Legislation has been introduced in both the House and Senate that seeks to provide legal certainty to 401(k) plans that choose to consider environmental, social and governance (ESG) factors in their investment decisions or offer ESG investment options.
The Financial Factors in Selecting Retirement Plan Investment Act was introduced May 20 in the Senate by Sens. Tina Smith (D-MN) and Patty Murray (D-WA), who is Chair of the Senate Health, Education, Labor and Pensions Committee. Rep. Suzan DelBene (D-WA) introduced companion legislation in the House of Representatives.
In the final months of the Trump administration, the Department of Labor issued two final rules—Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights—that seemingly attempted to restrain the consideration of ESG factors in making investment decisions. The Biden-led DOL has since walked away from those rules, saying in March that it does not plan to enforce them. Subsequently, President Biden issued an Executive Order on May 20 that, among other things, directs the Labor Secretary to reconsider the rules.
The sponsors of the legislation contend that despite considerable demand for sustainable investment options, relatively few workplace retirement plans take sustainable investing principles into account because of the uncertain and regularly changing legal environment.
“We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country,” Smith stated in introducing the legislation.
According to a summary, the legislation would:
- amend ERISA to make clear that plans may consider ESG factors in their investment decisions when they are expected to have an impact on investment outcomes, provided plans consider them in a prudent manner consistent with their fiduciary obligations;
- amend ERISA to codify a longstanding principle that plans may consider ESG factors as tiebreakers when deciding between otherwise comparable options; and
- formally repeal the DOL’s rule on Financial Factors in Selecting Plan Investments and seek to limit future regulatory actions that impose unfair regulatory burdens in an effort to discourage ESG investing by ERISA plans.
Several organizations expressed support for the legislation. In fact, the American Retirement Association’s CEO, Brian Graff, was quoted in the lawmakers’ accompanying press release announcing the legislation, saying, “Retirement plan sponsors and participants deserve the freedom to choose the 401(k) investments that best suits their needs. This legislation allows the ESG investments to be included on a 401(k) menu consistent with a normal fiduciary process without artificial and unnecessary barriers that are inconsistent with fundamental principles of ERISA.”
