Washington, DC – On December 13, 2021, HLLI submitted a comment letter asking the Department of Labor’s Employee Benefits Security Administration to withdraw its proposed rule revising 29 CFR § 2550.404a-1, Investment Duties. The proposed rule purports to clarify when and how pension plan fiduciaries may consider Environmental, Social, and Corporate Governance (ESG) factors in making investment decisions and exercising shareholder rights. The proposed rule replaces two rules issued in 2020 that reinforced the exclusive benefit rule of ERISA Section 404 requiring plan fiduciaries to act solely in the best financial interest of pension plan participants and beneficiaries.
Our comment letter notes that the exclusive benefit rule of Section 404 creates an objective standard for pension plan fiduciaries. Congress’s intent when it passed ERISA was to provide a safe and secure retirement for workers. Accordingly, Congress intended Section 404 to create a rigid duty of loyalty and prudence for plan fiduciaries, and this is supported by Supreme Court precedent, most notably in Fifth Third Bancorp v. Dudenhoeffer, 575 U.S. 523 (2014). In that case, the Court held that the sole or exclusive benefit rule of Section 404 relates to providing financial benefits for plan participants and beneficiaries, even in the context of an Employee Stock Ownership Plan (ESOP), a pension plan that by its very nature incorporates non-pecuniary objectives (corporate ownership by employees).
The proposed rule was prompted by two Executive Orders concerning risks associated with climate change. The preamble of the proposed rule indicates that it only seeks to remove confusion about when and how ESG factors can be considered by plan fiduciaries. Nonetheless, the practical effect of the proposed rule is to tacitly encourage use of ESG factors by plan fiduciaries when making investment and shareholder rights decisions, which undermines the objective standard of the exclusive benefit rule. The proposed rule also eliminates certain record-keeping requirements contained in the rules it supplants, thereby undermining fiduciary accountability. Our letter also notes that ESG investing is flawed because there is no uniform standard by which to judge ESG factors and because ESG investing regularly results in poor outcomes and higher fees.
ESG matters involve a multitude of frequently conflicting policy preferences. If Congress wishes plans to consider ESG in their decisions, it is capable of passing legislation which allows them to. The proposed rule, however, works to essentially outsource these potentially thorny issues to a small group of plan fiduciaries and their agents by granting them latitude to act other than in the best financial interest of plan participants while also eroding fiduciary accountability. The proposed rule will potentially jeopardize the financial security of millions of ERISA pension plan participants and beneficiaries.
A copy of the comment letter is available here. We hope that the Department of Labor thoughtfully considers our letter, withdraws the proposed rule, and restores the two rules the proposed rule seeks to replace.