If the GOP takes control of Congress, one priority may be fighting the DOL’s efforts to make it easier for plan fiduciaries to consider environmental, social and governance factors when selecting plan investments.
The Maximize Americans’ Retirement Security Act (S. 4613), legislation introduced July 26 by Sen. Mike Braun (R-IN), would clarify that the fiduciary duty of plan administrators is to select and maintain investments based solely on “pecuniary” financial factors. Joining Braun as cosponsors are Sens. Richard Burr (R-NC), Tommy Tuberville (R-AL), Cynthia Lummis (R-WY), Roger Marshall (R-KS), Roger Wicker (R-MS), Steve Daines (R-MT) and James Inhofe (R-OK).
The legislation comes as the Department of Labor seeks to finalize in the near future its October 2021 proposal setting aside the Trump administration’s final rules on the use of ESG factors in selecting plan investments and fiduciary duties regarding proxy voting, replacing it with one that explicitly allows a consideration of those factors.
“At a time when energy costs are soaring and Hoosiers are grappling with record high inflation, Democrats are politicizing American retirement funds and targeting companies that invest in energy sources that could help alleviate these soaring costs. The Biden Administration should not be sacrificing the retirement savings of thousands of individuals to promote liberal policy objectives,” Braun said in a statement announcing the legislation.
As part of their argument, the senators point to a March 2022 article in the Harvard Business Review that cited various studies showing that ESG investing policies result in worse rates of return and that, compared to other investment plans, ESG investors generally end up paying higher costs for worse performance.
While the legislation would require plan fiduciaries to select investments solely on pecuniary factors, the legislation also specifies that if a fiduciary cannot distinguish between investments on pecuniary factors alone, they may use non-pecuniary factors, but must explain the reasoning behind their decision to participants.
That documentation must include:
- why pecuniary factors were not sufficient to select or maintain the investment;
- how the investment compares to the alternative investments with regard to: (1) the composition of the investments of the plan with respect to diversification; (2) the liquidity and current return of the investments of the plan relative to the anticipated cash flow requirements of the plan; and (3) the projected return of the investments of the plan relative to the funding objectives of the plan; and
- how the chosen non-pecuniary factor is consistent with the interests of participants and beneficiaries in their retirement income or financial benefits under the plan.
Under the legislation, pecuniary factors are defined as any factors that a fiduciary prudently determines are expected to have a material effect on the risk or return of an investment.
Braun had offered an amendment during the Senate Health, Education, Labor and Pensions (HELP) Committee’s consideration of the RISE & SHINE Act in June, but it was rejected along party lines by a tie vote of 11-11. In addition, Sen. Daines introduced similar legislation in June that essentially seeks to codify the Trump-era DOL rules preventing plan fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions solely on pecuniary-based financial factors.