In November of 2022, the Department of Labor (DOL) published a final rule that allows retirement plan fiduciaries to consider environmental, social, and governance (ESG) factors when selecting retirement investments and exercising shareholder rights (proxy voting). This rule runs contra to the Trump Administration’s rules, which only allowed fiduciaries to consider ESG as a “tiebreaker” between similar investment options. As one may have expected, the new rule has been a source of controversy and concern.
What is ESG?
ESG factors are social factors that can be considered by plan fiduciaries when choosing investment options. These factors are not solely pecuniary (i.e., relating solely to risk and rate of return). Rather, ESG focuses on factors like a company’s carbon footprint, whether it invests in the community, and whether it has diversity in its leadership, among other factors.
What are the Concerns of Using ESG?
Since the DOL published the rule, twenty-five (25) states filed suit against the DOL, challenging the rule. In addition, Congress passed legislation, which President Biden vetoed, that would have rescinded the DOL’s rule. The main concern of both participants and opponents of the DOL’s rule is that plan fiduciaries will select retirement investments and exercise shareholder rights using ESG to further their own political agenda, without any regard to the financial wellbeing of the plan or its participants.
What can Plan Fiduciaries do?
It is important for plan fiduciaries to remember two things: (1) they owe plan participants duties of loyalty and prudence when choosing retirement investment options; and (2) they must act in the sole and best interest of the plan and its participants. While the DOL’s rule allows fiduciaries to consider ESG, they must still consider which investment options will best serve the plan and its participants.
What can Participants do?
For defined-contribution plans that have participant-directed accounts, the ultimate decision on how to invest the participant’s money rests with the participant. Participants should review their investments carefully to determine which investment options are right for them, socially and financially.
Plan participants and opponents of the DOL’s rule are concerned that allowing plan fiduciaries to consider ESG factors when selecting retirement investments and exercising shareholder rights will result in financial hardships for the plan and its participants. While fiduciaries may consider ESG factors, there are two important things to keep in mind: (1) fiduciaries have a duty to act in the sole and best interest of the plan and its participants; and (2) participants with participant-directed accounts have the final say on how they invest their money. Both fiduciaries and participants should review investment options carefully before making any decisions.