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The Wagner Law Group

The Wagner Law Group is a nationally recognized practice in the areas of ERISA and employee benefits, estate planning, employment, labor and human resources and investment management.

 

Established in 1996, The Wagner Law Group is dedicated to the highest standards of integrity, excellence and thought leadership and is considered to be amongst the nation's premier ERISA and employee benefits law firms. The firm has eight offices across the country, providing unparalleled legal advice to its clients, including large, small and nonprofit corporations as well as individuals and government entities worldwide. The Wagner Law Group's 34 attorneys, senior benefits consultant and seven paralegals combine many years of experience in their fields of practice with a variety of backgrounds. Nine of the attorneys are AV-rated by Martindale-Hubbell and six are Fellows of the American College of Employee Benefits Counsel, an invitation-only organization of nationally recognized employee benefits lawyers.  Five of the firm's attorneys have been named to the prestigious Super Lawyers list for 2017, which highlights outstanding lawyers based on a rigorous selection process. The Wagner Law Group is certified as a woman-owned and operated business by the Women's Business Enterprise National Council.

 

 

 

 

 

  

 

 

 

Contact Info

The Wagner Law Group

 

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April 26, 2018

 

ERISA Law Alert

 

DOL Issues FAB 2018-1

 

 

 


On April 23rd, in Field Assistance Bulletin ("FAB") 2018-01, the DOL provided guidance to the Employee Benefits Security Administration's national and regional offices on how to respond to inquiries about Interpretive Bulletin ("IB") 2016-01 relating to shareholder rights and written investment policy statements and IB 2015-01 relating to economically targeted investments. Perhaps not surprisingly, their current view on these issues is considerably narrower than those expressed by the prior Administration.

Although IB 2015-01 had apparently allowed the collateral benefits of ESG (environmental, social, and governance) considerations to be taken into account in certain circumstances, such as a tie-breaker when the economic benefits of an investment were equivalent, in FAB 2018-01 there were circumstances when otherwise collateral ESG issues present material business issues that qualified business professionals would treat as economic considerations. In the DOL's view, in these circumstances, the otherwise collateral ESG benefits would be more than tie-breakers. Only to the extent that these ESG considerations could properly be treated as economic considerations, could they be taken into account. The DOL followed that analysis with the warning to plan fiduciaries, in determining the prudence of a particular plan investment that they should not readily treat ESG factors as economically relevant to that particular investment decision, even if those factors arguably promote general market trends or industry growth. Rather, "ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits," and the "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."

With respect to investment policy statements, although IB 2016-01 indicated that investment policy statements are permitted to include policies concerning the use of ESG factors, on integrating ESG-related tools to evaluate an investment's risk or return, the DOL did not believe it was necessary for an IPS to contain such guidelines. The FAB further concluded, which should have come as no surprise to the regional and national offices, that if an investment policy statement contained such guidelines, and it would be imprudent for the manager to follow those guidelines, the manager could and should disregard them.

With respect to the investment platform in 401(k) plans and the selection of a qualified default investment alternative ("QDIA"), the DOL's analysis focused upon ESG-themed funds such as a Socially Responsible Index Fund, Religious Belief Investment Fund, or an Environmental and Sustainable Investment Fund in contrast to a non-ESG-themed Fund in which ESG factors may be taken into account as one of many factors in ordinary portfolio management. While the DOL viewed it as acceptable to add a prudently selected, well-managed, and properly diversified ESG-themed alternative to a 401(k) platform, because that action would not require the removal or the foregoing of adding another non-ESG-themed fund, that analysis would be inapplicable to the selection of a QDIA. From the DOL's perspective, the QDIA regulations do not permit a fiduciary to choose a QDIA based upon collateral, public policy goals and present two different concerns. First, to the extent the fiduciary's decision reflected its own policy preferences without regard to a possible different view held by plan participants, there would be a possible breach of the duty of loyalty. However, even if the interests of the plan fiduciary and the particular plan population were aligned, the decision might be imprudent if the fund selected would produce a lower rate of return than a non-ESG alternative fund with a commensurate degree of risk, or if the fund would be riskier than the non-ESG themed alternative with a commensurate rate of return.

With respect to shareholder engagement in IB 2016-01 the DOL had 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 companies invest may be consistent with a fiduciary's obligations under ERISA, if the responsible fiduciary concludes that there is a reasonable expectation that such activities are likely to enhance the economic value of the plan's investment in that corporation after taking into account the costs involved. The DOL had further noted there were various circumstances in which plans may have a reasonable expectation that such activities are likely to enhance the value of the plan's investment after taking into account the costs. The DOL also indicated in IB 2016-01, after noting the benefits of plan involvement, that absent special circumstances, it would not be necessary to conduct a cost-benefit analysis with respect to every such action. In FAB 2018-01, however, the DOL indicated that IB 2016-01 was not meant to imply that plan fiduciaries, including 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". Then, so there could be no ambiguity on the DOL's view on this issue, the DOL concluded that if a plan fiduciary were considering a routine or substantial expenditure of plan assets to actively engage with management on environmental or social issues, such an expenditure "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." Not many fiduciaries will be interested in performing that type of analysis, with which the DOL could disagree.

Takeaway

FAB 2018-01 would have been shorter and had fewer questionable interpretations of what was intended by prior DOL guidance had it indicated that it had changed its position on these issues. It obviously makes it difficult for the applicable plan fiduciaries to operate in a frequently changing legal environment with respect to such an important fiduciary rule. Perhaps at some point the DOL will propose regulations for public comment, instead of providing sub-regulatory guidance through the issuance of Field Assistance Bulletins. Until such time, however, plan fiduciaries will need to act in accordance with FAB 2018-01.

 

 

 

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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.