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PSCA officials say new DOL guidance will dampen adoption of ESG investment options

Plan Sponsor Council of America officials say that new guidance from the Department of Labor on ESG investments will likely discourage sponsors covered by ERISA from adding ESG investment options to their lineups.

The DOL guidance "will make it potentially more difficult" for plan fiduciaries to feel comfortable in offering such options, said Kenneth Raskin, PSCA board chairman, on Tuesday. "Fiduciaries will want to play it safe."

Mr. Raskin, a partner at the King & Spalding law firm, made his comments in a discussion with journalists at the PSCA annual conference in Scottsdale, Ariz.

The DOL guidance, issued through a field assistance bulletin, said in part that "fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision."

David Levine, PSCA's Washington lobbyist, said the DOL guidance didn't offer a completely clear definition of an ESG investment option. For example, he noted that one footnote in the DOL document added to the uncertainty. The footnote said in part that ESG-themed funds "should be distinguished" from non-ESG funds in which "ESG factors may be incorporated as one of many factors in ordinary portfolio management." Mr. Levine is a principal at the Groom Law Group.

So far, ESG funds haven't made much of a dent in DC plans covered by ERISA, according to the latest survey by PSCA of its members offering 401(k) or profit-sharing plans. Of 684 respondents covering the 2016 plan year, only 2.4% offered ESG funds.

It's still "too early" for ESG funds to play a big role in plan lineups, said Stephen McCaffrey, immediate past board chairman of PSCA and senior counsel of National Grid U.S. "In time, it will happen."

Mr. Raskin added that ERISA plans can overcome concerns by providing access to ESG funds through self-directed brokerage accounts.

PSCA officials also said sponsors must be aware of their relationships with record keepers due to the recent overturning of the fiduciary rule by the 5th U.S. Circuit Court of Appeals, which the DOL declined to appeal.

The key issue is contracts sponsors may have signed with record keepers when the rule was initially enacted and when some record keepers offered to take on additional fiduciary responsibilities.

"Beware of record-keeper contract changes," Mr. McCaffrey said.

"Service provider models may change," Mr. Levine added.