[Federal Register Volume 80, Number 206 (Monday, October 26, 2015)]
[Rules and Regulations]
[Pages 65135-65137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-27146]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2509
RIN 1210-AB73
Interpretive Bulletin Relating to the Fiduciary Standard Under
ERISA in Considering Economically Targeted Investments
AGENCY: Employee Benefits Security Administration, Labor.
ACTION: Interpretive bulletin.
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SUMMARY: This document sets forth supplemental views of the Department
of Labor (Department) concerning the legal standard imposed by sections
403 and 404 of Part 4 of Title I of the Employee Retirement Income
Security Act of 1974 (ERISA) with respect to a plan fiduciary's
decision to invest plan assets in ``economically targeted investments''
(ETIs). ETIs are generally defined as investments that are selected for
the economic benefits they create in addition to the investment return
to the employee benefit plan investor. In this document, the Department
withdraws Interpretive Bulletin 08-01 and replaces it with Interpretive
Bulletin 2015-01 that reinstates the language of Interpretive Bulletin
94-01.
DATES: This interpretive bulletin is effective on October 26, 2015.
FOR FURTHER INFORMATION CONTACT: Office of Regulations and
Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll-free number.
SUPPLEMENTARY INFORMATION:
Background
The Department has been asked periodically over the last 30 years
to consider the application of ERISA's fiduciary rules to pension plan
investments selected because of the collateral economic or social
benefits they may further in addition to their investment returns.
Various terms have been used to describe this and related investment
behaviors, such as socially responsible investing, sustainable and
responsible investing, environmental, social and governance (ESG)
investing, impact investing, and economically targeted investing (ETI).
The terms do not have a uniform meaning and the terminology is
evolving. As used in this interpretive bulletin, however, an
economically targeted investment broadly refers to any investment that
is selected, in part, for its collateral benefits, apart from the
investment return to the employee benefit plan investor. The Labor
Department previously addressed issues relating to ETIs in Interpretive
Bulletin 94-1 (IB 94-1) \1\ and Interpretive Bulletin 2008-1 (IB 2008-
1).\2\ The Department's stated objective in issuing IB 94-1 was to
correct a popular misperception at the time that investments in ETIs
are incompatible with ERISA's fiduciary obligations. The preamble to
the Interpretive Bulletin explained that the requirements of sections
403 and 404 of ERISA do not prevent plan fiduciaries from investing
plan assets in ETIs if the ETI has an expected rate of return that is
commensurate to rates of return of alternative investments with similar
risk characteristics that are available to the plan, and if the ETI is
otherwise an appropriate investment for the plan in terms of such
factors as diversification and the investment policy of the plan. Some
commenters have referred to this standard as the ``all things being
equal'' test.
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\1\ 59 FR 32606 (June 23, 1994). Prior to issuing IB 94-1, the
Department had issued a number of letters concerning a fiduciary's
ability to consider the collateral effects of an investment and
granted a variety of prohibited transaction exemptions to both
individual plans and pooled investment vehicles involving
investments, which produce collateral benefits. See, Advisory
Opinions 80-33A, 85-36A and 88-16A; Information Letters to Mr.
George Cox, dated January 16, 1981; to Mr. Theodore Groom, dated
January 16, 1981; to The Trustees of the Twin City Carpenters and
Joiners Pension Plan, dated May 19, 1981; to Mr. William Chadwick,
dated July 21, 1982; to Mr. Daniel O'Sullivan, dated August 2, 1982;
to Mr. Ralph Katz, dated March 15, 1982; to Mr. William Ecklund,
dated December 18, 1985, and January 16, 1986; to Mr. Reed Larson,
dated July 14, 1986; to Mr. James Ray, dated July 8, 1988; to the
Honorable Jack Kemp, dated November 23, 1990; and to Mr. Stuart
Cohen, dated May 14, 1993; PTE 76-1, part B, concerning construction
loans by multiemployer plans; PTE 84-25, issued to the Pacific Coast
Roofers Pension Plan; PTE 85-58, issued to the Northwestern Ohio
Building Trades and Employer Construction Industry Investment Plan;
PTE 87-20, issued to the Racine Construction Industry Pension Fund;
PTE 87-70, issued to the Dayton Area Building and Construction
Industry Investment Plan, PTE 88-96, issued to the Real Estate for
American Labor A Balcor Group Trust; PTE 89-37, issued to the Union
Bank; PTE 93-16, issued to the Toledo Roofers Local No. 134 Pension
Plan and Trust, et al.
