DOL’s Ali Khawar defends fiduciary and ESG rules, discusses lost-and-found database

Ali Khawar, principal deputy assistant secretary for the Labor Department’s Employee Benefits Security Administration, defended two department rules facing litigation and addressed the concerns surrounding the lost-and-found database it’s building.

One of the rules being challenged in court, known as the Retirement Security Rule, alters the test used for determining an investment advice fiduciary under ERISA, changing it so that one-time advice, such as annuity purchases or rollovers to IRAs, must be in an investor’s best interest.

The department finalized the rule and related amended prohibited transaction exemptions in April. However, in July, two federal judges in Texas separately halted the rule’s implementation. Both those judges said the rule is substantially similar to a 2016 rule that a three-judge panel struck down at the 5th U.S. Circuit Court of Appeals, New Orleans, in 2018.

Khawar pushed back on those arguments at Pensions & Investments’ Defined Contribution West conference in Pasadena, Calif.

“We knew about the 5th Circuit's opinion,” Khawar said. “We took it very seriously, and we think we promulgated something that shows fidelity to the concerns that they had.”

The department plans to appeal both rulings halting implementation of the rule, according to September filings.

Another DOL rule currently facing litigation is one finalized in November 2022, which explicitly allows ERISA fiduciaries to consider environmental, social and governance factors when making investment decisions. That rule reverses two rules promulgated under the Trump administration that said ERISA fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk, and outlined the process for a fiduciary to take when making decisions about casting a proxy vote.

“I think this is what you see reflected in the rule…the question is not whether ESG is good or is ESG bad,” Khawar said. “The question is how can you best deliver risk-adjusted returns to your participants that you're looking out for?”

The rule promulgated under the Trump administration made many fiduciaries think they couldn’t make ESG considerations at all, and “they were very concerned that there was almost an ESG override,” Khawar said in a later interview. Therefore, the new rule aims to take a more “neutral approach,” he added.

Separately, Khawar talked about the DOL’s process of building a lost-and-found database, which will allow retirement savers who lost track of their accounts to locate their plan administrators.

The database was mandated as part of SECURE 2.0, the retirement security package passed in late 2022.

“The problem that we have is that the database is only going to be as useful as the data that's in it,” Khawar said.

The DOL had planned to use existing data that 401(k) plans regularly submit to the IRS and Social Security Administration, but the IRS decided it cannot share such data with the Labor Department, citing disclosure and confidentiality restrictions, according to an April proposal from the department.

Therefore, the DOL is “on the cusp of opening the doors to a voluntary information collection,” Khawar said, meaning that plan sponsors and record keepers would need to provide information to the department.

“If you're a record keeper, if you're a plan sponsor: really do think about sending us that information,” Khawar said to the audience of retirement industry professionals at DC West.

When asked how the DOL plans to address cybersecurity concerns around the database, Khawar said in an interview that the database will have a robust identity verification mechanism so it can check “you are the person that you're claiming to be before you can kind of search for your data.”

He also said the Labor Department will likely issue a kind of public notification within the next few weeks to let plan sponsors and record keepers know how they can begin sending information for the database.