern “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.”

If ever there was a solution in search of a problem…

The reality today is that ESG investments—those that incorporate environmental, social, governance (ESG) factors—have struggled to find a toehold in defined contribution plans despite numerous industry surveys suggesting that participants are interested in such alternatives. Fewer than 3% of DC plans offer an ESG option, according to the 62nd annual Plan Sponsor Council of America survey, and less than 0.2% of plan assets have been invested in those options. 

That hesitancy on the part of plan fiduciaries has almost certainly been fueled, if not fanned, by previous pronouncements from the DOL, most recently a 2018 Field Assistance Bulletin which laid out the “all things equal” standard seen by many as a pull back from the position articulated during the Obama administration. It hasn’t helped that these options were typically more expensive, tended to underperform more traditional options, and were subject to the whims of investment professionals as to what investments and practices satisfied their sense of ESG.

Well that, as they say, was then.    

Today there’s plenty of evidence to suggest that many ESG-themed investments perform just as well as, if not better than, those with a more “traditional” focus. In fact, a growing number of investment managers are incorporating that focus—notably the “governance” aspect—as part of their regular screens, viewing consideration of ESG risk exposure as a baseline consideration.   

Ultimately, we believe—as we commented to the DOL in late July—that ERISA requirements for fiduciaries selecting plan investments should neither promote the sacrifice of investment returns or assumption of greater investment risks as a means of promoting collateral social policy goals—nor should they preclude consideration of benefits other than investment return. The concern expressed by many of our members was that this proposal not only opens the door to complex interpretations of how to regard ESG factors—but that it could ultimately stifle investment selection, decrease participant savings rates and even diminish portfolio diversification.

Not that there isn’t room for improvement and clarity in ESG labelling. Many factors today compete for that label, and those who blindly embrace options simply because of a marketer’s branding will surely come to regret that myopia. But the Labor Department’s proposal provides no more nuance than the blunt affixation of an ESG label—largely, if not nearly completely, constraining a fiduciary from considering ESG factors as part of a prudent process even those deemed to have a substantive impact on long-term investment returns. 

ARA members have long applied ERISA’s fiduciary principles in carrying out their fiduciary duties when selecting plan investments and investing plan assets, regardless of the type of investment. As always, we believe the best interests of plan participants and beneficiaries are best served by providing plan fiduciaries—and those who support them—the opportunity to consider the impact that factors such as ESG could have on long-term performance. 

Note: Following a 30-day comment window that ended July 30 and more than 8,000 comment letters, the DOL on Oct. 14 submitted a final rule, entitled “Financial Factors in Selecting Plan Investments,” to the White House’s Office of Management and Budget for review. The OMB generally has up to 90 days to vet the final rule and either approve it for release or send it back for modifications, which doesn’t seem likely in this case, being that the rule appears to be on a fast track. Additionally, OMB review can often take less than 30 days, suggesting that the rule could be released in the next few weeks. 

Brian H. Graff, Esq., APM, is the Executive Director of ASPPA and the CEO of the American Retirement Association. 

 

All comments
Mark Quigley
3 years 5 months ago
I do believe the American retirement plan investor, regardless of account balance, can be pretty saavy about their choices when provided all the facts. Long ago, I worked (as a TPA) with financial advisors who indicated all they need is one positive element to sell an investment. It did not concern them that several negative elements might make a particular investment not a good choice. If an investor asked, of course, straight answers were provided, but rarely were those questions asked. The same is true here. ESG investments 'sound' ideal, but maybe not if you are trying to get the best return on your money. The investment arena is complex and takes one's time and energy to figure it out. I am often quite sure the investment advisor has not done all of their homework as well.