2018 - Christian Investment Forum · 4/23/2018 · Investments/ETIs –The Obama-ERA DOL’s Views...

INVESTING WITH EXCELLENCE | ADVANCING THE KINGDOMTHE COVE - AUGUST, 2018

2018


Legal & Fiduciary Issues | What’s Next with DOL?

Harry Nelson

Eventide Funds

Alex Ryan

Groom Law Group


Environmental, Social, and Governance Considerations in ERISA Plan InvestmentsThe Christian Investment Summit

August 16, 2018

Alexander P. Ryan

Groom Law Group, Chartered

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Coverage and Background

• ERISA = the Employee Retirement Income Security Act of 1974, as amended.

• Federal law that regulates most privately-sponsored, employer-provided pension plans (i.e., traditional defined benefit and 401(k) plans) and welfare plans (i.e., health, life, disability and severance plans).

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ERISA does not regulate:

• Governmental plans (e.g., State plans)

• Church plans

• Workmen’s compensation plans/plans to comply with disability insurance laws

• Certain non-U.S. plans

• IRAs (note: IRAs are subject to the Code, however)

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• ERISA grew out of rapid growth of private retirement plans and concerns about lack of regulations and protections for workers’ retirement benefits and concerns about corruption.

• Employers are not required to establish benefit plans. But if they do so, the plans and plan administration must comply with ERISA, if applicable.

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General ERISA Fiduciary Obligations

• Exclusive purpose/exclusive benefit rule (duty of loyalty). Decisions must be made “solely in the interest” of the plan’s participants.

• Duty of prudence. Must act “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

• Duty to diversify investments to minimize risk of large losses, unless prudent not to do so.

• Duty to comply with plan documents.

• Duty to avoid non-exempt prohibited transactions.

• Duty to hold plan assets in trust – “indicia of ownership” corollary.

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Application of ERISA’s Fiduciary Rules to ESG Investments/ETIs

• Broadly speaking: Transactions that are selected for the collateral economic or social benefits they create, in addition to the investment return to ERISA plan investors.

• Also known as “socially responsible investing,” “sustainable and responsible investing,” and “impact investing.”

• May include environmental, social, and governance factors.

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• DOL has issued various pronouncements with respect to the issue of “economically targeted investments” (ETIs) and other social investing issues, including in late 2015 and most recently in April 2018.

• Historically, DOL has generally followed the “all things being equal” test: Fiduciaries may consider 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.

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• DOL has consistently said that the focus of plan fiduciaries on the plan’s financial returns and risk to beneficiaries must be paramount.

• A 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 plan participants.

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• Thus, while a plan fiduciary may consider collateral benefits in choosing between investments that have comparable risks and rates of return, DOL has consistently held that fiduciaries who are willing to accept reduced returns or greater risks to secure collateral benefits are in violation of ERISA.

• The basic “rules” remain constant, but the tone and emphasis tend to change, depending on which party is in office. See, for example, the following slides contrasting the views of the Obama and Trump administrations.

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Application of ERISA’s Fiduciary Rules to ESG Investments/ETIs – The Obama-ERA DOL’s Views

• In late 2015, the Obama-ERA DOL attempted to resolve industry confusion regarding ESG investing and clarify its position under ERISA.

• DOL stated that plan fiduciaries should appropriately consider factors that potentially influence risk and return, and that ESG issues may have a direct relationship to the economic value of a plan’s investment.

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• DOL further stated that 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.

• Similarly, DOL noted that if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that derive from ESG factors, the fiduciary may make the investment without regard to collateral benefits.

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•DOL also clarified that plan fiduciaries may invest in ETIs based, in part, on their collateral benefits, so long as the investments are economically equivalent, with respect to return and risk to beneficiaries in the appropriate time horizon, to investments without such collateral benefits.

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• DOL further noted in 2015 that:

• ERISA does not prohibit a fiduciary from addressing ETIs or incorporating ESG factors into a plan’s investment policy statement or integrating ESG-related tools, metrics and analyses to evaluate risk or return.

• ERISA does not prevent fiduciaries from considering whether and how potential investment managers consider ETIs or use ESG criteria in their investment practices.