\2\ 73 FR 61734 (October 17, 2008).
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The Department has also consistently stated, including in
Interpretative Bulletin 94-1, that the focus of plan fiduciaries on the
plan's financial returns and risk to beneficiaries must be paramount.
Under ERISA, the plan trustee or other investing fiduciary may not use
plan assets to promote social, environmental, or other public policy
causes at the expense of the financial interests of the plan's
participants and beneficiaries. Fiduciaries may not accept lower
expected returns or take on
[[Page 65136]]
greater risks in order to secure collateral benefits.
Specifically, the Department stated in Interpretive Bulletin 94-1:
\3\
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\3\ 59 FR 32606, 07.
Sections 403 and 404 of the Employee Retirement Income Security
Act of 1974 (ERISA), in part, require that a fiduciary of a plan act
prudently, and to diversify plan investments so as to minimize the
risk of large losses, unless under the circumstances it is clearly
prudent not to do so. In addition, these sections require that a
fiduciary act solely in the interest of the plan's participants and
beneficiaries and for the exclusive purpose of providing benefits to
their participants and beneficiaries. The Department has construed
the requirements that a fiduciary act solely in the interest of, and
for the exclusive purpose of providing benefits to, participants and
beneficiaries as prohibiting a fiduciary from subordinating the
interests of participants and beneficiaries in their retirement
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income to unrelated objectives.
The Department continued in Interpretative Bulletin 2008-1: \4\
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\4\ 73 FR 61734, 35.
ERISA's plain text thus establishes a clear rule that in the
course of discharging their duties, fiduciaries may never
subordinate the economic interests of the plan [participants and
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beneficiaries] to unrelated objectives [ ].
In the preamble to IB 94-1, the Department elaborated: \5\
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\5\ 59 FR 32606, 07 (footnote omitted).
While the Department has stated that a plan fiduciary may
consider collateral benefits in choosing between investments that
have comparable risks and rates of return, it has consistently held
that fiduciaries who are willing to accept expected reduced returns
or greater risks to secure collateral benefits are in violation of
ERISA. It follows that, because every investment necessarily causes
a plan to forgo other investment opportunities, an investment will
not be prudent if it would provide a plan with a lower expected rate
of return than available alternative investments with commensurate
degrees of risk or is riskier than alternative available investments
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with commensurate rates of return.
Thus, it has been the Department's consistent view that sections 403
and 404 of ERISA do not permit fiduciaries to sacrifice the economic
interests of plan participants in receiving their promised benefits in
order to promote collateral goals.
At the same time, however, the Department has consistently
recognized that fiduciaries may consider such collateral goals as tie-
breakers when choosing between investment alternatives that are
otherwise equal with respect to return and risk over the appropriate
time horizon. ERISA does not direct an investment choice in
circumstances where investment alternatives are equivalent, and the
economic interests of the plan's participants and beneficiaries are
protected if the selected investment is in fact, economically
equivalent to competing investments.
On October 17, 2008, the Department replaced Interpretive Bulletin
94-1, with Interpretive Bulletin 2008-01, codified at 29 CFR 2509.08-
01. IB 2008-01 purported not to alter the basic legal principles set
forth in IB 94-1. Its stated purpose was to clarify that fiduciary
consideration of collateral, non-economic factors in selecting plan
investments should be rare and, when considered, should be documented
in a manner that demonstrates compliance with ERISA's rigorous
fiduciary standards.
