ERISA-DOL Provides Guidance On The Exercise Of Shareholder Rights, Written Statements Of Investment Policy And Economically Targeted Investments

In Field Assistance Bulletin No. 2018-01 (the “FAB”), the U.S. Department of Labor (the “DOL”) provides additional guidance on the exercise of shareholder rights, written statements of investment policy and economically targeted investments.  Here is what the FAB says:


The DOL’s longstanding position is that, under ERISA, the fiduciary act of managing plan assets that involve shares of corporate stock includes making decisions about voting proxies and exercising shareholder rights.  To assist plan fiduciaries in understanding their obligations under ERISA, the DOL issued Interpretive Bulletin (IB) 2016-01.  The DOL has a similarly longstanding position that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.  Interpretive Bulletin (IB) 2015-01 contains the DOL’s interpretation of ERISA sections 403 and 404 as applied to employee benefit plan investments in economically targeted investments (that is, investments selected for the economic benefits they create apart from their investment return to the employee benefit plan).

ESG Investment Considerations

In General

In IB 2015-01, the DOL reiterated its longstanding view that, because every investment necessarily causes a plan to forego other investment opportunities, plan fiduciaries are not permitted to sacrifice investment return or take on additional investment risk as a means of using plan investments to promote collateral social policy goals.  IB 2015-01 also reiterated the view that when competing investments serve the plan’s economic interests equally well, plan fiduciaries can use such collateral considerations as tie-breakers for an investment choice.  The preamble of IB 2015-01 added: “if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance (“ESG”) factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.”

In making that observation, the DOL merely recognized that there could be instances when otherwise collateral ESG issues present material business risk or opportunities to companies that company officers and directors need to manage as part of the company’s business plan and that qualified investment professionals would treat as economic considerations under generally accepted investment theories.  In such situations, these ordinarily collateral issues are themselves appropriate economic considerations, and thus should be considered by a prudent fiduciary along with other relevant economic factors to evaluate the risk and return profiles of alternative investments.  In other words, in these instances, the factors are more than mere tie-breakers.  To the extent ESG factors, in fact, involve business risks or opportunities that are properly treated as economic considerations themselves in evaluating alternative investments, the weight given to those factors should also be appropriate to the relative level of risk and return involved compared to other relevant economic factors.

Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.  It does not ineluctably follow from the fact that an investment promotes ESG factors, or that it arguably promotes positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors.  Rather, ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.  A fiduciary’s evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return and risk of an investment based on appropriate investment horizons consistent with the plan’s articulated funding and investment objectives.

In IB 2016-01, the DOL noted that investment policy statements are permitted to include policies concerning the use of ESG factors to evaluate investments, or on integrating ESG-related tools, metrics, or analyses to evaluate an investment’s risk or return.  That discussion in the IB does not reflect a view that investment policy statements must contain guidelines on ESG investments or integrating ESG-related tools to comply with ERISA.  Moreover, the IB does not imply that if an investment policy statement contains such guidelines then fiduciaries managing plan assets, including appointed ERISA section 3(38) investment managers, must always adhere to them.  A statement of investment policy is part of the “documents and instruments governing the plan” within the meaning of ERISA section 404(a)(1)(D), and an investment manager or other plan fiduciary to whom such an investment policy applies is required to comply with the policy, but only insofar as the policy is consistent with Titles I and IV of ERISA (including the core fiduciary obligations of prudence and loyalty).  Thus, if it is imprudent to comply with the investment policy statement in a particular instance, the manager must disregard it.

Investment Alternatives in 401(k)-Type Plans and Qualified Default Investment Alternatives

The DOL explained in the preamble to IB 2015-01 that the standards set forth in sections 403 and 404 of ERISA apply to a fiduciary’s selection of an investment fund as a plan investment or, in the case of an ERISA section 404(c) plan or other individual account plan, a designated investment alternative under the plan.  In the case of an investment platform that allows participants and beneficiaries an opportunity to choose from a broad range of investment alternatives, adding one or more funds to a platform in response to participant requests for an investment alternative that reflects their personal values does not necessarily result in the plan forgoing the placement of one or more other non-ESG themed investment alternatives on the platform.  Rather, in such a case, a prudently selected, well managed, and properly diversified ESG-themed investment alternative could be added to the available investment options on a 401(k) plan platform without requiring the plan to remove or forgo adding other non-ESG-themed investment options to the platform.

