Background. ERISA requires plan fiduciaries to act in the best economic interest of plan participants when selecting retirement plan investments. Fiduciaries have often questioned whether non-economic factors of an investment may be considered as well. For example, may a 401(k) plan offer a “socially responsible” investment fund (i.e., one that focuses its investments on sustainability, environmental concerns, governance issues, or similar social criteria)?
New DOL Guidance. The Department of Labor (DOL) recently clarified its guidance on socially responsible investing in response to a perception that its earlier guidance had been misconstrued as too restrictive on plan fiduciaries. The DOL reiterated that economic features should remain the primary focus of plan fiduciaries, but other factors can and should be taken into account in the following circumstances:
- Tie-Breaker for Economically Equivalent Funds. If a fiduciary determines that two investments are economically equivalent, it is free to look to non-economic considerations to break the tie. For example, if a fiduciary determines that two funds have equivalent risk and return characteristics, it is free to select the socially responsible fund because of its specific non-economic focus. Fiduciaries may consider non-economic factors as tie-breakers, but it is not required.
- Economic Impact of the Socially Responsible Focus. The DOL acknowledged that pursuing investment strategies that consider environmental, social and governance factors can have a positive effect on the economic performance of the investment. For example, a fund that focuses on sustainable investments may be economically superior to a similar fund simply because of its focus on sustainability. Fiduciaries should consider these factors, similar to all other economic factors, in evaluating investments.
Evaluating and Documenting Socially Responsible Funds. Finally, the DOL emphasized that no additional evaluation or documentation is required for socially responsible funds. Fiduciaries should engage in the same prudent selection process that applies to the evaluation of any other investment funds and similarly document this process. Socially responsible criteria may even be specifically provided for in a plan’s investment policy statement.
Contact Information. If you are interested in offering or evaluating a socially responsible investment for your plan, please contact Don Mazursky (404.888.8840), David Putnal (404.888.8836), Toby Walls (404.888.8870), Teri King (404.888.8847)