On April 23, 2018, the DOL released Field Assistance Bulletin (FAB) 2018-01 relating to (1) plan investment in “economically targeted investments (“ETIs”), (2) the exercise of shareholder rights and (3) investment policy statements. We will address the first of these topics in today’s post. Generally, ETIs are investments that promote certain environmental, social and governance goals in addition to general investment benefits.
Background: Policy Tug-of-War
FAB 2018-01 is the most recent episode in a decades-long policy debate about how fiduciaries charged with investing ERISA plan assets should weigh the collateral economic or social benefits offered by certain investments. Plan fiduciaries have long struggled with implementing vague guidance on how to satisfy ERISA’s strict standards for investment of assets on the plan level while also doing what the fiduciary perceives as “the right thing” on a societal level.
The Clinton administration issued Interpretive Bulletin (IB) 94-01, which (according to IB 2015-01) was issued to “correct a popular misperception at the time that investments in ETIs are incompatible with ERISA’s fiduciary obligations.” IB 94-01 explained what some have called the “all things being equal” test, under which ERISA permits plan fiduciaries to invest in an ETI if the ETI has a risk/return profile similar to a non-ETI option that would be appropriate given the diversification and investment policy of the plan. However, IB 94-01 instructs fiduciaries that “an investment will not be prudent if it would provide a plan with a lower expected rate of return than available alternative investments with commensurate degrees of risk or is riskier than alternative available investments with commensurate rates of return.”
The George W. Bush administration replaced IB-94 with IB 2008-01 in October of 2008, which emphasized “that fiduciary consideration of collateral, non-economic factors in selecting plan investments should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.” IB 2015-01.
Finding the language of IB 2008-01 unduly discouraged investment in ETIs, the Obama administration released IB 2015-01 (“Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments”) (29 C.F.R. 2509.2015-1) which withdrew IB 2008-01 and reinstated the language of IB 94-01. The preamble to IB 2015-01 clarified that “plan fiduciaries should appropriately consider factors that potentially influence risk and return” and that ESG (Environmental, Social, and Governance) factors “may have a direct relationship to the economic value of the plan’s investment” and “are not merely collateral considerations or tie-breakers, but rather […] proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices. Similarly, if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.”
Overview of FAB 2018-01 ETI Guidance: Limiting 2015-01?
FAB 2018-01 provides additional guidance to Employee Benefits Security Administration (EBSA) national and regional offices “to assist in addressing questions” from fiduciaries regarding IB 2015-01. Addressing the language from the preamble to 2015-01 cited and underlined above, FAB 2018-01 seems to hedge the Obama-era statement as a recognition that “there could be instances when otherwise collateral ESG issues present material business risk or opportunities” which “investment professionals would treat as economic considerations under generally accepted investment theories” (and are thus “more than mere tie-breakers”). While acknowledging this possibility, the FAB 2018-01 warns that “[f]iduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.” FAB 2018-01 clarifies that “ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.”
While the FAB provides little in the way of practical guidance for fiduciaries, it is significant in that it indicates yet another shift the DOL’s policy. Plan fiduciaries should review whether their plans hold ETIs, and whether they have appropriately weighed any ESG factors as described in FAB 2018-01. Future posts will comment on some of the other topics covered by FAB 2018-01.