Posted on July 30, 2020

WASHINGTON, D.C. – A U.S. Department of Labor proposal to provide regulatory guideposts for plan fiduciaries involving environmental, social and governance (ESG) investing should be withdrawn, according to the Insured Retirement Institute (IRI), which filed comments on the proposed rule today.

The ESG Proposal would amend the “Investment Duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, (ERISA) to expressly require that plan fiduciaries select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.

“We believe the Department should maintain the long-standing principles-based approach to investment selection by ERISA fiduciaries,” said Jason Berkowitz, IRI Chief Legal and Regulatory Affairs Officer. “Singling out the ESG investment category for unique treatment and scrutiny is inconsistent with well-established, principles-based ERISA regulations.”

IRI said that the ESG Proposal will trigger unintended consequences, expose plan fiduciaries to additional regulatory scrutiny, and heighten litigation risks related to the selection of all plan investment options.

“We oppose a heightened regulatory standard for any specific investment category, as the Department’s principles-based standards for ERISA fiduciaries and plan sponsors effectively protects plan participants from financial risk,” Berkowitz added.

Additionally, IRI noted that the ESG proposal should be consistent with the Department’s recently issued private equity investments Information Letter and President Trump’s Executive Order to reduce regulatory impediments to financial institutions.

IRI also identified potential impacts of the ESG Proposal on investment selection, successful plan financial performance, heightened risks of regulatory burdens, and inconsistencies with long-standing Department principle-based rules.

Additionally, the Labor Department’s cost-benefit analysis concludes that the ESG Proposal will impose virtually no costs on the thousands of fiduciary service and investment product providers to the over 700,000 ERISA-governed defined benefit and defined contribution plans that the ESG Proposal may affect. IRI noted that that retirement providers will expend time and incur varying legal and other costs in connection with the ESG Proposal. 

“The amount of time and money necessary for fiduciary service providers and others to undertake the relevant foregoing tasks will be significant,” Berkowitz explained. “Plan sponsors will have to conduct the exact same analysis and incur similar legal costs plus additional expenses of hiring investment professionals to conduct a thorough analysis of all plan investments, making proper documentation, and potentially making lineup changes. The aggregate legal and investment professional costs could be very consequential.”

Berkowitz concluded, “IRI and its members strongly and respectfully implore the Department to withdraw this ESG Proposal on the basis of existing, effective regulations for plan fiduciaries and investment managers, the unnecessary and excessive regulatory burdens the proposed rule would place on retirement plans and market activity, heightened liabilities, and barriers to a broader expanse of investment categories and options.”

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Contact: Dan Zielinski