The Department of Labor is cracking down on plan sponsors that use environmental, social and governance-themed funds as investment options in their retirement plans.
In an enforcement letter sent to plan sponsors with ESG funds in their plan lineups, the agency requested a slew of documents, including materials showing the "names, addresses and responsibilities of all persons or entities with responsibility for making investment decisions."
A sample letter viewed by Pensions & Investments gives the plan sponsor two weeks to provide the requested materials for a three-year period beginning Jan. 1, 2017. The letter was dated May 5.
"The Department seeks to better understand the plan fiduciaries' selection of ESG funds for inclusion in the plan's investment options and compliance with their duty to administer the plan prudently and solely for the purpose of providing benefits to participants and beneficiaries, and defraying reasonable expenses of administering the plan," said Thomas Licetti, the New York regional office director for the Employee Benefits Security Administration of the Labor Department, in the letter.
Other requested materials include investment policies and procedures, proxy voting materials, meeting notes and "portfolio statements for any investment holdings included in the plan's portfolio in whole or in part based on the consideration of ESG factors." It also requests prohibited transaction exemptions relied on for the plan's investment in proprietary funds.
The department also sent letters to registered investment adviser firms and other service providers for the affected plan sponsors. The letters are reported to have gone out in waves from different regional offices, according to Michael L. Hadley, a partner with law firm Davis & Harman who specializes in employee benefits and ERISA.
The inquiry reinforces a controversial proposal issued in June that many industry observers say will curb ESG investing in ERISA plans.
The proposal adds regulatory text that makes clear that ERISA requires plan fiduciaries in both private defined benefit and defined contribution plans to select investments "based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action."
Critics of the proposal chided the agency's latest enforcement move. "The request suggests unwarranted skepticism by the DOL about environmental, social and governance issues. A growing body of research indicates E, S and G factors can be material to value creation and help mitigate risk in investing," said Amy Borrus, executive director of the Council of Institutional Investors, in an email.
Will Hansen, executive director of the Plan Sponsor Council of America, also attacked the Labor Department's probe. "We remain concerned that this nationwide investigative program could hinder plan participant fund options as well as decrease retirement savings if an ESG-type fund is not an available fund option within the retirement plan. This type of investigation on top of the recent rule-making from the DOL may cause a plan sponsor to not provide an ESG fund in the fund lineup."
Despite strong opposition, the Labor Department defends the proposal, saying that fiduciaries must discharge their duties "solely in the interest" and "for the exclusive purpose" of providing benefits to participants and their beneficiaries.
"Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan," Labor Secretary Eugene Scalia said in a news release after the proposal was unveiled. "Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers."