The Department believes that in the seven years since its
publication, IB 2008-01 has unduly discouraged fiduciaries from
considering ETIs and ESG factors. In particular, the Department is
concerned that the 2008 guidance may be dissuading fiduciaries from (1)
pursuing investment strategies that consider environmental, social, and
governance factors, even where they are used solely to evaluate the
economic benefits of investments and identify economically superior
investments, and (2) investing in ETIs even where economically
equivalent. Some fiduciaries believe the 2008 guidance sets a higher
but unclear standard of compliance for fiduciaries when they are
considering ESG factors or ETI investments.
An important purpose of this Interpretive Bulletin is to clarify
that plan fiduciaries should appropriately consider factors that
potentially influence risk and return. Environmental, social, and
governance issues may have a direct relationship to the economic value
of the plan's investment. In these instances, such issues are not
merely collateral considerations or tie-breakers, but rather are proper
components of the fiduciary's primary analysis of the economic merits
of competing investment choices. Similarly, if a fiduciary prudently
determines that an investment is appropriate based solely on economic
considerations, including those that may derive from environmental,
social and governance factors, the fiduciary may make the investment
without regard to any collateral benefits the investment may also
promote. Fiduciaries need not treat commercially reasonable investments
as inherently suspect or in need of special scrutiny merely because
they take into consideration environmental, social, or other such
factors. When a fiduciary prudently concludes that such an investment
is justified based solely on the economic merits of the investment,
there is no need to evaluate collateral goals as tie-breakers.
In addition, this Interpretive Bulletin also clarifies that plan
fiduciaries may invest in ETIs based, in part, on their collateral
benefits so long as the investment is economically equivalent, with
respect to return and risk to beneficiaries in the appropriate time
horizon, to investments without such collateral benefits. In an effort
to correct the misperceptions that have followed publication of IB
2008-01 the Department is withdrawing IB 2008-01, replacing it with
this guidance that reinstates the language of IB 94-1.
Consistent with fiduciaries' obligations to choose economically
superior investments, the Department does not believe ERISA prohibits a
fiduciary from addressing ETIs or incorporating ESG factors in
investment policy statements or integrating ESG-related tools, metrics
and analyses to evaluate an investment's risk or return or choose among
otherwise equivalent investments. Nor do sections 403 and 404 prevent
fiduciaries from considering whether and how potential investment
managers consider ETIs or use ESG criteria in their investment
practices. As in selecting investments, in selecting investment
managers, the plan fiduciaries must reasonably conclude that the
investment manager's practices in selecting investments are consistent
with the principles articulated in this guidance.
In addition, the Department does not construe consideration of ETIs
or ESG criteria as presumptively requiring additional documentation or
evaluation beyond that required by fiduciary standards applicable to
plan investments generally. As a general matter, the Department
believes that fiduciaries responsible for investing plan assets should
maintain records sufficient to demonstrate compliance with ERISA's
fiduciary provisions. As with any other investments, the appropriate
level of documentation would depend on the facts and circumstances.
The Department also has concluded that the same standards set forth
in sections 403 and 404 of ERISA governing a fiduciary's investment
decisions, discussed above, apply to a fiduciary's selection of a
``socially-responsible'' mutual fund as a plan investment or, in the
case of an ERISA section 404(c) plan or other individual account plan,
a designated investment alternative under the plan. Specifically, in
Advisory Opinion 98-04A, the
[[Page 65137]]
Department has expressed the view that the fiduciary standards of
sections 403 and 404 do not preclude consideration of collateral
benefits, such as those offered by a ``socially-responsible'' fund, in
a fiduciary's decision to designate an investment alternative in an
individual account plan. Whether a particular fund or investment
alternative satisfies the requirements set forth in sections 403 and
404 of ERISA is an inherently factual question that the appropriate
plan fiduciaries must decide based on all the facts and circumstances
of the individual situation.
