DOL Final Rule: Clarity on ESG Investing in Retirement Plans

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What does the US Department of Labor’s recently announced Final Rule for ESG (environmental, social, and governance) investing in retirement plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) mean? Are ESG investments valid qualified default investment alternatives (QDIA)? Can plan fiduciaries and investment professionals have meaningful sustainable investing conversations once again?

Susan Olson, Vice President of Government Relations at Natixis Investment Managers, delves into these topics and more with a nationally recognized expert on employer-sponsored retirement plans, Bradford Campbell. Brad is a partner and employee benefits attorney for Faegre Drinker in Washington, DC. He was the Assistant Secretary for Employee Benefits Security of the US Department of Labor during the George W. Bush administration, and he served as ERISA’s primary regulatory and enforcement official.

Here are a few highlights from the talk:

How Important is This Final ESG Rule for Retirement Plan Sponsors and Investors?
The reason it's important is it lays out exactly whether and how fiduciaries can make investment decisions, including questions like, can we consider ESG factors? And, how do we consider those factors? Even though we've talked about this a lot during the last few years, the reality is the Labor Department first started issuing guidance on this back in 1994.

What Does This Final Rule Accomplish?
The reason this final regulation is significant is rather than having the government take an advocacy position, either for ESG or against it… what this rule really does is it says, “Hey, rather than the government telling us what to do, we're going to tell you fiduciaries to make up your own minds based on the relevant factors.”

That's a really helpful approach because it means that fiduciaries are making these decisions where it makes sense to include these factors. And I think one thing that's important for the audience to understand is there are, of course, goals here in ERISA. Your goal is to manage these assets, to provide for the economic and retirement security of the participants.

How has the Final Rule clarified what you can use in core funds – such as default funds and QDIAs?
The 2020 rule really made it quite difficult to understand when you could select an investment as a qualified default investment alternative (QDIA). In other words, an investment for use with automatic enrollment and auto escalation provisions that are now very common in plans and are really working well. The 2020 regulation made it really difficult to know whether your QDIA that you picked was appropriate because it wasn't allowed to have sort of any collateral factors. The language was a little fuzzy, but it really raised some questions. The new regulation clarifies this. It says, ESG or not, the normal QDIA rules apply.

So, whether your fund has ESG-related factors or not, it's eligible to be a QDIA. The issue is, is it a prudent investment? Did you go through your normal prudent, thorough, well-documented process to pick an investment that's consistent with the QDIA regulations?