In the case of a qualified default investment alternative (a “QDIA”), however, selection of an investment fund is not analogous to merely offering participants an additional investment alternative as part of a prudently constructed lineup of investment alternatives from which participants may choose. Nothing in the QDIA regulation suggests that fiduciaries should choose QDIAs based on collateral public policy goals.  In the QDIA context, the decision to favor the fiduciary’s own policy preferences in selecting an ESG-themed investment option for a 401(k)-type plan without regard to possibly different or competing views of plan participants and beneficiaries would raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty.  Even if consideration of such factors could be shown to be appropriate in the selection of a QDIA for a particular plan population, however, the plan’s fiduciaries would have to ensure compliance with the guidance in IB 2015-01.  For example, the selection of a ESG-themed target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with commensurate degrees of risk, or if the fund would be riskier than non-ESG alternative available target date funds with commensurate rates of return.

Shareholder Engagement Activities

The DOL’s longstanding view is that plan fiduciaries should engage in traditional and customary proxy voting activities in discharging their fiduciary obligation to prudently manage plan investments.  The DOL observed in the preamble to IB 2016-01 that, in most cases, proxy voting and other shareholder engagement does not involve a significant expenditure of funds by individual plan investors because the activities are undertaken by institutional investment managers that are appointed as the responsible plan fiduciary pursuant to ERISA sections 402(c)(3), 403(a)(2), and 3(38). The IB noted further that investment managers often engage consultants, including proxy advisory firms, to further reduce individual plan costs of researching proxy matters and exercising shareholder rights.

In IB 2016-01, the DOL stated that an investment policy that contemplates engaging in shareholder activities that are intended to monitor or influence the management of corporations in which the plan owns stock can be consistent with a fiduciary’s obligations under ERISA, if the responsible fiduciary concludes there is a reasonable expectation that such activities (by the plan alone or together with other shareholders) are likely to enhance the economic value of the plan’s investment in that corporation after taking into account the costs involved.  In fact, it is increasingly common for investment managers to include proxy voting and shareholder engagement guidelines in their investment policy statements.

IB 2016-01 further states that, in various circumstances, plans may have a reasonable expectation that such activities are likely to enhance the value of the plan’s investments after taking into account the costs.  For example, investment managers often engage with companies to learn about corporate governance practices, or company actions to manage its environmental risks, human capital, facilities, stakeholder relations, and long-term access to critical resources.  Other common communications are to share significant concerns about board profiles, related-party transactions, executive compensation, the corporation’s long-term business plans, or to discuss overarching principles that the investment manager applies to proxy voting decisions.

All that language in the IB should be read in the context of the DOL’s observation that proxy voting and other shareholder engagement typically does not involve a significant expenditure of funds by individual plan investors because the activities are generally undertaken by institutional investment managers that are appointed as the responsible plan fiduciary pursuant to ERISA sections 402(c)(3), 403(a)(2), and 3(38).  The IB was not intended to signal that it is appropriate for an individual plan investor to routinely incur significant expenses to engage in direct negotiations with the board or management of publicly held companies with respect to which the plan is just one of many investors.  Similarly, the IB was not meant to imply that plan fiduciaries, including appointed investment managers, should routinely incur significant plan expenses to, for example, fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues relating to such companies.

The DOL noted in the IB that there may be circumstances, for example involving significantly indexed portfolios and important corporate governance reform issues, or other environmental or social issues that present significant operational risks and costs to business, and that are clearly connected to long-term value creation for shareholders with respect to which reasonable expenditure of plan assets to more actively engage with company management may be a prudent approach to protecting the value of a plan’s investment.  But, as stated in the preamble to IB 2016-01, “[t]he [DOL] has rejected a construction of ERISA that would render ERISA’s tight limits on the use of plan assets illusory and that would permit plan fiduciaries to expend trust assets to promote myriad public policy preferences. Rather, plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals.”

If a plan fiduciary is considering a routine or substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment manager, that may well constitute the type of “special circumstances” that the IB 2016-01 preamble described as warranting a documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.

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