House committee clears bill to curb ERISA plans’ ESG investing 

Under current Department of Labor (DOL) regulations, ERISA fiduciaries may consider any factor they reasonably determine to be relevant to an investment’s risk and return. The regulation also allows fiduciaries to use collateral factors unrelated to risk or return as tiebreakers when choosing between competing investments that equally serve the plan’s financial interests. However, the rule prohibits fiduciaries from subordinating participants’ interests to objectives unrelated to plan benefits, such as sacrificing investment returns or taking additional investment risk.

The existing regulation — issued by the Biden administration in 2022 — amended more stringent regulations adopted in late 2020 by the first Trump administration, which stakeholders reported had a “chilling effect” on fiduciaries’ consideration of ESG factors. While the bill wouldn’t expressly bar fiduciaries from considering ESG factors, it would effectively overturn the 2022 regulation by incorporating the following elements of the 2020 regulation directly into ERISA:

• Fiduciaries generally could consider only “pecuniary factors” they prudently determine will have a material effect on an investment’s risk and return
• Nonpecuniary factors could serve as a tie breaker only if fiduciaries are unable to distinguish between investment alternatives based on pecuniary factors alone (and in that case fiduciaries would be required to extensively document their decision, including why pecuniary factors weren’t sufficient)
• An investment alternative couldn’t serve as a DC plan’s default investment alternative if its investment objectives, goals or principal investment strategies “consider, or indicate the use of” nonpecuniary factors

The bill would be effective for fiduciary actions taken 12 months after enactment. (Separately, DOL informed the 5th US Circuit Court of Appeals that the agency intends to engage in a new rulemaking initiative on ESG investments following a federal district court ruling upholding the 2022 regulation.)

The bill would resurrect elements of the first Trump administration’s rules on proxy voting — also amended by the Biden administration’s 2022 regulation — including adding the following to ERISA’s fiduciary provisions:

• An express statement that fiduciaries wouldn’t need to vote every proxy or exercise every shareholder right to satisfy their ERISA duties
• More stringent standards for determining when to exercise these rights, including heightened documentation requirements for proxy voting activity, and an explicit prohibition on consideration of nonpecuniary objectives unrelated to participants’ financial interests
• Special monitoring obligations for fiduciaries who delegate proxy-voting authority or retain a third party for proxy-voting advice
• Proxy-voting policy safe harbors allowing fiduciaries to (a) limit voting resources to proposals they prudently determine are substantially related to the issuer’s business activities or expected to have a material effect on the value of the plan’s investment, or (b) refrain from voting where less than five percent of the plan’s assets are invested in the issuer

These provisions would apply to any exercise of shareholder rights on or after January 1, 2026.

DC plans that offer broker windows and self-directed brokerage accounts would need to provide a notice to participants any time they direct investments into, out of or within these arrangements starting in 2027. The bill provides model language for the required participant notice, which would inform participants of the following:

• The plan offers designated investment alternatives that are prudently selected and monitored by a plan fiduciary
• Investments available through the brokerage window aren’t designated investment alternatives or subject to the plan fiduciary’s oversight
• Participants may experience diminished returns, higher fees and higher risk by selecting investments through the brokerage window instead of the plan’s designated investment alternatives

The notice would also need to include a graph showing the participant’s projected retirement balance at age 67 if their account achieves annual returns of 4, 6 and 8 percent.