Bloomberg Law
Nov. 3, 2020, 11:01 AM

Diluted ‘Do-Good’ Investing Rule More Palatable but Less Cogent

Warren Rojas
Warren Rojas
Senior Reporter

A final record-keeping rule for “do-good” retirement investing may ward off potential litigation now that regulators have walked back their proposed crackdown of environmental, social, and corporate governance (ESG)-focused funds.

The revamped rule reiterates that fiduciary duty is about protecting the financial security of plan participants, a guiding principle established by the Employee Retirement Income Security Act of 1974. The proposed rule aimed to put a stop to the conflicting investment advice each administration has piled on over time, but Labor Department officials appear to have softened their position in pursuit of compromise.

“They have dialed this rule so far back that it’s just codifying prior guidance at this point,” Michael Kreps, a retirement policy professional and principal at Groom Law Group, said.

The new rule clarifies that retirement plan fiduciaries must base investment decisions solely on pecuniary factors, according to Jeanne Klinefelter Wilson, acting director of the Employee Benefits Security Administration.

The rule does allow plan sponsors to use ESG considerations as the deciding factor in what the Labor Department views as “rare” tie-breakers, but fiduciaries must thoroughly analyze and document the process to show they considered “reasonably available alternatives with similar risks.” Tie-breakers occur when a fiduciary “cannot distinguish between alternative investments on the basis of pecuniary factors,” according to EBSA.

Modifications to the new rule include: removing most references to ESG; redefining pecuniary factor as anything “expected to have a material effect on risk and return based on appropriate investment guidelines;” and curtailing record-keeping requirements surrounding any ESG-related deliberations to specifically justifying tiebreaker decisions.

The Labor Department did “a good job of cleaning up a lot of the language” in the final rule, Aliya Robinson, senior vice president of retirement and compensation policy at the ERISA Industry Committee, said. She commended regulators for focusing on pecuniary issues and relaxing the record-keeping requirements surrounding financial decision making.

“It definitely lessens the litigation risk,” Robinson said.

Still, while the proposed rule seemed designed to curb ESG investing, the compromise language makes it “tough to see what’s being accomplished here,” Kreps said.

“You could still expect to see a ping-ponging between administrations,” he said of the rewrites that have spanned decades.

Aron Szapiro, head of policy research at Morningstar, said lawmakers have the power to definitively resolve the tiebreaker issue—along with other investment challenges that have bubbled up since the passage of ERISA.

“What would be really helpful is if Congress weighed in and settled this,” he said.

The rule is scheduled to take effect in January 2021.

Next Administration

The revisions made to the proposed rule show regulators “kept their core message without tripping up,” said Lynn Dudley, senior vice president for global retirement and compensation policy at the American Benefits Council.

And getting it on the books before the next president is sworn in will make it difficult to delay or undo the policy change.

But Kreps wondered about the “stickiness” of the investing rule. He said an incoming Biden administration or unified Democrat-run Congress would probably have more pressing issues to attend to—including salvaging Obamacare and taking another run at rules governing how financial advisers make money when dealing with retirement funds.

Dudley said putting a stamp on ESG investing is probably on Biden’s agenda “but not at the top of it,” listing additional coronavirus relief and rejiggering the tax code as core items. Biden could always modify the ESG rule with sub-regulatory guidance, Dudley said, just like in past administrations.

Rachel Curley, a democracy advocate at Public Citizen, pointed to the thousands of critical comments lodged against the proposed rule as proof that it should be disposed of in short order. “Given the massive opposition from investors and the public, this rule should be at the top of the list for reversal,” she said in a release.

Like the final product or not, Fiduciary Guidance Counsel founder Peter Gulia gave EBSA credit for following through.

“This is the first administration that has made a rule,” he said.

To contact the reporter on this story: Warren Rojas in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Alexis Kramer at