Federal Judge Rejects One of Two Challenges to DOL ESG Rule

The court’s decision says that the rule does not violate ERISA, but another case in Wisconsin continues.

A U.S. District Court ruled on Thursday against 26 states and other plaintiffs in their lawsuit challenging the legality of the Department of Labor’s final rule permitting retirement plan fiduciaries to use environmental, social and governance considerations in their decision making about investments.

The plaintiffs argued that ESG investing practices would limit the investments that oil and gas companies receive from the public markets, hurting those companies, the states that they operate in, and their employees. Additionally, ESG investing would result in lower returns for defined contribution plan participants, according to the complaint.

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At the core of the plaintiffs’ argument was an allegation that, by expressly permitting ESG in fiduciary decision making, financial interests would be subordinate to politically or philosophically motivated interests.

On Thursday, Donald Trump-appointed Judge Matthew J. Kacsmaryk on ruled in Utah vs. Walsh that the proposal does not explicitly violate the Employee Retirement Income Security Act because ERISA does not forbid ESG investing or a tiebreaker test that includes non-economic factors. The rule, he noted, requires fiduciaries to act prudently and not subordinate financial interests when considering ESG.

If the rule does not expressly violate the statute, then plaintiffs must argue that it is arbitrary and capricious, a test they failed to back, Kacsmaryk wrote. He also explained plaintiffs failed that burden because the DOL argued that they were trying to address confusion and a “chilling effect” identified by commenters about an earlier rule from 2020 which made it unclear if ESG could be considered at all, and this is the “minimal level of analysis from which the agency’s reasoning may be discerned.”

To address this confusion, the DOL said that prudent risk and return considerations can include ESG factors, but they do not need to. However, a fiduciary cannot subordinate financial interests to non-financial interests; they must consider ESG only to the extent that it is a risk-return factor. The ruling noted that the DOL has considered ESG a financial factor since at least 2015, and that the 2020 rule that plaintiffs sought to restore acknowledged that not considering ESG factors in certain circumstances could actually be a breach of fiduciary duty.

The DOL also reworked the tiebreaker test for when a plan may consider non-financial factors when choosing between two investments. The 2020 rule said that the plan must be “unable to distinguish” between the choices, but the 2022 rule says they must “equally serve the financial interests of the plan.”

The latter test is understood to be less burdensome than the former, but Kacsmaryk wrote that the modification really “changes little” and there is “little meaningful daylight” between them.

The judge also ruled that ESG can be used in evaluating a qualified default investment alternative in an employer-sponsored retirement plan as long as that investment is otherwise prudent.

At the end of the ruling, the Kacsmaryk wrote that “while the Court is not unsympathetic to plaintiff’s concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the Rule to reach this conclusion.”

The DOL initially expressed skepticism of the venue, the Amarillo Division of the U.S. District Court for the Northern District of Texas, and requested a venue change, which was rejected.

A separate lawsuit challenging the ESG rule in the U.S. District Court for the Eastern District of Wisconsin Milwaukee Division is still ongoing. That case is called Braun and Luehrs v. Walsh.

Workers’ Retirement Savings Are Boosted By Access to Savings Tools

BlackRock and Human Interest found that the lack of access to a retirement plan is a ‘crucial’ factor to preventing retirement savings.   

U.S. workers earning below the national average annual salary of $60,000 are not successfully saving for retirement because they lack access to savings tools, according to research conducted by BlackRock and online employee retirement benefits provider Human Interest.

BlackRock and Human Interest found the retirement savings of workers are largely driven by—or, alternatively, blunted by—the availability of “intuitive and automated savings tools,” the September 14 retirement insights post stated.

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When workers are offered access to retirement tools, data showed the rates at which individuals are saving are significantly higher: Those earning less than $60,000 annually with access to retirement tools contribute 7.4% of their income, compared with a 0.9% savings rate for those below-average-income workers without access to a retirement benefit.

With an average savings rate of 7.4%, a “median-income worker” saving on the Human Interest platform for retirement may be able to accrue $710,900 by age 65, according to the research. A “median-income worker” without access to a retirement benefit and saving at a 0.9% rate would have saved about $86,500, about eight times less than their counterpart, data showed.

Data for the retirement insights post was sourced from BlackRock’s philanthropic Emergency Savings Initiative. Over the past four years, BlackRock conducted 43 financial security studies and pilot programs as part of the initiative, created to reach low-to-moderate income households across the U.S., the post stated.

Bolstering a retirement plan with an emergency savings account can support workers to greater amounts. Workers with emergency savings were found to be more than 70% more likely to contribute to their defined contribution retirement plan, and those with emergency funds were found to be 13 times less likely to take a hardship withdrawal from their plan than those with inadequate savings, the data showed.

BlackRock invested in Human Interest, a San Francisco-based recordkeeper for small business 401(k) plans, earlier this year. The firms did not disclose the amount of the investment.

Low-income households with at least $1,000 in emergency savings were half as likely to withdraw money from their workplace retirement savings accounts during the pandemic, according to a study from BlackRock’s Emergency Savings Initiative, conducted in partnership with the Defined Contribution Institutional Investment Association’s Retirement Research Center, published earlier this year.

Several additional studies have shown a connection between workers’ access to emergency savings accounts and their likelihood to contribute to a defined contribution retirement plan.

For low- and moderate-income workers, access to emergency savings accounts is also likely to bolster retirement contributions, explained Natalie Blain, a senior innovation manager at Commonwealth, at the Plan Progress webinar last year.

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