Dive Brief:
- The House Committee on Education and Workforce approved a bill last week that would limit retirement fund managers from using ESG factors in investment decisions and impose additional monitoring and documentation requirements.
- The “Protecting Prudent Investment of Retirement Savings Act,” H.R. 2988, cleared the committee by a 21-15 vote on June 25 along party lines with the committee’s Republicans in support. The bill would amend the Employment and Retirement Income Security Act of 1974 and impose additional documentation requirements any time a fiduciary is unable to distinguish between investments on pecuniary factors alone.
- If passed into law, the legislation would work to further undo a Biden-era Labor Department rule allowing fiduciaries to use ESG factors in a tiebreaker scenario. Under President Trump, the agency first asked for the case to be paused, then said it planned to issue a new rule on the topic.
Dive Insight:
Rep. Rick Allen, R-Ga., first introduced the bill in April, and the committee said in a June 25 press release after its passage that the legislation “seeks to ensure financial institutions are focused on maximizing returns in retirement plans rather than on woke ESG factors.”
H.R. 2988 would reinforce fiduciaries’ responsibility to act in the sole interest of a plan’s participants and beneficiaries, and also includes portions related to service providers and the exercise of shareholder rights.
The bill does not prohibit the use of non-pecuniary factors “if a fiduciary is unable to distinguish between or among investment alternatives or investment courses of action on the basis of pecuniary factors alone.” However, such a decision is only allowed in a tiebreaker scenario if the fiduciary documents why they were unable to decide based solely on pecuniary factors; how the non-pecuniary factors used to select the investment are “consistent” with the interests of the plan; and how the chosen investment compares to the alternatives.
Allen’s bill would define pecuniary factors in ERISA as “a factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy established.”
Another section of the bill related to shareholder rights would require covered fiduciaries to act only in the “economic interest of the plan” when exercising or considering whether to exercise a shareholder right. Additionally, it would require plan managers to maintain a record of all proxy votes, proxy voting activity “or other exercise of a shareholder right, including any attempt to influence management.”
The shareholder rights section would also require plan fiduciaries to “not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries.”
The requirements surrounding the exercise of shareholder rights would also extend to investment managers and proxy advisory firms that have been delegated the authority to “vote proxies or exercise other shareholder rights,” according to the bill.
If the bill becomes law, the limitations and documentation requirements for utilizing non-pecuniary factors like ESG would go into effect 12 months after its enactment, and the shareholder rights section would go into effect on Jan. 1, 2026.
The Labor Department under President Joe Biden had issued a rule explicitly allowing the use of “collateral benefits” like ESG and other non-pecuniary factors in the case where multiple investments “equally serve” the financial interests of a plan and it would be imprudent to invest in all options. That rule went into effect in January 2023 and faced lawsuits from a coalition of 26 Republican-led states, until the agency abandoned the rule in May.
While the lawsuit was active, a federal district court judge twice ruled that the Biden-era regulation was allowable.
Allen’s bill will now head to the full House for consideration.