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• ETIs or consideration of ESG criteria do not presumptively require additional documentation or evaluation beyond that required by fiduciary standards applicable to plan investments generally.

• Fiduciaries responsible for plan investments should maintain records sufficient to demonstrate compliance with ERISA fiduciary standards, and the level of such documentation will depend on the facts and circumstances.

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• Same standards apply to a fiduciary’s selection of a socially-responsible mutual fund as a plan investment, or, in the case of an ERISA section 404(c) plan or other individual account plan, a designated investment alternative under the plan.

• Whether a particular fund or investment alternative satisfies the requirements of ERISA is a factual question that plan fiduciaries must decide based on the facts and circumstances.

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Application of ERISA’s Fiduciary Rules to ESG Investments/ETIs – The Trump-ERA DOL’s Views (so far)

• January 2017: Donald Trump takes office and DOL leadership changes.

• DOL issued Field Assistance Bulletin 2018-01 on April 23, 2018 (the “FAB”).

• The FAB was intended to provide guidance to DOL’s national and regional offices in addressing questions from plan fiduciaries and other stakeholders regarding exercise of shareholder voting rights and ETIs.

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Application of ERISA’s Fiduciary Rules to ESG Investments/ETIs –The Trump-ERA DOL’s Views (so far)

• In the FAB, DOL reiterates its longstanding position that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.

• DOL further notes that otherwise collateral ESG issues may present material business risk or opportunities to companies that company officers and directors need to manage as part of the company’s business plan and that qualified investment professionals would treat as economic considerations under generally accepted investment theories.

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Application of ERISA’s Fiduciary Rules to ESG Investments/ETIs –The Trump-ERA DOL’s Views (so far)

• However, according to the current DOL, fiduciaries “must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision” and the fact that an investment promotes ESG factors or promotes market trends or industry growth does not necessarily mean that the investment is a prudent choice for retirement investors.

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• In DOL’s view, “ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.”

• A fiduciary’s evaluation of the economics of an investment should be focused on “financial factors that have a material effect on the return and risk of an investment,” taking into consideration appropriate investment horizons.

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• DOL also notes in the FAB that DOL is not of the view that a plan’s investment policy statement must contain guidelines on ESG investments or integrating ESG-related tools to comply with ERISA.

• DOL further states that if an IPS contains such guidelines, plan investment managers need not necessarily adhere to them if doing so is imprudent.

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• In the FAB, DOL also distinguishes its views regarding offering ESG investments on a typical 401(k) plan investment line-up from its views regarding designating ESG investments as “qualified default investment alternatives” (where plan participants are “defaulted” into particular investments as a result of their failure to make affirmative investment selections otherwise).

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• In the case of a typical 401(k) plan line-up, DOL allows for the possibility of including ESG investments, noting that a “prudently selected, well managed, and properly diversified ESG-themed investment alternative could be added to the available investment options on a 401(k) plan platform without requiring the plan to forgo adding other non-ESG-themed investment options to the platform.”

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• However, in the case of QDIAs, DOL notes that these are not analogous to merely offering participants an additional investment alternative to an investment line-up from which participants can select their options.

• Accordingly, in the QDIA context, the decision to favor the fiduciary’s own policy preferences in selecting ESG-themed options “without regard to possibly different or competing views of plan participants and beneficiaries” would call into question the fiduciary’s compliance with ERISA’s duty of loyalty.

• And, says DOL, even if consideration of such factors could be shown to be appropriate, the plan’s fiduciaries would have to conclude that such ESG-themed QDIA would not provide a lower expected rate of return than alternative options with commensurate risk, or entail greater risk than alternative options with commensurate rates of return.

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Questions?

Alexander P. Ryan

Groom Law Group, Chartered

1701 Pennsylvania Avenue, NW

Suite 1200

Washington, DC 20006

(202) 861-6639

www.groom.com

[email protected]

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http://www.groom.com/

mailto:[email protected]


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2018 - Christian Investment Forum · 4/23/2018 · Investments/ETIs –The Obama-ERA DOL’s Views...

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