Best Interests, Better Outcomes

Can an ERISA pension plan invest in projects or companies that serve the common good, while still keeping at the forefront the fiduciary obligation to invest prudently and for the exclusive benefit of retirees and workers?
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Anyone responsible for managing an employer-sponsored retirement plan knows that the best interests of the plan and its beneficiaries come first. They always have -- well, at least since the 1974 passage of the Employee Retirement Income Security Act -- and as far as the Labor Department is concerned, they always will. But working in the best interests of the plan and having a positive impact in a community can go hand in hand. This is a position that the department is re-affirming today by issuing new guidance on Economically Targeted Investing.

Economically Targeted Investing, or ETI, refers to the practice of selecting investments, in part, for their collateral benefits, in addition to the investment return for the retirement plan. Various terms have been used to describe this and related investment behaviors, such as socially responsible investing, sustainable and responsible investing, and environmental, social and governance (ESG) investing. At bottom ETI refers to the idea of investing first for financial return, but also for social returns as well.

When I travel around the country and talk about the need to raise the minimum wage or expand access to paid leave, I often talk about the need for us to reject false choices. We don't have to choose between doing right by your workers and doing right by your shareholders. There's a growing national conversation that rejects the zero-sum game in favor of a win-win mindset, embracing the idea that these goals are complementary and not at cross-purposes.

The issue we're talking about today is a first cousin of that idea. The question is this: Can an ERISA pension plan invest in projects or companies that serve the common good, while still keeping at the forefront the fiduciary obligation to invest prudently and for the exclusive benefit of retirees and workers?

In 1994, we answered yes to that question. We issued common-sense guidance that built on decades of prior pronouncements by making clear that -- all other factors being equal -- it's perfectly acceptable for retirement plans to consider the social impact of their investments. If you could demonstrate that you weren't compromising on financial performance, you could pursue other goals as well.

Seven years ago, in the waning days of the Bush Administration, the Labor Department revisited the question: can ERISA plans honor their fiduciary obligation and pursue social goals? This time, inexplicably, at just the moment when the marketplace was rapidly expanding and growing in sophistication, we answered: "Well... only under very rare circumstances."

It was a classic case of violating the "if-it-ain't-broke-don't-fix-it" rule. The department "modified" the 1994 guidance and issued a new interpretation of ERISA that was both counterintuitive and counterproductive. It purported not to amend the principles set forth in the 1994 guidance, but it did assert that economically targeted investing should be rare and that it had to comply with exacting documentation requirements.

The message of 2008 bulletin was unmistakable. Even if the "all things being equal test" hadn't changed, in many quarters it was understood to have changed. Whatever the stated goal of the 2008 change, a range of stakeholders have told us that, in practice, it has had a chilling effect on economically targeted investing. We've heard repeatedly that fiduciaries are gun shy about these investments -- not because of their financial merits, but because they're afraid of running afoul of our guidance.

Today, we remove the shackles and return to the sound principles originally clarified in 1994, by issuing new guidance regarding Economically Targeted Investments made by retirement plans covered by ERISA. The guidance confirms the department's longstanding view, as laid out in the 1994 interpretation, that fiduciaries may take social impact into account as "tie-breakers" when investments are otherwise equal with respect to their economic and financial characteristics.

The 2008 bulletin muddied the waters, creating uncertainty for fiduciaries as to where the bar was set and how they could be sure they had cleared it. A return to the 1994 guidance is a return to a well-defined, widely-understood standard that had guided their decision-making for 14 years.

To be very clear, this is not a thumb on the other side of the scale. The guidance the Labor Department is issuing today in no way compromises the financial health of retirement plans or their participants. For the four-plus decades since the passage of ERISA, that has been the paramount consideration, and it cannot be trumped. Fiduciary obligation is the law of the land, and nothing in the guidance undermines that. Instead, the guidance reaffirms that fiduciaries may not accept lower returns or incur greater risks in the name of collateral benefits.

Today, we finally catch up to the breathtaking change we've seen in this space over the last few decades. By restoring the 1994 guidance, we bring ERISA investors together with economically targeted investment opportunities -− allowing the capital to meet the opportunity, allowing the money to meet the marketplace.

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