States Double Down on Effort to Block ESG 401(k) Rule in Texas

The US Labor Department regulation permitting private-sector retirement plans to consider socially conscious investments on a limited basis turns US benefits law “on its head,” according to more than two dozen states suing regulators.

States challenging the environmental, social, and corporate governance investing rule in a Texas federal court said in a late Tuesday filing that the Biden administration’s position burdens plan participants as opposed to the fiduciaries charged with protecting them.

Plaintiffs filed a motion in support of their effort to convince Judge Matthew J. Kacsmaryk of the US District Court for the Northern District of Texas to temporarily bar the DOL from enforcing its rule.

Fiduciary duties under the Employee Retirement Income Security Act of 1974 (Pub. L. No. 93-406) are “the highest known to law,” the states argued. The regulation undoing a pair of Trump-era rules imposing higher fiduciary obligations on ESG investments threatens to undermine workers’ savings, they said.

“DOL has now subverted those protections and made it easier for fiduciaries to advance collateral agendas that are unrelated to the financial interests of participants,” the filing states.

Plaintiffs claim that the DOL’s rule violates ERISA and is so broad that it triggered the major questions doctrine, meaning congressional input was necessary and more pertinent than regulatory agency deference.

Regulators failed to rebut the need the Trump administration had articulated when it issued its 2020 rule, and they didn’t consider issuing sub-regulatory guidance instead, the plaintiffs allege.

The Labor Department late last month fired back at the states’ proposed motion for preliminary injunction, claiming the effort to undo its rule in Texas and a Wisconsin federal court rests on a “false premise” that regulators are choosing ESG factors over financial considerations.

Kacsmaryk denied the Labor Department’s motion last month to move the lawsuit out of his courtroom.

The Trump appointee is known for striking down Biden administration rulemaking, and issued a high-profile preliminary ruling last week banning the abortion drug mifepristone.

The case is State of Utah v. Su, N.D. Tex., No. 2:23-cv-00016, reply brief filed 4/11/23.