The Department of Labor (DOL) recently reiterated its position that plan fiduciaries are not permitted to sacrifice investment return or take additional investment risk to promote “collateral social policy goals.”
The DOL reasoned that environmental, social and governance factors are not typically relevant economic factors that should be used to evaluate investment alternatives. In some situations, when they reflect business risks or opportunities, they can be treated as economic considerations and more than mere tie-breakers. However, ERISA fiduciaries must always put the economic interests of the plan first.
The DOL appears to concede that socially responsible investment options are less problematic in defined contribution plans. Plans that allow participants to direct their own investments, including plans complying with ERISA section 404(c), do not forgo other investment options by including a “a prudently selected, well managed, and properly diversified” fund with environmental, social, and governance factors among the plan’s diverse array of investment lineups.
However, the DOL cautions against using a fund with environmental, social, and governance factor goals as a qualified default investment option (QDIA). “In the QDIA context, the decision to favor the fiduciary’s own policy preferences in selecting an [environmental, social, and governance]-themed investment option for a 401(k)-type plan without regard to possibly different or competing views of plan participants and beneficiaries would raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty.” If a fiduciary decides to consider socially responsible funds for a QDIA or target date fund, the fiduciary must ensure that the fund’s rate of return and risk profile would be comparable to or better than other funds that do not consider social factors.