The Department of Labor’s proposed rule addressing environmental, social and governance (ESG) factors in selecting plan investments received more than 1,500 comment letters during the 30-day comment window, with many taking issue with the proposal.
The proposed regulation was released June 23, but the comment period ended July 30. Among the commenters were law, investment and advisory firms, industry trade groups, pension groups, private sector companies, members of Congress and individuals, with many offering substantive comments or suggesting that the department extend the comment period or withdraw the proposal and start over.
While the American Retirement Association’s comment letter cautioned that the proposal “could stifle investment selection, decrease participant savings rates and diminish portfolio diversification,” other letters were even more critical, blasting the approach taken by DOL.
Industry Comments
One example comes from investment research firm Morningstar. “Simply stated, the Department’s proposed rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections,” the firm states in its letter. “Were the Department to keep the rule as proposed, it would lead to worse outcomes for plan participants as plan sponsors shied away from assessing ESG risks in selecting investments.”
Morningstar contends that ESG risk analysis should be part of any prudent investment analysis and “not called out for special, unique scrutiny.” In fact, the firm suggests that ERISA fiduciaries should have an obligation to consider ESG risk as it is a pecuniary matter that is fundamental to evaluating the long-term performance of an investment.
A letter from the Investment Company Institute states that, “We are concerned that the ... requirements, both individually and combined, would apply heightened fiduciary requirements or prescriptions to the use of any investment strategy that incorporates ESG consideration.” The ICI adds, “this sudden shift departs from more than 45 years of precedent dating from the adoption of ERISA and appears to be based on an inaccurate or incomplete understanding of ESG.” As such, the ICI urges the DOL to withdraw the proposal, but offers several recommendations should the department still choose to move forward with its proposal.
Voya notes in its comment letter that it has several concerns with the DOL’s proposal, believing, among other things, that it ignores the needs of retirement plan savers and fails to recognize the benefits that ESG investments can provide. “We see no valid reason to isolate ESG factors and subject them to special tests above and beyond ERISA’s existing, robust fiduciary principles. An informed and responsible fiduciary may have viewpoints on any number of qualitative matters,” Voya states. The firm also urges the DOL to withdraw its proposal and either leave prior guidance in place, or develop a new proposal that “recognizes and supports the important role that ESG factors can have in identifying appropriate investments and promoting participation in workplace retirement savings plans.”
Voya also cites recent research it conducted finding that 76% of individuals felt it was important for their employer to apply ESG principles to workplace benefits and 60% would likely contribute more to an ESG-aligned retirement plan if it were certified. The firm notes that it is working with DALBAR, which is creating an ESG certification for Retirement Plans that would measure how actively a plan sponsor is applying the principles of ESG to the plan.
Pecuniary Factors
For its part, DALBAR takes issue with the DOL’s argument that only risk-adjusted returns qualify as financial benefits. Noting that the proposed rule would limit the factors fiduciaries can use in selecting plan investments to what the department defines as “pecuniary” factors, the firm contends that the “critical flaw” in this approach is that the definition of “pecuniary” fails to include the two most crucial factors—participation and contributions—in securing retirement income.
To that end, DALBAR argues that the presence of ESG investments can increase participation and contribution levels. Based on its most recent survey of employees (“Financial Success Drivers of DC Plans"), the firm similarly found that 76% were likely to participate in a plan that had ESG investments and 32% said they were very likely to participate in such plans. “Ignoring factors that impact participation and contributions in the definition of ‘pecuniary’ was a giant blind spot for the DOL in this proposal,” says Cory Clark, DALBAR’s Chief Marketing Officer.
Among other things, the firm recommends that the definition of “pecuniary factors” should be changed to include retirement income and to add the effect on participation and contribution as a basis for including an investment. “An ERISA plan’s singular focus should be to fund participants’ retirement income. That notion was cited as the driving force behind this proposal, but ironically retirement income is nowhere to be found in the definition of pecuniary,” Clark adds.
Senate Dems Weigh In
Meanwhile, Sen. Patty Murray (D-WA), ranking member of the Senate Health, Education, Labor and Pensions Committee—who blasted the proposal when it was released—submitted a comment letter with nine other Senate Democrats urging the DOL to withdraw the proposed rule.
“This rushed and out-of-touch proposal relies on speculation rather than evidence to justify its misguided approach and would undermine fiduciaries’ ability to consider all available information and make sound investments,” says the letter cosigned by Sens. Tina Smith (D-MN), Elizabeth Warren (D-MA), Dick Durbin (D-IL), Sherrod Brown (D-OH), Cory Booker (D-NJ), Brian Schatz (D-HI), Mazie Hirono (D-HI), Amy Klobuchar (D-MN) and Sheldon Whitehouse (D-RI).
“Though the Department assumes throughout the proposed rule that ESG investments sacrifice returns to achieve non-pecuniary goals, the Department does not offer evidence demonstrating such inferior performance and ignores an abundance of evidence demonstrating that ESG investing compares favorably to traditional investments in performance and risk,” the senators note.
Industry Groups Request Extension
Taking a different tack, a letter from the American Bankers Association, the Defined Contribution Institutional Investment Association, Insured Retirement Institute, the Investment Adviser Association, Investment Company Institute, the Securities Industry and Financial Markets Association, and the SPARK Institute urges the DOL to extend the comment period by 30 days.
“The Proposal represents a major overhaul to DOL regulation section 2550.404a-1, which applies to a fiduciary’s selection of all plan investments and has been in place since 1979,” the letter states. “To help avoid unintended consequences that could include increased costs and burdens on fiduciaries for the selection of any plan investment, significant limitations on the investment choices of plan participants, and increased risk of litigation against plans, more than thirty days is needed for analysis,” the letter adds.
It should be noted that several of these organizations also submitted separate comment letters.
