Please access our summary of the Labor Department’s long awaited final rule on Financial Factors in Selecting Plan Investments here. We find the approach in the investment selection process for fiduciaries to remain consistent with the long-imposed ERISA framework. Plan investment fiduciaries are held to the highest standards of loyalty and prudence when carrying out their duties when selecting and monitoring investment options under a participant directed, individual account-based plan (i.e., 401(k) and 403(b) or traditional pension plans). The responsibility, thus liability, should squarely rest on the shoulders of those who have discretionary authority to make investment decisions, including creating the investment core menu under a plan.
The Rule reaffirms that “fiduciaries must never sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals”. Pecuniary benefits remain central to the long-term retirement saving success. The evaluation of plan investments “must be focused solely on economic considerations that have a material effect on the risk and return of an investment.” This simply means ESG factors can be part of the overall fiduciary consideration when selecting investments.
I did not expect nor encourage the Labor Department to provide a safe harbor list of selection criteria for ESG factors. The prudent person rule is a facts and circumstance rule that says a fiduciary must discharge his or her duties with the care, skill, prudence, and diligence that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and aims. Under a dynamic and uncertain world, we rely on investments fiduciaries to make informed and deliberated decisions for the sole interest of participants. This final rule affirms the age-old fiduciary responsibility in selecting and monitoring investment choices. In sum, a fiduciary may give consideration to ESG or other factors as long as the selection criteria for these factors do not add risks, add costs and/or diminish pecuniary benefits against comparable investments that do not take ESG factors into consideration. I suspect that the presence or absence of ESG factors as a part of a fiduciary’s investment selection and monitoring process will be a hot topic in class action lawsuits in the future.