ESG 401(k) Suit Briefs Offer Dueling Post-Chevron Alternatives

A pair of motions for summary judgment in a federal case seeking to overturn the US Labor Department’s sustainable 401(k) investing rule clash over the significance of past regulator actions in a post-Chevron environment.

The DOL’s Employee Benefits Security Administration and 25 red state attorneys general suing the agency embraced in briefs submitted Oct. 16 different elements of the US Supreme Court’s landmark June ruling in Loper Bright Enterprises v. Raimondo, which overturned the Chevron doctrine of deferring to reasonable agency interpretations where laws are ambiguous or silent.

Arguments over the agency’s ESG investing standards have been whittled down since the complaint was first filed last year to focus on competing interpretations of the “tiebreaker provision” in the rule. All else equal, the Biden administration wants to free private-sector retirement plan fiduciaries to consider environmental, social, and corporate governance factors when selecting investments on behalf of plan participants and beneficiaries.

Allowing more “woke” investing risks undermining investors’ hard-earned savings, Republican critics argue.

The department is asking the US District Court for the Northern District of Texas rehearing the case to consider a 30-year-old “longstanding position” the agency has taken on settling differences between like investments. The high court in its Loper Bright ruling emphasized how useful agency interpretations that have “remained consistent over time” should be in aiding a court reviewing government procedure, the DOL said in its brief.

But the tiebreaker provision of the rule flies in the face of prudence and loyalty standards under the 1974 Employee Retirement Income Security Act (Pub. L. No. 93-406) and exceeds EBSA’s constraints under the Administrative Procedure Act (Pub. L. No. 79-404), the GOP states’ brief said.

“This Court should conclude—consistent with text, structure, the common law, Supreme Court precedent, drafting history, Congressional disapproval, and the major-questions doctrine—that ERISA imposes a prophylactic duty to act for the sole and exclusive financial benefit of beneficiaries,” the states said. “There is no room for mixed motives, even if a fiduciary claims to not subordinate financial interests.”

The case has landed back in the lap of Northern District Judge Matthew J. Kacsmaryk after the US Court of Appeals for the Fifth Circuit remanded judgment to the lower court in light of Loper Bright. The circuit panel wants the district court’s “‘independent judgement’ as to whether the Department’s new rule can be squared with either ERISA or the APA.”

Kacsmaryk, a Trump-appointee with a conservative legal background, stunned the retirement benefits industry last year when he ruled in favor of the DOL’s interpretation, saying the government adequately explained why its rule was needed in order to clear up confusion under a pair of Trump administration rules.

In his decision, Kacsmaryk relied heavily on applying the Chevron doctrine, making it clear that he had analyzed ERISA’s ambiguity with respect to tied investments and considered DOL’s prior record. But he also said that the Biden administration rule “changes little in substance” from Trump-era rules the Republican states had previously supported.

The case is Utah v. Walsh, N.D. Tex., No. 2:23-cv-00016, motions for summary judgment filed 10/16/24.