New DOL Rule Could Significantly Curtail Viability of ESG Initiatives Within Retirement Plans

New DOL Rule Could Significantly Curtail Viability of ESG Initiatives Within Retirement Plans

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on print

Environmental, social and corporate governance (“ESG”) guidelines are growing in popularity among investors, but their use in retirement plans could face serious hurdles thanks to a recent Department of Labor decision.

On October 30, 2020, the Department of Labor (“DOL”) released a final ruling amending the “investment duties” regulation under Title 1 of the Employee Retirement Income Security Act of 1974 (“ERISA”). These amendments “require plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”

All told, the DOL ruling effectuates five primary amendments:

  • Adds provisions confirming that ERISA fiduciaries must evaluate investments based only on pecuniary factors – “financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.”
  • Includes an express regulatory provision stating that compliance effectively prohibits fiduciaries from sacrificing returns or taking on additional investment risk just to promote non-pecuniary goals.
  • Includes a provision requiring fiduciaries “to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.”
  • Sets required investment analysis and documentation requirements should plan fiduciaries use non-pecuniary factors when choosing between investments they can’t distinguish based solely on pecuniary factors.
  • States that ERISA’s prudence and loyalty standards apply to fiduciary’s selection of designated investment alternatives offered to participants and beneficiaries in a participant-directed individual account plan.

“This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives,” Labor Secretary Eugene Scalia said in a release.

One thing the final ruling doesn’t include is an explicit reference to ESG – but it is an assumed target of this resolution, as several restrictions and rules specifically governing ESG fund selection were included the original proposed resolution in June.

While explicit references to ESG have been removed, the fear is that interpretations of the rule will still dissuade fiduciaries from considering environmental, social and governance factors. With the results of the recent U.S. elections still undetermined as of the date of this article, the 2021 political environment could also be a major variable to consider when evaluating the impact of the new rule.

Related Posts

Darren Mooney

Partner and Co-Head of Business Development

Darren Mooney is a Partner and the Co-Head of Business Development at Greyline. Before joining Greyline, Darren served as deputy chief compliance officer of Partner Fund Management where he held primary responsibility for the compliance program of the second-largest hedge fund in the Bay Area. Prior to that, Darren spent five years providing compliance consulting services at Cordium and then ACA Compliance Group, where he led the company’s San Francisco office and west coast operations. In addition to providing ongoing consulting services to a variety of investment managers, including hedge fund, private equity, venture capital, real estate, quantitative and other wealth managers, Darren also regularly guided clients through the SEC registration process, implemented tailored compliance programs, supported clients’ live SEC exams, and served as an SEC-mandated independent compliance consultant following an SEC enforcement action. Darren’s other experience includes serving as deputy chief compliance officer and associate counsel at F-Squared Investments where he directly supported the compliance program during the investigation and subsequent enforcement regarding historical advertising practices. Darren has a B.S. in Economics from the University of Delaware and a J.D. from Suffolk University Law School. He is a member of the Massachusetts bar.

Annie Kong

Partner and Head of Venture Capital
Annie Kong is a Partner and Head of the Venture Capital Division at Greyline. She provides ongoing compliance consulting to investment advisers and manages client relationships. Prior to joining Greyline, Annie was part of compliance and operations at a long-only manager-of-managers that advised pension fund clients. While there, she conducted compliance and operational due diligence on SEC-registered investment advisers on the platform. She also oversaw and counseled on various legal matters across the firm. Annie has a B.A. in Economics from the University of California, San Diego, and a J.D. from the University of San Diego School of Law. She is an active member of the State Bar of California.
Greyline is pleased to announce that we are the recipient of the 2021 HFM U.S. Service Award in the Best Technology Firm – Newcomer category.