The Department of Labor unveiled guidance aimed at giving retirement plan fiduciaries more leverage in selecting socially responsible investments.
The DOL has previously issued guidance on the issue of social investments, also known as economically targeted investments (ETIs), but said it is issuing Interpretive Bulletin 2015-01 because the old guidance was discouraging plan fiduciaries from selecting such investments.
“Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand,” Secretary of Labor Thomas E. Perez said in a press release on Oct. 22, the day the guidance was released.
The DOL said in IB 2015-01 that it is issuing the guidance out of concern that its 2008 guidance muddied the waters and perhaps dissuaded fiduciaries from pursuing investment strategies that consider environmental, social and governance (ESG) factors. Some plan fiduciaries reported to the DOL that the earlier guidance “sets a higher but unclear standard of compliance for fiduciaries when they are considering ESG factors or ETI investments,” the agency said.
“We have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments. Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position,” Perez said.
ETIs are investments selected for the benefits they create beyond the investment return to the employee benefit plan investor, the DOL said in the guidance.
Fiduciaries of Employee Retirement Income Security Act plans, when evaluating ETIs, still can't accept lower expected returns or take on greater risks in order to secure collateral benefits, the DOL said in the new guidance. But fiduciaries may take such benefits into account as “tiebreakers” when investments are otherwise equal with respect to their economic and financial characteristics, the agency said.
Withdrawing Earlier Guidance
The DOL said it is withdrawing Interpretive Bulletin 2008–01—the source of the confusion about ETIs—and replacing it with the new guidance, which reinstates the language of Interpretive Bulletin 94-01.
“An important purpose of this Interpretive Bulletin is to clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return,” the department said in the guidance. ESG issues may have a direct relationship to the economic value of the plan's investment, and so aren't just collateral considerations or tie-breakers, but are proper components of the fiduciary's primary analysis in comparing the economic merits of different investments, the DOL said.
It also said that consideration of ETIs or ESGs doesn't require any additional documentation or evaluation beyond what's already required by fiduciary standards applicable to plan investments.
The bulletin is scheduled to be published Oct. 26 in the Federal Register, and is effective the same day.
Excerpted from a story that ran in Pension & Benefits Daily (10/23/2015).
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