Compliance May 27, 2021

Biden Asks DOL to Consider Rescinding Last ESG Rule

The president appears to want to pave the way for more ESG investing in retirement plans.

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President Joe Biden has signed an executive order on climate-related financial risk that includes a directive to the Labor secretary to consider suspending, revising or rescinding the “Financial Factors in Selecting Plan Investments” final rule regarding environmental, social and governance (ESG) investments that was published during the last days of the Trump administration.

The executive order might not come as a surprise to some in the retirement plan business, as shortly after Biden was elected president, industry insiders said they expected him to champion ESG investing in retirement plans.

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The final rule the Department of Labor (DOL) implemented in November set forth the guidance that retirement plan sponsors should only consider “pecuniary,” or performance-related, factors when selecting investments for their investment lineup, rather than expressly limiting the use of ESG funds. It took a softer stance than the initial proposed rule, which drew intense criticism. And shortly after the rule was passed, many in the industry applauded it as paving the way for more ESG investing in retirement plans.

However, in a blog post on Stradley Ronan’s website, George Michael Gerstein, an attorney and co-chair of the firm’s fiduciary governance and ESG groups, says the Financial Factors rule could prevent some retirement plan sponsors from offering ESG funds and that the executive order could be a game-changer.

“It is a big deal that, with a rescission of the Financial Factors rule, fiduciaries would seemingly no longer have to comb through a fund’s prospectus and marketing materials for references to non-pecuniary factors, nor would the fiduciary need to scrutinize a fund manager’s use of screens or ratings,” Gerstein writes. “These requirements obviously present legal risk to a fiduciary and, therefore, may deter some fiduciaries from considering ESG products.”

Biden’s executive order also asks Labor Secretary Marty Walsh to identify what actions the DOL can take under the Employee Retirement Income Security Act (ERISA) and the Federal Employees’ Retirement System Act to “protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.”

It also asks the secretary to assess “how the Federal Retirement Thrift Investment Board has taken environmental, social and governance factors, including climate-related financial risk, into account.”

Walsh is directed to submit a report to the president on the actions taken in response to the executive order within 180 days.

The executive order comes after Biden, shortly after taking office, asked the DOL to review the Financial Factors rule. In mid-March, the DOL’s Employee Benefits Security Administration (EBSA) announced it would not enforce the final rule. At the time, it said it would offer more guidance down the line.

In sum, Gerstein says, “ESG is and will remain entirely relevant to ERISA fiduciaries. Under ERISA and existing guidance, fiduciaries may take ESG factors into account when investing plan assets or selecting investment options for a plan lineup. With ESG top of mind for the current Congress and White House, ERISA fiduciaries should continue to evaluate whether taking ESG into account is prudent under the circumstances.”

Meanwhile, U.S. Senators Tina Smith, D-Minnesota, and Patty Murray, D-Washington, and U.S. Representative Suzan DelBene, D-Washington, have introduced legislation in both chambers of Congress, the Financial Factors in Selecting Retirement Plan Investments Act, that they say would provide legal certainty to workplace retirement plans that choose to consider ESG factors in their investment decisions or offer ESG investment options. Their legislation would also formally repeal the Trump-era DOL rule on pecuniary factors.

The lawmakers’ bill certainly is timely, as it is widely expected that demand for ESG investing, particularly among Millennials, will only increase.

Compliance May 26, 2021

Lengthy Self-Dealing Lawsuit Filed Against State Street

The complaint alleges that many of the funds offered by State Street in its staff retirement plan were selected and retained because the defendants benefited financially from their inclusion, to the detriment of the participants.

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A new Employee Retirement Income Security Act (ERISA) lawsuit has been filed in the U.S. District Court for the District of Massachusetts, wherein a proposed class of plaintiffs argues State Street Corp. has engaged in self-dealing within one of its own retirement savings programs for employees, the State Street Salary Savings Program.

“This case is about a company’s self-dealing at the expense of its own workers’ retirement savings,” the complaint states. “The defendants were required by [ERISA] to act solely in the interest of the plan’s participants and beneficiaries when making decisions with respect to selecting and monitoring the plan’s investments, and the fees and expenses associated with those investments. Rather than fulfilling these fiduciary duties by offering plaintiffs and the other investors in the plan only prudent investment options at reasonable cost, the defendants selected for the plan and repeatedly failed to remove or replace imprudent proprietary investment funds managed and offered by defendant State Street Corp. and/or its subsidiaries or affiliates.”

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The complaint alleges these funds were not selected and retained as the result of an impartial or prudent process, but were “instead selected and retained because defendants benefited financially from their inclusion in the plan to the detriment of the participants.”

By choosing and then retaining these proprietary investment funds, the complaint continues, the defendants enriched themselves at the expense of their own employees.

“The defendants also breached their fiduciary duties by failing to monitor the plan’s administrative fees, and likewise failing to consider the prudence of retaining a poorly performing money market fund,” the complaint continues. “The defendants committed further statutory violations by engaging in conflicted transactions expressly prohibited by ERISA.”

The lengthy complaint examines each of these issues in term, echoing language and arguments from the previous rash of ERISA self-dealing lawsuits that have been filed against large financial services providers across the United States. Like many of the prior cases, which have found various degrees of success so far in early pleading motions and preliminary rulings, this one names a sizable list of defendants beyond State Street Corp, including the company’s benefits and investment committees.

The complaint also questions the general prudence of a financial services company providing the bulk of the investment products offered within its own retirement plan.

“No one investment management firm is good at everything,” the complaint states. “Some investment management firms excel at providing fixed-income investment products, others at equity investment products, and still others at international and emerging market investment products. Prudent fiduciaries for large plans understand this fact and accordingly take a ‘best of breed’ approach in assembling menus of retirement plan investment options for their retirement plan investors, carefully and diligently searching among the various vendors in the retirement plan investment product market to construct a suitable and appropriately low-cost and diversified array of investment options.”

The complaint alleges that, with the exception of one money market fund and a brokerage window built into the plan, defendants offered participants only State Street Funds as their designated retirement investment options.

“Participants [were treated] as captive investors to prop up the company’s investment management business, while other investors were exiting or decreasing their positions in these funds, and the company was thereby losing the revenue from non-plan investment sources,” the complaint alleges.

According to the complaint, the only non-proprietary retirement investment option offered through the plan is the Vanguard Money Market Fund.

“Yet even this fund has not been a suitable investment for the plan during the relevant period because of its continuously poor track record,” the complaint states. “Specifically, the fund has fallen well below its designated benchmark in its one-year, five-year and 10-year performance history. Given this dismal performance record, it is evident that the defendants failed to consider the continued prudence of retaining the money market fund in the plan at any time during the relevant period, let alone replace it with a better performing and cost-efficient alternative in furtherance of the participants’ interests.”

The full text of the complaint is available here.

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