EBSA Proposed Rules

Interpretive Bulletin Relating to the Fiduciary Standard Under ERISA in Considering Economically Targeted Investments   [10/26/2015]
[PDF]
Federal Register, Volume 80 Issue 206 (Monday, October 26, 2015)
[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