Critics Slam DOL Proposal to Scrutinize ESG Choices in Retirement Plans

By Alex Padalka July 31, 2020

The Department of Labor’s proposed rule requiring retirement plans to justify their selection of environmental, social and governance-focused funds has met little support but plenty of criticism from various corners of the industry.

Last month, the agency proposed forcing retirement plans to prove that the ESG funds they choose are “economically indistinguishable” from other investments. Senior DOL officials warned that choosing ESG funds with higher fees, lower returns or greater risk would run counter to the goal of the Employee Retirement Income Security Act of 1974.

Thursday was the last day to submit comments on the proposal. Information published on the DOL's website as of early Friday morning shows 1,503 comments had been submitted, but they were not made public.

Unintended consequences

The Insured Retirement Institute says the DOL should withdraw the proposal, as otherwise such a rule would “trigger unintended consequences, expose plan fiduciaries to additional regulatory scrutiny, and heighten litigation risks related to the selection of all plan investment options.” 

“Singling out the ESG investment category for unique treatment and scrutiny is inconsistent with well-established, principles-based Erisa regulations,” Jason Berkowitz, IRI chief legal and regulatory affairs officer, says in a statement.

Furthermore, while the DOL said the proposed rule would cost just $57,000 in compliance, Berkowitz says the costs and resources would actually be “significant.”

The IRI also says the DOL’s proposal should be consistent with its recent changes to rules easing the inclusion of private equity funds in defined contribution plans. 

Extra costs

The Principles for Responsible Investment — a global coalition of more than 3,000 investors with more than $100 trillion in assets — says the DOL’s proposed rule would sow confusion among fiduciaries “regarding if and when ESG factors may be considered material.” The proposal would also prevent fiduciaries from being able to choose investments they deem best from a risk and return perspective, as well as incur extra costs to beneficiaries, the PRI says in a statement. The group likewise requests that the DOL withdraw the proposal. 

Doubts

The U.S. Impact Investing Alliance, an advocacy group for the promotion of impact investing, raises doubts about the DOL’s assumptions in drafting the proposal, “specifically the assumption that investment strategies based on ESG factors inherently sublimate risk and return considerations to focus on ‘non-pecuniary considerations,’ which has been disproven by recent academic and financial literature,” the group says in a statement. And the DOL’s cost-benefit analysis was inadequate, failing to capture associated and potential costs of the proposed change, according to the alliance.

The group also says the proposed rule would set up an arbitrary double standard that would put ESG funds under more scrutiny than non-ESG alternatives.

Contrary to ESG experience

 Voya Financial says in a statement that the DOL’s proposal “ignores the needs of retirement plan savers and fails to recognize the benefits that ESG investments can provide” and likewise urges the agency to withdraw the proposal.

"We believe that fulfilling fiduciary obligations and ESG investing are not mutually exclusive,” Christine Hurtsellers, CEO of Voya Investment Management, says in a statement. “Contrary to the DOL’s assertion, recent experience has shown that ESG investments can outperform broader markets, particularly in times of market stress. Ultimately, we believe that ESG factors may help identify material financial risks and opportunities and can drive better long-term investment performance.”

Voya says its research shows that 76% of individuals believe it’s important for the companies where they work to apply ESG principles to their workplace benefits.

The company also says that the DOL should either leave the current guidance on ESG investing in place or develop a new proposal supporting the role of ESG factors in workplace retirement plans.

July 30 was the last day for comments on the rule. The DOL said it may make small changes to the rule in light of the comments.

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