Compliance August 10, 2021

ESG Regulation Submitted to OMB by DOL

The title of the regulation also suggests it will address the related but distinct issue of proxy voting advice and shareholder activism among retirement plan fiduciaries.

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The U.S Department of Labor (DOL) has submitted a new proposed regulation to the White House’s Office of Management and Budget (OMB), titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.”

The submission represents a key step forward for the Biden administration’s stated plans of modifying the regulatory framework that controls retirement plan fiduciaries’ actions when considering and using environmental, social and governance (ESG)-themed investments. The title of the regulation also suggests it will address the related but distinct issue of proxy voting advice and shareholder activism among retirement plan fiduciaries.

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OMB typically reviews proposed regulations within 60 days from the date of their submission or publication of the 30-day Federal Register notice—whichever is later—but, in some circumstances, the process can take longer.

Sources expect the forthcoming regulations to take a substantially different track compared with the work of the Trump administration, which finalized new restrictions on the use of ESG funds and proxy voting advisers by retirement plan fiduciaries late in 2020.

With respect to ESG investments, although the final 2020 rule did not expressly limit the use of ESG funds, given its framing of the “pecuniary” concept, experts argued it would still likely have that effect if or when it was enforced. This is because fiduciaries would seemingly have to comb through an ESG fund’s prospectus and marketing materials for any references to non-pecuniary factors being used in the investment process. Such requirements present potentially significant legal risk to fiduciaries and, therefore, may deter some from considering ESG funds.

Similar concerns have been voiced by stakeholders in the financial services and retirement planning industry with respect to the proxy voting regulation implemented late last year. In basic terms, the final rule confirmed that proxy voting decisions and other exercises of shareholder rights must be made “solely in the interest of providing plan benefits to participants and beneficiaries considering the impact of any costs involved.” As the DOL stated under former President Donald Trump, the proxy voting rule seeks to ensure that plan fiduciaries do not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective or promote non-pecuniary benefits or goals.

When the DOL first issued its final rule on benefit plan proxy voting, some retirement industry stakeholders voiced concern that it risked seriously chilling proxy voting activities and other forms of shareholder engagement executed by investment managers and other parties on behalf of retirement plan investors. Similar fears were raised on the ESG front, leading the Biden administration to adopt a nonenforcement policy as it reviews both regulations.

Given President Joe Biden’s words and actions regarding the importance of fighting climate change and promoting corporate social responsibility, experts say it is almost certain that the current DOL will move to ease those concerns about proxy voting and ESG activities.

That said, some insiders think the Biden administration’s proposal itself may not have to be radically different from the pecuniary-focused framework already in place, in part because the final version of the ESG rule included important changes relative to the proposal. Chief among these changes is the fact that the text of the final rule no longer refers explicitly to “ESG” as an investment theme that deserves additional scrutiny. Rather, as noted, it presents a framework that emphasizes that retirement plan fiduciaries should only use pecuniary factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance.

Editor’s note: PLANSPOSOR Magazine is owned by Institutional Shareholder Services (ISS). ISS has engaged in litigation related to the Trump administration’s proxy voting regulations.

Ask the Experts August 10, 2021

Can a Plan Allow In-Service Distributions for Only Rehired Retirees?

Experts from Groom Law Group and CAPTRUST answer questions concerning retirement plan administration and regulations.

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“We sponsor an ERISA 403(b) retirement plan. On occasion, we rehire retirees for projects and other work. Since they are typically rehired in a part-time, non-benefits eligible position, often for a fraction of their pre-retirement salary, they wish to continue their retirement distributions from the plan. However, since the plan does not permit in-service distributions, we have to deliver the bad news that they cannot take a distribution while employed.

“Could we amend our plan to allow in-service distributions ONLY for these rehired retirees? Or would we have to open up in-service distributions to all employees older than 59.5 for these former retirees to take distributions, which we would prefer not to do?”

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Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Great question. The Experts see two options here.

The first option, as you note, is to consider amending the plan to permit in-service distributions solely for these employees. For this path, we need to first look at when in-service distributions are permitted under Code section 403(b) and related regulations.

Although the rules differ slightly based on the investment vehicle and whether elective deferrals are to be distributed, in-service distributions could potentially be offered upon attainment of a stated age (including age 59.5), after a fixed number of years, or upon disability.  See Treas. Reg. 1.403(b)-6 for a breakdown of permitted in-service distributions. In this situation, you could consider an amendment to permit in-service distributions after age 59.5 for rehires working less than a prescribed hours threshold. The caveat with this approach is that amending the plan to permit these distributions solely for rehired retirees could raise nondiscrimination concerns. Therefore, an amendment would need to comply with any nondiscrimination rules applicable to your plan.

The second option is to allow these individuals who were eligible to receive benefits as terminated employees to continue to be eligible for distributions upon rehire. Keep in mind that the rehire of employees who are receiving retirement benefits puts the focus on whether such retirement was a bona fide termination. This review would implicate a number of factors (e.g., length of separation, absence of an understanding at the time of separation and commencement of benefits if the employee will return to employment with the employer (in any capacity), etc.). See IRS Private Letter Ruling 201147038.  While these considerations are implicated upon any separation and commencement of benefits where the plan does not permit in-service distributions, they are amplified when such employee is rehired. That said, where an employee commenced benefits after a bona fide termination, the employee may be able to continue receiving benefits upon rehire notwithstanding in-service distributions restrictions in the plan.

While we recommend discussing the implications of this approach with retirement plan counsel familiar with your plan, perhaps avoiding a suspension of benefits upon rehire would be another option.

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

Do YOU have a question for the Experts? If so, we would love to hear from you! Simply forward your question to Rebecca.Moore@issgovernance.com with Subject: Ask the Experts, and the Experts will do their best to answer your question in a future Ask the Experts column.

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