EBSA Final Rules

Interpretive Bulletin Relating to Investing in Economically Targeted Investments   [10/17/2008]
FR Doc E8-24551
[Federal Register: October 17, 2008 (Volume 73, Number 202)]
[Rules and Regulations]               
[Page 61734-61736]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Employee Benefits Security Administration

29 CFR Part 2509

RIN 1210-AB29

Interpretive Bulletin Relating to Investing in Economically 
Targeted Investments

AGENCY: Employee Benefits Security Administration, Labor.

ACTION: Interpretive bulletin.


SUMMARY: This document sets forth the views of the Department of Labor 
concerning the legal standards imposed on fiduciaries of employee 
benefit plans by sections 403 and 404 of Title I of the Employee 
Retirement Income Security Act (ERISA) when considering investments in 
``economically targeted investments.'' These guidelines affect 
fiduciaries of employee benefit plans, including trustees, investment 
managers and others responsible for the management of employee benefit 
plan assets.

DATES: This interpretive bulletin is effective on October 17, 2008.

Interpretations, Employee Benefits Security Administration, (202) 693-
8500. This is not a toll free number.

SUPPLEMENTARY INFORMATION: On June 23, 1994, the Department of Labor 
(the Department) published Interpretive Bulletin Sec.  2509.94-1 (29 
CFR 2509.94-1) addressing the limited circumstances under which 
fiduciaries, consistent with the requirements of sections 404 and 404 
of Title I of the Employee Retirement Income Security Act (ERISA), may, 
in connection with investment decisions, take into account factors 
other than the economic interests of the plan. The guidance provided in 
this document, Interpretive Bulletin Sec.  2509.08-1, clarifies, 
through explanation and examples, that fiduciary consideration of non-
economic factors should be rare and, when considered, should be 
documented in a manner that demonstrates compliance with ERISA's 
rigorous fiduciary standards. This guidance modifies and supersedes the 
guidance provided in interpretive bulletin 94-1.

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

[[Page 61735]]

the Code of Federal Regulations as follows:

Subchapter A--General


1. The authority citation for part 2509 continues to read as follows:

    Authority: 29 U.S.C. 1135. Secretary of Labor's Order No. 1-
2003, 68 FR 5374 Feb. 3, 2003). Sections 2509.75-10 and 2509.75-2 
are also issued under 29 U.S.C. 1052, 1053, 1054. Section 2509.75-5 
is also issued under 29 U.S.C. 1002.

Sec.  2509.94-1  [Removed]

2. Part 2509 is amended by removing Sec.  2509.94-1.
3. Part 2509 is further amended by adding new Sec.  2509.08-1 to read 
as follows:

Sec.  2509.08-1  Supplemental guidance relating to fiduciary 
responsibility 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,'' that is, 
investments selected for the economic benefits they create apart from 
their investment return to the employee benefit plan. The guidance set 
forth in this interpretive bulletin modifies and supersedes the 
guidance set forth in interpretive bulletin 94-1 (29 CFR 2509.94-1).
    ERISA requires 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 Act 
specifically states, in relevant part, that:
     ``[A]ssets of a plan shall never inure to the benefit of 
any employer and shall be held for the exclusive purposes of providing 
benefits to participants in the plan and their beneficiaries.* * *'' 

    \1\ Sec. 403(c)(1), 29 U.S.C.A. 1103(c)(1).

     ``[A] fiduciary shall discharge his duties with respect to 
a plan solely in the interest of the participants and beneficiaries and 
for the exclusive purpose of providing benefits to participants and 
their beneficiaries.'' \2\

    \2\ Sec. 404(a)(1)(A)(i), 29 U.S.C.A. 1104(a)(1)(A)(i).

    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 to unrelated objectives, and may not 
select investments on the basis of any factor outside the economic 
interest of the plan except in very limited circumstances enumerated 
    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 
    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 
    ERISA's plain text does not permit fiduciaries to make investment 
decisions on the basis of any factor other than the economic interest 
of the plan. Situations may arise, however, in which two or more 
investment alternatives are of equal economic value to a plan. The 
Department has recognized in past guidance that under these limited 
circumstances, fiduciaries can choose between the investment 
alternatives on the basis of a factor other than the economic interest 
of the plan. The Department has interpreted the statute to permit this 
selection because (1) ERISA requires fiduciaries to invest plan assets 
and to make choices between investment alternatives, (2) ERISA does not 
itself specifically provide a basis for making the investment choice in 
this circumstance, and (3) the economic interests of the plan are fully 
protected by the fact that the available investment alternatives are, 
from the plan's perspective, economically indistinguishable.
    Given the significance of ERISA's requirement that fiduciaries act 
``solely in the interest of participants and beneficiaries,'' the 
Department believes that, before selecting an economically targeted 
investment, fiduciaries must have first concluded that the alternative 
options are truly equal, taking into account a quantitative and 
qualitative analysis of the economic impact on the plan. ERISA's 
fiduciary standards expressed in sections 403 and 404 do not permit 
fiduciaries to select investments based on factors outside the economic 
interests of the plan until they have concluded, based on economic 
factors, that alternative investments are equal. A less rigid rule 
would allow fiduciaries to act on the basis of factors outside the 
economic interest of the plan in situations where reliance on those 
factors might compromise or subordinate the interests of plan 
participants and their beneficiaries. The Department rejects a 
construction of ERISA that would render the Act's tight limits on the 
use of plan assets illusory, and that would permit plan fiduciaries to 
expend ERISA trust assets to promote myriad public policy 

