On January 26, 2023, twenty-five states and some oil and gas entities, including Western Energy Alliance, a trade association representing 200 oil and gas companies, filed the lawsuit against Martin Walsh, the Secretary of Labor, and the DOL, requesting that the court invalidate the 2022 Rule, which was scheduled to take effect on January 30, 2023. The 2022 Rule clarifies the duties of fiduciaries to ERISA employee benefit plans concerning the selection of investments and investment courses of action.
The plaintiffs alleged that the 2022 Rule violates the Administrative Procedure Act (APA) because it is arbitrary and capricious and runs afoul of ERISA. The legal arguments in the case focused largely on fiduciary duties under ERISA, and specifically, whether and how a retirement plan fiduciary may take environmental, social, and governance (ESG) issues into account when making plan investment decisions. Prior to 2020, the DOL recognized that ESG issues are proper components of the fiduciary’s primary analysis of the economic merits of plan investments and that ERISA’s obligations do not forbid consideration of collateral or nonfinancial benefits in the selection of competing investments. In 2020, the DOL under the Trump Administration changed the Investment Duties Rule to allow consideration of other factors, such as ESG issues, only when investments being considered are indistinguishable based on pecuniary factors alone.
In 2022, the DOL under the Biden Administration released the 2022 Rule, which changed the wording back to similar wording prior to the 2020 Rule, allowing plan fiduciaries to make investment decisions based on risk and return analysis, including ESG factors, depending on the facts and circumstances of the situation.
Since both parties moved for summary judgment, the court determined that it was required to determine if the 2022 Rule violates ERISA in two steps. First, has Congress addressed the specific question at issue in the case? The court found that Congress had not. Second, is the 2022 Rule arbitrary or capricious in substance or manifestly contrary to ERISA? The court found that it is neither.
The court also considered the requirement under the APA that courts set aside agencies’ actions if they are found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Agencies are also required to examine all the evidence and explain their actions, including a rational connection between the facts found and the action taken. The court found that the DOL took action based on comments received on the existing and proposed Rules and, therefore, could not conclude that the DOL’s actions violated the APA.
The court denied the plaintiffs’ motion and granted the defendants’ motion. The 2022 Rule is in effect and has been since January 30, 2023.
Retirement plan fiduciaries should be aware of this ruling and consult with their counsel or plan investment advisors for further information.
Opinion: Utah v. Walsh »
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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