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Economically targeted investing—ERISA considerations

“A number of my clients have asked about economically targeted investing (ETI). Are there any special considerations of which I need to be aware?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from New Jersey is representative of a common inquiry related to selecting plan investments.

Highlights of the Discussion

Plan fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) should be aware of the Department of Labor’s (DOL’s) stance and guidance on ETI. First, let’s wrap our heads around what ETI is, and the many names by which it is known.

ETI is a type of investment behavior where an individual or plan committee considers the economic, social and/or corporate governance benefits of an investment, in addition to its propensity for favorable returns, when making investing decisions. Other common names for this behavior include socially responsible investing, sustainable and responsible investing, environmental, social and governance (ESG) investing, green investing and impact investing.

ESG criteria are many and varied. The Forum for Sustainable and Responsible Investment offers the following common examples of ESG criteria, but there are surely others:

Environmental Social Corporate Governance
Water Use & Conservation Workplace Safety Corporate Political Contributions
Sustainable Natural Resources Labor Relations Executive Compensation
Pollution/Toxins Workplace Benefits Board Diversity
Clean Technology Diversity & Anti-Bias Issues Anti-Corruption Policies
Climate change/Carbon Community Development Board Independence
Green Building/Smart Growth Avoidance of Tobacco or Other Harmful Products  
Agriculture Human Rights  

Over the past 35 years, various members of the financial industry have asked the DOL to opine on the use of ESG investments within qualified retirement plans given the constraints of ERISA. ERISA requires plan fiduciaries to make decisions with respect to their plans that are in the best interests of the participants and beneficiaries, with their decisions being held to an expert standard. Selecting and monitoring plan investments is well within this purview.

Through several DOL interpretive bulletins (IBs), culminating with IB 2015-01, the DOL has confirmed its longstanding view that, “… plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is appropriate for the plan and economically and financially equivalent with respect to the plan’s investment objectives, return, risk, and other financial attributes as competing investment choices.” Some have referred to this standard as the “all things being equal” test. Put another way, “Would the investment make the cut as a plan investment using ERISA standards if it were not ESG conscious?”

What about a plan’s investment policy statement (IPS), the written document that provides fiduciaries with general instructions for making investment management decisions? If ESG investing is an objective of the plan, then the DOL deems it appropriate for a plan’s IPS to reference the process and criteria for inclusion of such investments. Moreover, prudence dictates plan fiduciaries maintain records sufficient to demonstrate compliance with ERISA’s evaluation requirements and IPS guidelines.

Conclusion

All things being equal, plan fiduciaries can consider an investment’s ESG criteria as part of an ETI objective as long as the investment otherwise meets ERISA’s best interest and prudent expert standards.

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