    \3\ See letters from the Department of Labor to Jonathan Hiatt 
dated May 3, 2005; to Thomas Donahue dated December 21, 2007 (A.O. 
2007-07A); and to David Chavern dated June 27, 2008 (A.O. 2008-05A).

    A plan fiduciary's analysis is required to comply with, but is not 
necessarily limited to, the requirements set forth in 29 CFR 2550.404a-
1(b). In evaluating the plan portfolio, as well as portions of the 
portfolio, the fiduciary is required to examine the level of 
diversification, degree of liquidity, and the potential risk/return in 
comparison with available alternative investments. The same type of 
analysis must also be applied when choosing between investment 
alternatives. Potential investments should be compared to other 
investments that would fill a similar role in the portfolio with regard 
to diversification, liquidity, and risk/return.
    In light of the rigorous requirements established by ERISA, the 
Department believes that fiduciaries who rely on factors outside the 
economic interests of the plan in making investment choices and 
subsequently find their decision challenged will rarely be able to 
demonstrate compliance with ERISA absent a written record demonstrating 
that a contemporaneous economic

[[Page 61736]]

analysis showed that the investment alternatives were of equal value.
    A plan owns an interest in a limited partnership that is 
considering investing in a company that competes with the plan sponsor. 
The fiduciaries may not replace the limited partnership investment with 
another investment based on this fact unless they prudently determine 
that a replacement investment is economically equal or superior to the 
limited partnership investment and would not adversely affect the 
plan's investment portfolio, taking into account factors including 
diversification, liquidity, risk and expected return. The competition 
of the limited partnership with the plan sponsor is a factor outside 
the economic interests of the plan, and thus cannot be considered 
unless an alternative investment is equal or superior to the limited 
    A multiemployer plan covering employees in a metropolitan area's 
construction industry wants to invest in a large loan for a 
construction project located in the same area because it will create 
local jobs. The plan has taken steps to ensure that the loan poses no 
prohibited transaction issues. The loan carries a return fully 
commensurate with the risk of nonpayment. Moreover, the loan's expected 
return is equal to or greater than construction loans of similar 
quality that are available to the plan. However, the plan has already 
made several other loans for construction projects in the same 
metropolitan area, and this loan could create a risk of large losses to 
the plan's portfolio due to lack of diversification. The fiduciaries 
may not choose this investment on the basis of the local job creation 
factor because, due to lack of diversification, the investment is not 
of equal economic value to the plan.
    A plan is considering an investment in a bond to finance affordable 
housing for people in the local community. The bond provides a return 
at least as favorable to the plan as other bonds with the same risk 
rating. However, the bond's size and lengthy duration raises a 
potential risk regarding the plan's ability to meet its predicted 
liquidity needs. Other available bonds under consideration by the plan 
do not pose this same risk. The return on the bond, although equal to 
or greater than the alternatives, would not be sufficient to offset the 
additional risk for the plan created by the role that this bond would 
play in the plan's portfolio. The plan's fiduciaries may not make this 
investment based on factors outside the economic interest of the plan 
because it is not of equal or greater economic value to other 
investment alternatives.
    A plan sponsor adopts an investment policy that favors plan 
investment in companies meeting certain environmental criteria (so-
called ``green'' companies). In carrying out the policy, the plan's 
fiduciaries may not simply consider investments only in green 
companies. They must consider all investments that meet the plan's 
prudent financial criteria. The fiduciaries may apply the investment 
policy to eliminate a company from consideration only if they 
appropriately determine that other available investments provide equal 
or better returns at the same or lower risks, and would play the same 
role in the plan's portfolio.
    A collective investment fund, which holds assets of several plans, 
is designed to invest in commercial real estate constructed or 
renovated with union labor. Fiduciaries of plans that invest in the 
fund must determine that the fund's overall risk and return 
characteristics are as favorable, or more favorable, to the plans as 
other available investment alternatives that would play a similar role 
in their plans' portfolios. The fund's managers may select investments 
constructed or improved with union labor, after an economic analysis 
indicates that these investment options are equal or superior to their 
alternatives. The managers will best be able to justify their 
investment choice by recording their analysis in writing. However, if 
real estate investments that satisfy both ERISA's fiduciary 
requirements and the union labor criterion are unavailable, the fund 
managers may have to select investments without regard to the union 
labor criterion.

    Signed at Washington, DC, this 9th day of October 2008.
Bradford P. Campbell,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
[FR Doc. E8-24551 Filed 10-16-08; 8:45 am]