Earlier this year, the DOL published long-anticipated guidance on the use of “ESG” factors in evaluating retirement plan investment options. The notice of proposed rulemaking attempts to settle the recent regulatory game of ping pong surrounding use of ESG factors by setting forth proposed regulations that would revise certain fiduciary duty requirements.
So, what exactly are ESG factors? The acronym “ESG” stands for Environmental, Social, And Governance. The term “ESG factors” denotes consideration of how a potential target investment values and responds to environmental, social, and governance matters. For example:
- Environmental: How an entity is addressing potential climate-change-related factors.
- Social: Entity’s workforce practices, progress on diversity and inclusion, and labor relations.
- Governance: Entity’s board composition, executive compensation, transparency in corporate decision-making, and avoidance of criminal and civil liability.
Over the years, there has been a lot of back and forth about whether plan fiduciaries may consider ESG factors when evaluating a potential investment or whether that would violate certain fiduciary duties under ERISA.
The proposed regulations make it clear that DOL believes ESG factors not only could be considered when evaluating investments for retirement plans, but often would be required considerations in the analysis of plan investments. The proposal clarifies that fiduciaries evaluating investment options may consider any factor that is material to an economic risk-return analysis—including ESG factors (which the guidance says are “often” material factors that could impact investment performance). The proposal also includes some proposed revisions to duties associated with the exercise of proxy voting and other shareholder rights for plan investments.
Notably, this is only a proposed rule and there are not any immediate deadlines. However, it is a clear indication of the Department of Labor’s current interpretation of fiduciary obligations. We encourage you to meet with clients now to discuss these changes. Clients may have been following this ESG debate for years and be eager to learn how it will impact their fiduciary duties (and how you are responding if you are a fiduciary to their plan).
Whether it’s a discussion about plan design strategies that best meet your clients’ needs or talking more about the latest legislative news impacting your retirement practice, the retirement plan design specialists at EJReynolds look forward to helping you achieve more sales success through partnering together with us.
Thank you for the privilege of working with you and please feel free to call us for assistance in meeting your retirement plan sales and servicing needs.