Over the past few months the Department of Labor has issued three pieces of guidance that are (potentially) significant for plan sponsors and plan fiduciaries.
This blog will not delve into the details of these issuances; rather, will offer a few observations.
The guidance issued by the DOL consists of the following:
- A final regulation (85 Fed. Reg. 72846-72685, November 13, 2020 (https://www.govinfo.gov/content/pkg/FR-2020-11-13/pdf/2020-24515.pdf) describing new restrictions on the use of environmental, social and governance factors (“ESG”) in the selection of plan investments (the “ESG Rule”).
- A ruling (in the form of an interpretative bulletin) containing new rules for plan fiduciaries with respect to proxy voting (85 Fed. Reg. 81658-81695, December 16, 2020 (https://www.govinfo.gov/content/pkg/FR-2020-12-16/pdf/2020-27465.pdf) (the “Proxy Rule”).
- A class-wide prohibited transaction exemption permitting fiduciaries (as redefined by the DOL in July, 2020, https://www.govinfo.gov/content/pkg/FR-2020-07-07/pdf/2020-14260.pdf) to receive (otherwise prohibited) forms of compensation–such as commissions (the Fiduciary PTE”).
Here are our observations:
- Two of these items (the Proxy Rule and the Fiduciary PTE) may never see the light of day. Both of these items do not go into effect until after January 20 and so can be unilaterally delayed by the incoming Biden administration. The third item (the ESG Rule) beats this January 20 deadline, so any changes by the incoming Biden administration to the ESG Rule will require some more effort. Nonetheless, we can anticipate significant changes to all three of these pieces of guidance after January 20.
- All three of these items of guidance were rushed through the regulatory process in ways that raise significant questions about the quality and thoughtfulness of the guidance. All three of these pieces of guidance were issued after a 30-day notice and comment period (the bare legal minimum) — none of them was the subject of an extended comment period — and only one of them (the Fiduciary PTE) was the subject of a public hearing. In effect, the DOL crammed all three of these pieces of guidance through the regulatory process — in effect, circumventing a process that is supposed to enable thoughtful consideration of different perspectives and viewpoints.
This perfunctory regulatory process is all the more alarming because all three of these items of guidance may have significant implications for plan fiduciaries and the well-being of Americans’ retirement funds. Moreover, two of these three pieces of guidance (the ESG Rule and the Proxy Rule) represent dramatic shifts from previous DOL guidance–the kind of shifts that should be the subject of vigorous public debate and public hearings.
It should also be noted that for two of these pieces of guidance (the ESG Rule and the Proxy Rule) the DOL justified the abbreviated regulatory process by specifying that issues relevant to the new guidance were previously analyzed by the DOL as part of prior guidance on these topics. This assertion can only be viewed with more than a touch of irony–because the prior analysis led to diametrically different regulatory positions than the new guidance. So, if the DOL really relied on the prior administrative record, one would anticipate that the outcomes would be more aligned with prior DOL positions on these topics. They were not.
- All three of these items of guidance (legally) only apply to plans governed by ERISA and so do not affect non-ERISA plans (such as governmental plans). While legally correct, this understates the practical impact of the new guidance. Although governmental plans are not legally bound to follow ERISA–as a practical matter, plan fiduciaries and vendors tend to extend ERISA practices and policies to non-ERISA plans. Governmental plan sponsors tend to follow ERISA as the gold-standard in fiduciary conduct — and because state law may even require a version of ERISA standards. And providers to governmental plans follow ERISA standards to adhere to these state mandates and for the added efficiency of having one set of practices for both ERISA and non-ERISA clients. Accordingly, these items of guidance (if they go into effect) will have more of a far-reaching impact on the entire retirement plan market.
- When one considers these three items of guidance in a more holistic fashion, a significant inconsistency occurs. In both the ESG Rule and the Proxy Rule the DOL emphasized the importance of a “strict” reading of ERISA’s fiduciary standards–fiduciaries can only consider the direct financial impact on a plan when selecting investments or when voting proxies and the DOL would not entertain the possibility that non-financial metrics (such as ESG factors) can also affect the quality of plan investments. In reaching these conclusions the DOL relied on what can be considered a hyper-narrow view of ERISA’s fiduciary standards–that ERISA’s “exclusive benefit” rule is met only if there is a direct and immediate connection between an activity and the plan’s financial wellbeing.
However, interestingly enough, under the Fiduciary PTE the DOL allows investment advisors (who are fiduciaries) to engage in economic activity (such as the sale of commissioned products) that places the interest of the fiduciary in direct conflict with the interests of the participant. And yet, in the Fiduciary PTE the DOL was somehow less concerned about following a the same “strict” reading of ERISA’s exclusive benefit rule. In effect, where the interests of the financial industry were involved the DOL was less concerned about strictly following the requirements of ERISA that “a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and …for the exclusive purpose of providing benefits to participants and their beneficiaries.”
This recent guidance from DOL has the potential to impose significant burdens on plan fiduciaries and participants. However, there is still time to prevent this damage.