The following Interpretive Bulletin deals solely with the
applicability of the prudence and exclusive purpose requirements of
ERISA as applied to fiduciary decisions to invest plan assets in ETIs,
and in particular the collateral benefits they may provide apart from a
plan's performance and the interests of participants and beneficiaries
in their retirement income. The bulletin does not supersede the
regulatory standard contained at 29 CFR 2550.404a-1, nor does it
address any issues which may arise in connection with the prohibited
transaction provisions or the statutory exemptions from those
provisions.
List of Subjects in 29 CFR Part 2509
Employee benefit plans, Pensions.
For the reasons set forth in the preamble, the Department is
amending subchapter A, part 2509 of title 29 of the Code of Federal
Regulations as follows:
SUBCHAPTER A--GENERAL
PART 2509--INTERPRETIVE BULLETINS RELATING TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974
0
1. The authority citation for part 2509 continues to read as follows:
Authority: 29 U.S.C. 1135. Secretary of Labor's Order 1-2003, 68
FR 5374 (Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2 issued
under 29 U.S.C. 1052, 1053, 1054. Sec. 2509.75-5 also issued under
29 U.S.C. 1002. Sec. 2509.95-1 also issued under sec. 625, Public
Law 109-280, 120 Stat. 780.
Sec. 2509.08-1 [Removed]
0
2. Part 2509 is amended by removing Sec. 2509.08-1.
0
3. Part 2509 is further amended by adding Sec. 2509.2015-01 to read as
follows:
Sec. 2509.2015-01 Interpretive bulletin relating to the fiduciary
standard under ERISA in considering economically targeted investments.
This Interpretive Bulletin sets forth the Department of Labor's
interpretation of sections 403 and 404 of the Employee Retirement
Income Security Act of 1974 (ERISA), as applied to employee benefit
plan investments in ``economically targeted investments'' (ETIs), that
is, investments selected for the economic benefits they create apart
from their investment return to the employee benefit plan. Sections 403
and 404, in part, require that a fiduciary of a plan act prudently, and
to diversify plan investments so as to minimize the risk of large
losses, unless under the circumstances it is clearly prudent not to do
so. In addition, these sections require that a fiduciary act solely in
the interest of the plan's participants and beneficiaries and for the
exclusive purpose of providing benefits to their participants and
beneficiaries. The Department has construed the requirements that a
fiduciary act solely in the interest of, and for the exclusive purpose
of providing benefits to, participants and beneficiaries as prohibiting
a fiduciary from subordinating the interests of participants and
beneficiaries in their retirement income to unrelated objectives.
With regard to investing plan assets, the Department has issued a
regulation, at 29 CFR 2550.404a-1, interpreting the prudence
requirements of ERISA as they apply to the investment duties of
fiduciaries of employee benefit plans. The regulation provides that the
prudence requirements of section 404(a)(1)(B) are satisfied if (1) the
fiduciary making an investment or engaging in an investment course of
action has given appropriate consideration to those facts and
circumstances that, given the scope of the fiduciary's investment
duties, the fiduciary knows or should know are relevant, and (2) the
fiduciary acts accordingly. This includes giving appropriate
consideration to the role that the investment or investment course of
action plays (in terms of such factors as diversification, liquidity,
and risk/return characteristics) with respect to that portion of the
plan's investment portfolio within the scope of the fiduciary's
responsibility.
Other facts and circumstances relevant to an investment or
investment course of action would, in the view of the Department,
include consideration of the expected return on alternative investments
with similar risks available to the plan. It follows that, because
every investment necessarily causes a plan to forgo other investment
opportunities, an investment will not be prudent if it would be
expected to provide a plan with a lower rate of return than available
alternative investments with commensurate degrees of risk or is riskier
than alternative available investments with commensurate rates of
return.
The fiduciary standards applicable to ETIs are no different than
the standards applicable to plan investments generally. Therefore, if
the above requirements are met, the selection of an ETI, or the
engaging in an investment course of action intended to result in the
selection of ETIs, will not violate section 404(a)(1)(A) and (B) and
the exclusive purpose requirements of section 403.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, U.S.
Department of Labor.
[FR Doc. 2015-27146 Filed 10-22-15; 11:15 am]
BILLING CODE 4510-29-P