ERISA Fiduciaries Need Hard Data for Post-Chevron Protection

The Department of Labor’s fiduciary investment rule is at risk of being vacated following the US Supreme Court’s decision in Loper Bright v. Raimondo that changed how courts consider federal agency expertise. As a result, fiduciaries should bolster all investment decisions with hard data to protect themselves and their clients.

Under the Employee Retirement Income Security Act, fiduciaries have a duty to establish and follow procedures based on their duties of loyalty and prudence. Section 404(a) of ERISA requires fiduciaries to act solely in the interests of the plan’s participants and beneficiaries for the exclusive purpose of providing benefits to the participants and beneficiaries. The DOL’s ESG rule addresses how qualified plan fiduciaries may consider other factors if there is an investment “tie.”

But now, ERISA fiduciaries lack clear answers on how Loper Bright might impact their role in selecting plan investments, especially when selection leans towards environmental, social, and governance marketplace participation. Investment data used in decision-making must be reliable and accurate, especially when financial factors can be considered in a tiebreaker.

After Loper Bright, agency interpretations are no longer sufficient, and courts must find an agency’s interpretation to be the “best” reading of a statute, making the future enforceability of the DOL’s finalized but unpublished 2022 ESG rule unclear. The rule, in part due to its tiebreaker provision, allows ERISA fiduciaries to consider “collateral benefits” when choosing between two or more investment options that “equally serve the financial interests of the plan over the appropriate time horizon.”

The DOL is arguing in Utah v. Su that it has clear authority under the law to promulgate its sustainable investing regulation. However, if a Texas judge finds the statutory text doesn’t confer authority to the DOL following Loper Bright, the judiciary could have a greater role in statutory interpretations.

If that happens, reliable data may help persuade judges without specialized knowledge on ERISA plan investments. Data-backed decisions will be more supportive and stand up to opposition based on the perception that considering collateral benefits breaches fiduciary duties because it is not data-driven.

The DOL’s battle to preserve ESG investments within the qualified plan arena is matched by the Securities and Exchange Commission’s climate disclosure rule, which also is in jeopardy since Loper.

The SEC rule is designed to promote consistent, comparable, and reliable information when considering incorporation of ESG factors. It does this by focusing its framework on enhanced quantitative data. A data-driven framework could easily be incorporated into DOL guidance thereby handing ERISA plan fiduciaries the tools needed to balance fiduciary duties with participant demands for ESG options.

Funds, and the advisers on which fiduciaries rely, differ in how they analyze, select, and manage investments to achieve ESG objectives. Independent consultants provide data to evaluate ESG factors, using specific ESG ratings or scores based on market research. Such ESG ratings are essentially the product of data analytics.

However, ESG ratings have been challenged on data collection methods that often involve artificial intelligence and algorithms. This raises issues of transparency and quality control. To combat concerns, funds can improve data reliability by ensuring sufficient representation across ESG-related data, using unified data collection methods, and ongoing efforts to assess and re-equilibrate algorithm training with data used to produce ESG ratings.

Agency interpretations have long enjoyed precedence via Skidmore v. Swift & Co.. However, federal judges’ reluctance to uphold agency rules via deference means the ESG rule will only be successful with arguments based on ERISA’s statutory text.

ERISA Section 505 explicitly empowers the DOL to prescribe regulations “necessary or appropriate to carry out the provisions” of ERISA. After Loper Bright, it remains unclear whether Section 505 will provide cover for the DOL’s ESG rule.

ESG opponents argue that allowing fiduciaries to consider collateral benefits when making investment decisions is contrary to ERISA’s intent and fiduciaries’ duty of loyalty to only act with the motive of maximizing financial gain with ERISA plan assets. Arguably, financial benefits that can’t be measured sufficiently by data aren’t data-based, and thus constitute a breach of fiduciary duty. To strengthen arguments supporting the permissibility of ESG factors, fiduciaries need to gather and evaluate data to ensure that they are complying with their duties.

ERISA fiduciaries need to ensure they access reliable quantitative data and increase their reliance on data to analyze the comparative performance of funds against each other. If the ESG rule is allowed to stand following Loper Bright, fiduciaries in tiebreakers may continue to select ESG funds whose performance is backed by consistent, reliable, and verifiable third-party ESG data maintained with financial-style controls.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Candace Quinn is an executive compensation and employee benefits shareholder at Buchanan, Ingersoll & Rooney.

Barbara Sanchez-Salazar is a senior attorney at Buchanan, Ingersoll & Rooney focused on employee benefits.

Minji Kim is an associate and labor and employment attorney at Buchanan, Ingersoll & Rooney.

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