EBSA broadening its focus on enforcement

Enforcement actions continued to rise at the Department of Labor's Employee Benefits Security Administration in fiscal year 2020, paced once again by missing participant recoveries, but that wasn't the only area where EBSA investigators turned their focus.

Earlier this year, the Labor Department began sending enforcement letters to plan sponsors and registered investment adviser firms requesting documents pertaining to environmental, social and governance-themed fund decisions.

"This kind of came out of nowhere," said Elizabeth S. Goldberg, a Pittsburgh-based partner with law firm Morgan, Lewis & Bockius LLP. "It seems like a lot of DOL muster in the investigations space has been on ESG in 2020."

In an enforcement letter sent in the spring to plan sponsors with ESG funds in their plan lineups, the Labor Department requested a slew of documents, including materials showing the "names, addresses and responsibilities of all persons or entities with responsibility for making investment decisions."

"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, New York regional office director for EBSA, in a sample letter viewed by Pensions & Investments.

Will Hansen, Arlington, Va.-based executive director of the Plan Sponsor Council of America and chief government affairs officer at the American Retirement Association, said the recent ESG-related investigations are yet another worry for plan sponsors.

"We are concerned that plan sponsors have the threat of litigation being brought against them from these copy-and-paste law firms and then on top of that they now have this threat of investigation activity from the Department of Labor on fund selection related to ESG funds," he said.

Ms. Goldberg said she was not aware of the Labor Department having made any adverse findings or obtaining any recoveries in its recent ESG investigations, which started shortly before it proposed a rule stipulating that ERISA plan fiduciaries cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk. Following harsh criticism from the retirement community during a 30-day comment period, when the final rule was unveiled on Oct. 30 the Labor Department walked back the ESG language in the proposal and instead required ERISA fiduciaries to not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk.

A Labor Department spokesman did not respond to questions about the ESG investigation initiative or whether any enforcement actions have been taken as a result.

Bradford P. Campbell, a Washington-based partner for Faegre Drinker Biddle & Reath LLP and former assistant secretary of labor for EBSA during President George W. Bush's administration, likened the ESG investigations to a "brushback pitch" in baseball. "I think they wanted to remind folks that you have to choose prudent investments and you can't just put a thumb on the scale in favor of an investment because it's ESG — it still has to be prudent," he said.

How a new administration will tackle certain issues is always difficult to predict, but the incoming Biden administration is likely to shake up some enforcement priorities at the Labor Department, like ESG-related investigations, but will continue others, like missing participants, ERISA attorneys said.

EBSA's fiscal year 2020 enforcement numbers, which were released in late October, do not include any ESG-specific findings, but do show a continued increase in enforcement actions taken.

The department recovered $2.6 billion from its investigations during the fiscal year, up from $2 billion in 2019 and $1.1 billion in 2018. In total, EBSA recovered more than $3.1 billion for direct payments to plans, participants and beneficiaries in 2020, up from $2.5 billion last year and $1.6 billion in 2018, according to a Labor Department fact sheet.

Of the $2.6 billion recovered in enforcement actions, roughly $1.5 billion was from its Terminated Vested Participant Project, which encompasses missing participants. That number was in line with the $1.5 billion the project recovered in 2019 and well above the $808 million in 2018.

The missing participant issue continues to be a headache for plan sponsors because there is still uncertainty as to how best to search for those missing participants and knowing when they can prudently stop looking, Mr. Hansen said.

"Plan sponsors continue to work with the Department of Labor and find this issue just as important as they do," Mr. Hansen added. "I do think it's unfortunate that the Department of Labor has still failed to provide proper guidance to plan sponsors on what exactly they should be doing in order to ensure that they are locating missing participants properly."

Any time the Labor Department has investigated a plan sponsor that Mr. Campbell or his colleagues have been made aware of in recent years, the investigations have always included questions about missing participants, he said.

In order to get the greatest amount of compliance from plan sponsors and best outcomes for missing participants, the Labor Department should put forth "a clear standard to point to and make sure it's universally adopted, rather than having vague standards and sort of a lingering threat of enforcement about whether your actions are good enough," Mr. Campbell added.

Mr. Hansen is hopeful such guidance will be issued under the next administration.

The fact that enforcement actions have continued to rise under the Trump administration is a surprise, said Thomas E. Clark Jr., a St. Louis-based partner and chief operating officer at The Wagner Law Group,

"If you would have asked me to bet a dollar four years ago, I would've lost that dollar because I would've assumed that the Trump administration would take a posture closer to the Bush administration," he said. "They were interested in the law being followed but I think the general consensus was (the Bush) DOL was more willing to take less aggressive stances if it resulted in greater compliance."

Mr. Clark said the Trump administration continued the approach undertaken during the Obama administration's tenure that took an aggressive stance on issuing penalties following a violation.

While the Trump administration has been focused on ESG investigations, "I am not sure that we're going to see the Biden administration as focused on pushing these investigations," Ms. Goldberg said.

But the enforcement focus on missing participants will likely continue under the new administration because it's been such a success for the Labor Department, Mr. Campbell said. But like Mr. Clark, Mr. Campbell said the retirement industry will have to wait and see until the Biden administration's personnel is in place before determining its enforcement priorities.