On April 23, 2018, the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) issued the Field Assistance Bulletin No. 2018-01 to provide guidance to plan fiduciaries with respect to their responsibilities in considering “economically targeted investments” (ETIs). ETIs is the DOL’s terminology for socially responsible investments (SRI) or environmental, social, governance (ESG) investments. While the new “guidance” is designed to provide clarity for plan fiduciaries, in reality, it is likely to create additional confusion.
To understand why, it is helpful to understand a little bit of the backstory. The purpose of the Field Assistance Bulletin was to provide guidance to plan fiduciaries regarding two prior Interpretive Bulletins (IB 2015-01 and IB 2016-01). IB 2015-01, “Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments,” was widely interpreted to provide a basis for plan fiduciaries to incorporate SRI or ESG criteria into their investment selection process. It was interpreted that way because it replaced prior guidance (in the form of Interpretive Bulletin 2008-01) that was considered to restrict the use of these criteria. In fact, IB 2015-01 states:
The Department believes that in the seven years since its publication, IB 2008-01 has unduly discouraged fiduciaries from considering ETIs and ESG factors. In particular, the Department is concerned that the 2008 guidance may be dissuading fiduciaries from (1) pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments, and (2) investing in ETIs even where economically equivalent. Some fiduciaries believe the 2008 guidance sets a higher but unclear standard of compliance for fiduciaries when they are considering ESG factors or ETI investments.
ERISA clearly articulates a fiduciary has a responsibility to act in the best interests of plan participants and their beneficiaries. As it relates to investment decision-making, it means that plan fiduciaries must put the economic interests of participants above any other, ancillary objectives. While that has been consistent since the advent of ERISA, in IB 2015-01, the DOL states that plan fiduciaries can consider ESG criteria as they “…may have a direct relationship to the economic value of the plan’s investment.”
So, what we have now is a game of regulatory ping pong. The DOL issued initial guidance in 1994 which provided an opportunity for SRI funds, in 2008 the DOL restricted the use of those options, then encouraged their use in 2015 and further encouraged that in 2016, and now in 2018 is seeking to “clarify” its position once again; this time in a way that is viewed as restricting of those investments. FAB 2018-01 says:
Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision. It does not ineluctably follow from the fact that an investment promotes ESG factors, or that it arguably promotes positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors.
So where does the current guidance leave us? Can we use socially responsible investments in our plans? Should we use them? The good news for plan sponsors using, or considering using SRI or ESG investments, is that FAB 2018-01 does not preclude the selection of these products within an investment menu and in fact, provides some clarity on the ability to include them within a fund menu that offers participants a wide range of investment options. FAB 2018-01 states:
In the case of an investment platform that allows participants and beneficiaries an opportunity to choose from a broad range of investment alternatives, adding one or more funds to a platform in response to participant requests for an investment alternative that reflects their personal values does not necessarily result in the plan forgoing the placement of one or more other non-ESG themed investment alternatives on the platform. Rather, in such a case, a prudently selected, well managed, and properly diversified ESG-themed investment alternative could be added to the available investment options on a 401(k) plan platform without requiring the plan to remove or forgo adding other non-ESG-themed investment options to the platform.
In plain English, the DOL says it may be reasonable for a plan fiduciary to include an SRI or ESG fund on its platform assuming it is prudently managed because it does not crowd out other non-ESG options. The DOL continues on to make an exception with respect to a plan’s qualified default investment alternative (QDIA). The DOL draws a distinction between offering an SRI/ESG fund as one of many options and actively using it as the default option which is used by the plan fiduciary when a participant otherwise doesn’t make an election. In that circumstance, the burden is higher, and the plan fiduciary would need to demonstrate that the SRI/ESG criteria impact the economic considerations of an investment.
In reviewing FAB 2018-01, my takeaways are as follows:
- It is okay to use prudently managed, well-run ESG/SRI investment options within your plan’s menu
- Do not use ESG/SRI criteria in selecting your plan’s QDIA
- Document the inclusion of ESG/SRI criteria within your plan’s investment policy statement
- ESG/SRI options should be included because you reasonably believe that they have a positive economic impact on the expected return and/or expected risk of an investment. (For example, a belief that companies following certain best practices from a governance perspective are going to have better returns or greater future growth.)
- ESG/SRI options should not be included just to appease participants or make a subset of your plan population feel good
If you would like more information on the topic of socially responsible investments or would like to discuss the FAB 2018-01 in greater detail, feel free to contact your Multnomah Group consultant.
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Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.