Although previous regulatory guidance from the Department of Labor has dampened efforts to include environmental, social and governance (ESG) investment options in retirement plans, experts advice that inclusion of these options can be important to plan participants. Here’s guidance on how to prudently consider the possibilities.
Careful Consideration
Good retirement plans offer carefully considered options to benefit a diversity of participants. For example, the American Academy of Actuaries has suggested that plan sponsors can improve engagement in the retirement plan by tuning into the age differences of employees: “Consider that younger individuals may be interested in different types of investment options than older ones. Plan designs that offer alternatives might thereby increase plan participation. In making such decisions—for example, to include environmental, social and governance investments on the fund menu—plan sponsors must make sure they are satisfying their fiduciary obligations, which might necessitate additional due diligence.”
Of course making any decision about investment options has become more and more challenging for plan sponsors, given the legal precedents established through lawsuits alleging flaws in both investment choices and fees that result in losses to retirement plan participants. In fact, leveraging the high standards of ERISA law, class action lawsuits continue to scrutinize how the investment options offered participants are selected, benchmarked, and, if warranted, removed from the plan. Because failure to remove poorly performing options can result in reduced retirement savings for participants, inaction has been considered a fiduciary breach. Lawsuits remind us that despite diligence as plan sponsors, it’s vital to have protection against allegations of a fiduciary breach.
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ESG Investments Can Be Effective
Underscoring that the addition of ESG investment options to retirement plans requires careful consideration, experts point out that doing so is possible and ESG options can be important in the portfolio. Evelyn Haralampu of Burns and Levinson offers this guidance:
Because investment returns are not to be sacrificed or greater risks assumed to promote collateral social policies, many plan fiduciaries have shied away from environmental, social and governance (ESG) investments. However, such investments do not need to be avoided if the ERISA fiduciary gives appropriate consideration to the facts and circumstances relevant to a particular investment or course of action, including the role of the investment in the portfolio, and acts accordingly.
In fact, a recent proposal by the U.S. Department of Labor seeks to modify certain prior regulatory guidance that had chilled ESG investments. Appropriate considerations include the risk of loss, opportunity for gain or other return as compared to similar investment alternatives. Diversification, liquidity, projected return are all factors for considering investments in a retirement plan, but investment returns are not to be sacrificed or greater risks assumed to promote collateral social policies. Thus, ESG factors may serve as a “tie breaker” when considering an otherwise appropriate investment…All things being equal, an ESG option may be chosen as an investment option as long as it does not present greater risks or reduced returns.
Take Precautions
Lawyers remind us that our fiduciary responsibilities don’t end after making a decision about the inclusion of investment options in the retirement plan: the duty of prudence requires continuous monitoring. As noted in JD Supra: “A collection of investment options that includes prudent choices does not erase the breach of fiduciary duty of also offering imprudent investment options, so the risk and returns must continually be monitored. As long as these precautions are taken there is no need to automatically rule out ESG investments for your ERISA portfolio.”
Keep in mind that defense against even the allegation of an ERISA fiduciary breach can be ruinous. Armed with Colonial’s Fiduciary-Cyber Insurance Pack, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be covered for defense costs and penalty limits up to $1,000,000. Plus, in the event of a cyber breach, your business—and plan—will receive support at every stage of incident investigation and breach response, as well as coverage against lawsuits or regulatory actions related to the breach.
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Continuous Coverage
Colonial’s comprehensive, multi-year packages offers plan sponsors the greatest value, protection and efficiency. Conveniently, Colonial provides: the required ERISA bond to protect the assets of the retirement plan from theft; Fiduciary Liability coverage to protect you and your assets from personal liability; and, Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.
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Serving customers since 1930, Colonial Surety is the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.
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