Compliance March 25, 2024

DOL Answers Appeal in ESG Rule Litigation

The ESG rule was upheld in a Texas district court, but was appealed to the 5th Circuit in October 2023.

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The Department of Labor filed to the U.S. 5th Circuit Court of Appeals a defense of its rule governing “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” sometimes called the environmental, social and governance rule, as complying with the Employee Retirement Income Security Act.

The final rule permits fiduciaries under ERISA to consider ESG factors in their risk-return analysis when selecting retirement plan investments. It also permits fiduciaries to use collateral factors as a tiebreaker between two or more investments when both investments equally serve the interests of the plan and for fiduciaries to use qualified default investment alternatives that use consider nonfinancial factors, if it is a prudent investment. The department finalized the rule in September 2022.

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In January 2023, the final rule was challenged in a Texas federal district court, which upheld the rule in September 2023. The plaintiffs in the initial litigation—26 Republican-led states, two corporations and a trade association in the fossil fuels industry, and two individuals—appealed in October in the case now known as Utah et al. v. Julie Su et al. The 5th Circuit hears appeals from federal cases in Louisiana, Mississippi and Texas.

The DOL argued its response to the appeal in much the same way that it did in district court: Fiduciaries are not permitted to subordinate the interest of the plan when considering ESG factors, and they may only consider nonfinancial factors to the extent that they are part of a prudent risk return analysis.

The DOL rejected the plaintiffs’ argument that the “rule improperly licenses fiduciaries to defy their statutory obligations by taking actions that are not in the financial interests of plan beneficiaries.” The DOL answered that “the rule does no such thing. To the contrary, a fiduciary engaging in such conduct would defy the clear text of the rule.”

Further, the DOL argued that the tiebreaker rule was the “best construction of ERISA.” Previously, fiduciaries could only use collateral benefits as a tiebreaker if the two choices were otherwise “indistinguishable,” a standard relaxed to “equally serve the interests of the plan.” The DOL’s filing notes investments need not be identical in order to equally serve the plan, and it is not always possible to choose both. Picking one or the other randomly, such as by a coin flip, is itself a collateral benefit, because it is nonfinancial and produces no marginal benefit to considering other nonfinancial factors.

The DOL added that, “if plaintiffs are correct that such ties are infrequent, that does not mean the tiebreaker standard is invalid; it just means the standard applies infrequently.”

The plaintiffs have not yet filed an answer, and oral arguments have yet to be scheduled.
Compliance March 25, 2024

ERIC Joins Amicus Brief Defending Yale University

The brief was filed to support Yale in the plaintiffs’ 2nd Circuit appeal of a 2023 jury verdict that was almost entirely in the university’s favor.

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The ERISA Industry Committee joined a coalition brief filed March 18 in the U.S. 2nd Circuit Court of Appeals, defending the $5.5 billion Yale University retirement plan and arguing that a district court ruling should be upheld. ERIC was joined by business advocate U.S. Chamber of Commerce and the American Benefits Council in filing the brief in the case Vellali et al v. Yale University et al, originally filed in 2016.

A jury in Connecticut federal district court last year found in Yale’s favor in the class action lawsuit brought against Yale’s 403(b) retirement plan, ruling the school mismanaged the plan but caused no losses to plan participants.

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The amicus brief argues the underlying district court decision correctly ruled that disproving loss causation requires defendants to show that a prudent fiduciary “could have” made the same decisions.

The amicus brief filed by ERIC and its allies argues:

  • Congress established a flexible prudence standard for ERISA fiduciaries because of the breadth of decisions that fiduciaries must make in the face of market uncertainty;
  • The case is one of dozens brought in recent years against university plans and part of a broader trend of litigation against plan fiduciaries that are costly to defend and do not actually benefit plan participants; and
  • Relaxing ERISA plaintiffs’ burdens of proof would hurt plans and participants alike.

“ERIC urges the U.S. Court of Appeals to recognize the flexibility and discretion that plan sponsors and fiduciaries are afforded by the Employee Retirement Income Security Act of 1974,” said Tom Christina, executive director of the ERIC Legal Center, in a statement. “If the wrong legal standard is adopted in cases targeting plan sponsors, large employers, like our member companies, would face higher costs, more litigation, and extortionate and baseless settlement demands that would threaten the quality of benefits offered to workers and retirees.”

The case alleged Yale University; a former vice president of human resources and administration; and the retirement plan fiduciary committee breached their fiduciary duty of prudence to participants by allowing unreasonable recordkeeping and administrative fees to be charged to participants in the plan.

The jury found the plaintiffs did not prove that the plan suffered any losses or that there were any damages, and a fiduciary following a prudent process could have made the same decisions as to recordkeeping and administrative fees as the defendants, according to the verdict.

The plaintiffs, represented by law firm Schlichter, Bogard & Denton, filed an appeal with the 2nd Circuit.

Washington, D.C.-based ERIC is a national advocacy organization representing large employers which provide health, retirement, paid leave and other benefits to their nationwide workforces. A request for further comment from ERIC representatives was not returned.

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