401(k) Specialist Issue 1 - 2023 - 36

401(k) FIDUCIARY
A Closer Look at Biden Administration's
New ESG Rule
By George Sepsakos and Jake Eigner
BACK IN OUR September column, we
highlighted a proposed rule by the Biden
Administration regarding the ability of plan
sponsors of qualified retirement plans under
ERISA to consider Environmental, Social, and
Governance (ESG) factors as part of a prudent
investment process.
On Nov. 22, 2022, the Biden Administration
Department of Labor released " Prudence and
Loyalty in Selecting Plan Investments and Exercising
Shareholder Rights, " (the " Rule " ) which is
briefly summarized below.
Whether and when the consideration of
ESG factors may be part of a prudent process
by a fiduciary of an ERISA plan has been the
subject of many formal and informal rulemaking
processes by the DOL over the previous
decades. The Rule is the latest chapter in such
rulemaking.
The Rule
The Rule amends the portion of the Code of
Federal Regulations that regulates " Investment
Duties " , 29 CFR § 2550.404a-1, in the following
notable ways:
* Language Stating ESG Factors May Be
Permissible Considerations: The Rule states
that fiduciaries may, but are not required to,
consider " climate change and other environmental,
social, or governance factors " when
those factors are economically relevant to the
consideration of an investment or investment
course of action. Of course, plan fiduciaries
must still act as prudent experts in selecting
these funds and the Rule does not change the
rigorous standards that fiduciaries are subject
to when making investment decisions.
* Participant Preferences: The Rule also
includes a provision that " fiduciaries do not
violate their duty of loyalty solely because they
take participants' preferences into account
when constructing a menu... " The provision
is carefully constructed to only reflect that
the duty of loyalty is not violated when taking
participant preferences into account. We
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ISSUE 1 2023 | 401kSpecialist.com
Jake Eigner
note that an investment option must also be
prudent and thus fiduciaries must carefully
evaluate any investment option requested by
participants before placing the option on a
plan investment lineup.
* Tiebreaker: In the past, the DOL has said
non-economic factors may only be considered
in case of a " tie, " or when investment options
are indistinguishable in terms of risk and
return; however, successive administrations
have disagreed about the frequency of ties and
when ties may occur. The preamble to this new
rule seems to suggest that ties may occur with
much more frequency than prior administraGeorge
Sepakos
tions, which stated or implied that the instance
of ties were " rare. " Specifically, the new
standard in the Rule of situations in which a tie
has occurred are when " competing alternative
investments equally serve the financial interests
of the plan. " (emphasis added), rather than
when the investments are " indistinguishable. "
* ESG in QDIAs: The previous DOL rule
under the Trump Administration included a
blanket ban on ESG-themed funds being considered
as the default fund. The Rule explicitly
repealed this ban, requiring fiduciaries to
instead evaluate QDIAs the same as any other
investment option.
Regulatory uncertainty may continue
The Rule represents the latest in a decades-long
back and forth spanning five
presidential administrations. However, the
conversation around ESG investing in retirement
plans is likely far from finished.
Last Nov. 3, several Senate Republicans sent
a letter to 51 law firms warning that " Congress
will increasingly use its oversight powers
to scrutinize the institutionalized antitrust
violations being committed in the name of
ESG. " Several pieces of legislation are currently
pending in the House of Representatives and
Senate focused on ESG issues. In addition,
19 State Attorneys General in August sent a
letter to a major asset manager warning that
their pivot towards focusing on ESG may be
inconsistent with the state laws of the states
represented. These stances by Republicans
at the state and federal level suggest that the
Rule is not the last word on these issues and
that further changes may be expected in future
administrations.
George Sepsakos is a principal at Groom Law Group,
Chartered, where he represents clients on a broad
range of ERISA, federal tax, and securities law
matters. Jake Eigner is an associate at Groom Law
Group, Chartered, who specializes in ERISA's application
to financial institutions.
https://401kspecialistmag.com/top-esg-considerations-for-plan-advisors-groom-law-group/ https://www.groom.com/ http://www.401kSpecialist.com
401(k) Specialist Issue 1 - 2023

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