Retirement plan fiduciaries may continue to consider the potential financial benefits of investing in funds that take “the economic effects of climate change and other environmental, social, and corporate governance factors” (“ESG factors”) into account without fear of automatically running afoul of ERISA’s fiduciary duty requirements after President Biden’s veto of a House resolution on March 20, 2023.
The point of controversy was a rule promulgated by the Democratic Biden administration (“the Biden rule”) that changed a Republican rule made final in the waning weeks of the Trump administration (“the Trump rule”). The Trump rule required plan fiduciaries to base investment decisions solely on “pecuniary factors,” defined as factors that a fiduciary “prudently determines” are expected to have a “material effect” on the risk or return of an investment, and was viewed as limiting consideration of ESG factors in plan investment decisions.
Pursuant to President Biden’s executive order (issued just after his inauguration), the DOL announced it would not enforce the Trump rule in March 2021. The DOL then proposed a rule explicitly allowing for the consideration of ESG factors in October 2021 and finalized this rule in December 2022. Please see our December 8, 2022 article for further information regarding the Biden rule. The newly Republican-controlled House of Representatives then passed (and the Senate later agreed to) a resolution to nullify the Biden rule, which President Biden vetoed.
Thus, retirement plan fiduciaries wanting to consider ESG factors can take some comfort that the Biden rule is here to stay, at least for the foreseeable future. However, its long-term prospects remain murky, especially with the White House up for grabs in 2024.
Fiduciaries should also be mindful that while the Biden rule ensures that taking ESG considerations into account would not be deemed an automatic ERISA violation by those fiduciaries, the rule also does not absolve fiduciaries of ERISA’s standard duty of prudence in investment and financial decisions by simple virtue of those ESG considerations.
That is, the Biden rule is not a “safe harbor” rule. Retirement plan fiduciaries are still required to exercise the same level of prudence and care when considering ESG factors for investment and financial decisions as they are when taking into account any other consideration for the same purposes.
Message to the House of Representatives — President's Veto of H.J. Res 30 »
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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