‘Do-Good’ Retirement Investing Could Get Costlier for Employers

Plan fiduciaries who seed their retirement programs with environmental, social, and corporate governance (ESG)-focused funds that are “economically indistinguishable” from other investments would need to document that decision-making under a new proposal.

The Labor Department released the proposed rule Tuesday. Senior administration officials said the guidance, which follows up on an executive order from April 2019, reinforces the protections enshrined in the Employee Retirement Income Security Act of 1974 by reminding fiduciaries they must never sacrifice the financial security of participants in order to promote other objectives.

Choosing ESG-related investments that demand higher fees, produce lower returns, or incur greater risk would run counter to the goal of ERISA, senior department officials warned in the rule.

“Providing a secure retirement for American workers is the paramount, and eminently-worthy, ‘social’ goal of ERISA plans,” the guidance said. “Plan assets may not be enlisted in pursuit of other social or environmental objectives.”

The Obama administration said investing in ESG funds was allowed if all other factors are equal. The Trump administration’s proposal walks back from that stance, stating that fiduciaries may “break the tie” between an “alternative investment” and a “non-pecuniary” option.

“True ties rarely, if ever, occur,” the guidance said. “The Department believes this documentation requirement provides a safeguard against the risk that fiduciaries will improperly find economic equivalence and make decisions based on non-pecuniary factors without a proper analysis and evaluation.”

Fiduciaries that do stick with ESG options “must document the basis for concluding that a distinguishing factor could not be found and why the selected investment was chosen,” the proposal says.

The department estimates the new reporting requirement will affect approximately 30,000 retirement plans, take 600 hours to fulfill, and consume $57,000 in compliance costs.