A senior Republican senator who sits on the Senate Finance Committee is taking aim at efforts that would give plan fiduciaries greater leeway in using environmental, social and governance (ESG) factors when selecting plan investments for DC plans.
Sen. Steve Daines (R-MT) on June 23 introduced the Securing Employee Retirement Returns Act, which essentially seeks to codify the Trump administration’s Department of Labor 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.
The term “pecuniary factor” means a factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the plan’s funding policy.
“Montanans should not have to pay the price for the whims of wokeness with their hard-earned life savings,” Daines said in a statement. “Fiduciaries must remember their responsibility is to their shareholders, not the woke mob—these are financial institutions, not pop-up shops for the radical Left.”
The legislation does provide some wiggle room, but not much. According to the bill, when choosing between or among investment alternatives that a fiduciary is unable to distinguish on the basis of pecuniary factors alone, the fiduciary may use non-pecuniary factors as the deciding factor in the selection or maintenance of an investment if the fiduciary documents:
- why pecuniary factors were not sufficient to select or maintain the investment; 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.
Moreover, the legislation specifies that when selecting or maintaining designated investment alternatives that permits a participant or beneficiary to choose from a broad range of DIAs, a fiduciary may select or maintain an investment in an investment fund, product or model portfolio that considers, or indicates the use of non-pecuniary factors, if:
- in selecting or maintaining such investment, the fiduciary otherwise satisfies the pecuniary duties of the legislation; and
- the investment is “not added or retained as, or as a component of, a qualified default investment alternative of the defined contribution plan.”
In introducing the legislation, Daines pointed to President Biden’s May 2021 Executive Order on Climate Related Financial Risk. Among other things, the Order directed the Labor Secretary to identify agency actions that could be taken under ERISA “to protect savings and pensions of U.S. workers from the threats of climate-related financial risk,” and directed the Secretary to consider suspending the Trump-era fiduciary rules under ERISA that prioritized pecuniary factors over non-pecuniary ones.
The Biden administration’s position on the use of ESG factors apparently has irked the GOP from the early days of the administration. Following a March 2021 enforcement policy statement by the DOL’s Employee Benefits Security Administration (EBSA) announcing that it will not enforce the final rules on Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, three senior GOP senators slammed the decision, contending that the DOL’s refusal to enforce these rules “will harm Americans’ retirement savings by allowing plan fiduciaries to sacrifice investment returns to promote non-pecuniary policy objectives like social justice, diversity quotas, and lower carbon emissions.”
A few months later in October 2021, the DOL released a proposal to set aside the previous administration’s final rules on the use of ESG factors in selecting plan investments and fiduciary duties regarding proxy voting for one that explicitly allows a consideration of those factors. The proposed rule has not yet been finalized, but according to the regulatory agenda, the DOL has a target date for releasing a final rule by December 2022.
The use of ESG factors in plan-investment decision-making has also reportedly been one of the reasons that the nomination of Lisa Gomez to lead EBSA continues to be held up in the Senate. In June, all 50 Senate Republicans voted against her nomination.