DOL Guidance Yields Cautions…but Clarifications
Charting ESG considerations among participants is relatively new, but their strong interest means that plan sponsors need to explore this topic further. Last year, the DOL clarified its position on the inclusion of ESG-themed investments within a DC retirement plan. The April 2018 Field Bulletin reiterated the bottom-line necessity from earlier bulletins that any investment option within a DC plan must not sacrifice financial performance potential in favor of other considerations, such as socially responsible considerations. And the face-value meaning of that would seem to add some due-diligence hurdles to many responsible investing approaches.
However, the DOL’s Field Bulletin did not categorically exclude ESG-themed approaches; and in a tie between two similar and similarly performing investment options, an ESG-themed fund or portfolio incorporating ESG considerations could certainly be included on a plan’s menu. The bulletin also noted that sometimes “collateral ESG issues” constitute intrinsic economic considerations for a company’s business plan, and should be included by a prudent fiduciary when evaluating the risks and returns. In such instances, “the weight given to those [ESG] factors should also be appropriate to the relative level of risk and return involved compared to other relevant economic factors.”
Interestingly, the 2018 Bulletin also made a distinction between ESG-themed funds and funds that incorporate ESG factors into their foundational, broad-based research and analysis of risks and returns. “For the purpose of this bulletin, ESG-themed funds (e.g., Socially Responsible Index Fund, Religious Belief Investment Fund, or Environmental and Sustainable Investment Fund), should be distinguished from non-ESG-themed investment funds in which ESG factors may be incorporated in accordance with IB 2015-01 and IB 2016-01 as one of many factors in ordinary portfolio management and shareholder engagement decisions.”
Consequently, funds that integrate these factors in their ongoing research would appear to offer plan participants a reasonable way to access responsible investing values while also providing plan sponsors and their fiduciaries a reasonable level of compliance with DOL guidelines concerning ESG investments.
What About Responsible Investing and QDIAs?
The Field Bulletin also looked specifically at the issue of ESG-themed investments as potential qualified default investment alternatives (QDIAs) for DC plans. In this instance, the DOL’s guidance states that “Nothing in the QDIA regulation suggests that fiduciaries should choose QDIAs based on collateral public policy goals.” The selection of a QDIA, such as a target-date fund, is not the same as merely offering another option within the stand-alone selections on a plan menu. QDIAs are used whenever a plan participant doesn’t actively make an investment determination, and DC plans increasingly use a QDIA in conjunction with automatic enrollment.
The problem for ESG-themed investments here is that plan sponsors and other fiduciaries for the plan might be imposing values or ethical perspectives that conflict with the views of some participants. Regardless of that, any ESG-themed target-date fund would also have to comply with earlier guidance (Field Bulletin IB 2015-01) that calls for expected risks and rates of return similar to those of available non-ESG target-date funds.
But once again, integrating responsible investing factors within a fund’s broad-based foundational research doesn’t appear in conflict with these cautions and guidelines. We believe that responsible investing should be available to plan participants. And we believe the integration of ESG factors within a fund’s underlying research is not only a good way to achieve that today; it is a crucial and necessary component of sound investment analysis.
