The lawsuit — State of Utah et al. v. Su et al. — was filed in January and argues that the Labor Department's rule undermines key protections for retirement savers, oversteps the department's authority under ERISA, and is arbitrary and capricious.
But in a Sept. 21 decision, Judge Matthew J. Kacsmaryk said the rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — which took effect Jan. 30 and allows ERISA fiduciaries to consider environmental, social and governance factors, does not violate the Employee Retirement Income Security Act nor is it arbitrary and capricious.
"Our coalition was deeply disappointed in the court's ruling," Utah Attorney General Sean Reyes said in a statement. "Contrary to ERISA, the rule clearly exceeds DOL's authority. The facts and legal arguments are still in our favor, and we look forward to our appeal prevailing in the Fifth Circuit."
He added, "Permitting asset managers to direct retirement funds from hard-working Americans into ESG investments puts trillions of dollars at risk in exchange for a radical climate agenda. Our citizens deserve real fiduciaries who manage funds to maximize value, not gamble with them for political gain. We are prepared to fight all the way to the Supreme Court to defend the hard-earned savings of our constituents."
Department officials and retirement experts contend that the rule is neutral and maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.
In his September decision, Kacsmaryk agreed with the department.
"The 2022 rule 'provides that where a fiduciary reasonably determines that an investment strategy will maximize risk-adjusted returns, a fiduciary may pursue the strategy, whether pro-ESG, anti-ESG, or entirely unrelated to ESG,'" Kacsmaryk wrote, citing an April amicus brief filed in support of the Labor Department by retirement expert J. Mark Iwry. "And like prior rules, the 2022 rule allows consideration of collateral factors to break a tie. Thus … the court cannot conclude that the rule is 'manifestly contrary to the statute.'"
A Labor Department spokesman directed comment requests to the Department of Justice; the Justice Department did not immediately respond.
The rule is also facing a separate but similar challenge from two 401(k) plan participants who filed a lawsuit in February in U.S. District Court in Milwaukee that alleges the Labor Department exceeded its authority in issuing the rule.