Benefits Byte

October 15, 2021

Summary Available for New Proposed ESG Regulations

American Benefits Council members can now access a detailed summary of the newly proposed regulations governing the selection of retirement plan investments, particularly with respect to consideration of environmental, social and governance (ESG) investment factors.

As we reported in the October 13 Benefits Byte, the proposed rules were issued by the U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA) pursuant to an executive order issued by the White House in May. The executive order directed the Secretary of Labor to “consider publishing, by September 2021 … a proposed rule to suspend, revise, or rescind” the rules finalized in 2020 by the previous administration: the so-called “ESG Rule” (Council summary) and the “Proxy Voting Rule” (Council summary).

DOL’s stated intent with the new proposal is to “address uncertainties regarding certain aspects of the 2020 regulations and related preamble discussions regarding the consideration of climate change and other ESG issues by fiduciaries in making investment and proxy voting decisions, and to increase fiduciaries’ clarity about their obligations, which will safeguard the interests of participants and beneficiaries in plan benefits.”

As the Council’s summary explains, the Biden administration’s proposed rule would once again swing the pendulum on the use of ESG factors back from the direction advanced by the prior administration. In fact, DOL has proposed to specifically reference ESG factors in the regulation as examples of factors that may be material to a risk/return analysis. Furthermore:

  • DOL’s core views on a fiduciary’s obligations nevertheless remain the same: a fiduciary still may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to collateral objectives. Thus, while some may view this this as a “reversal” of the Trump administration rule, much of the text of the regulation, and its impact, is not changed.
  • The proposal would eliminate use of the term “pecuniary” factors in the investment duties regulation, replacing it instead with a more general risk/return analysis concept and through references to “collateral” benefits.
  • The proposal would eliminate the special documentation requirement from the ESG Rule’s tie-breaker test and the prohibition on the use of funds that take into account non-pecuniary factors from being qualified default investment alternatives (QDIAs). DOL has also slightly rephrased how fiduciaries should think about the tie-breaker test, by framing it in terms of two investments that “equally serve the financial interests of the plan.”
  • Importantly, the proposal would impose a new disclosure requirement on participant-directed plans in the case of a designated investment alternative that was selected for the plan menu or as a QDIA using collateral factors: the plan would need to prominently disclose the collateral-benefit characteristic of the investment.
  • The proposal would generally simplify the Proxy Voting Rule and eliminate a special recordkeeping requirement that applies in connection with exercising shareholder rights.

Additional details on the proposal’s effect on the ESG Rule and the Proxy Voting Rule, and the implications for employer-sponsored retirement plans, are provided in the Council’s summary.

Comments on the proposed rule are due by December 13, 2021. For more information, or to provide input for a possible Council comment letter, contact Lynn Dudley, senior vice president, global retirement and compensation policy, or Diann Howland, vice president, legislative affairs.