DOL Bulletin Clarifies Prior Guidance Regarding Fiduciary Standards for ETIs and Shareholder Rights

The Employee Benefits Security Administration (EBSA) arm of the Department of Labor (DOL) has released Field Assistance Bulletin 2018-01 (FAB 2018-01), which clarifies earlier interpretations set forth in Interpretive Bulletins 2015-01 and 2016-01. Interpretive Bulletin 2015-01 addresses fiduciary standards as they relate to so-called economically targeted investments (ETIs) (investments selected based on nonfinancial factors, such as environmental, social, or corporate governance policy goals). Interpretive Bulletin 2016-01 addresses the exercise of shareholder rights under qualified plans.

FAB 2018-01 states that ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits, specifically in cases where nonfinancial factors could potentially influence investment selection. “Fiduciaries,” FAB 2018-01 cautions, “must not too readily treat [these] factors as economically relevant [and should] be focused on financial factors that have a material effect on the return and risk of an investment.” However, as stated in Interpretive Bulletin 2015-01, these nonfinancial factors may be considered as “tie-breakers” when competing investments serve the plan’s economic interest equally well, and may be considered more than tie-breakers if they present material business risks or opportunities that are properly treated as economic considerations themselves.

FAB 2018-01 further clarifies that investment policy statements are permitted, but are not required, to contain policies concerning the use of these nonfinancial factors to evaluate investments, and that the selection of a Qualified Default Investment Alternative (QDIA) based on these factors could raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty. “Nothing in the QDIA regulations suggests that fiduciaries should choose QDIAs based on collateral public policy goals,” notes the FAB.

Lastly, the FAB addresses shareholder activities that may require expenditure of plan assets (e.g., proxy voting), clarifying that Interpretive Bulletin 2016-01 was not meant to imply that plan fiduciaries should routinely incur significant plan expenses to 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.