In what may be a final push before the elections, the Republican-led House of Representatives on Sept. 18 approved legislation to prevent the use of environmental, social and governance (ESG) factors when making investment decisions for retirement plans.
In this latest salvo, the House on a near party-line vote of 217-206 (with three Democrats voting in favor) approved H.R. 5339, the Protecting Americans’ Investments from Woke Policies Act. The bill was originally introduced by Rep. Rick Allen (R-Ga.) on Sept. 5, 2023, as the Roll Back ESG to Increase Retirement Earnings (RETIRE) Act, but was amended to include three additional bills prior to going to the House floor (more on that below).
“As families continue to struggle to afford basic necessities like gas and groceries due to record inflation, the last thing hardworking taxpayers need is for their retirement savings to be depleted due to politically motivated mismanagement,” Rep. Allen stated during the House’s consideration. “This bill rolls back this overreaching rule and ensures ERISA retirement plan sponsors prioritize financial returns over ESG factors when making investment decisions on behalf of their clients,” he added.
In general, the legislation seeks to codify a Trump administration rule that was later overturned by the Biden administration’s Department of Labor. The Biden White House contended that the rule issued in 2020 under the Trump administration had a “chilling effect” on retirement investment advisers otherwise inclined to consider ESG factors when making investment decisions, even if the advisor determined that these factors were material to investment decisions.
H.R. 5339 generally requires fiduciaries of employer-sponsored retirement plans to make investment decisions based only on pecuniary factors (i.e., factors that a fiduciary prudently determines are expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan's policies and objectives).
The legislation, however, does include some leeway, stating that if a fiduciary is unable to distinguish between investment alternatives on the basis of pecuniary factors alone, the fiduciary may use non-pecuniary factors as the deciding factor, provided they document, among other things, why pecuniary factors were not sufficient to select a plan investment.
Prior to considering H.R. 5339, Republican lawmakers added three additional bills to the legislation that are loosely tied to ESG investing. They include the following:
- H.R. 5337, the Retirement Proxy Protection Act. Sponsored by Rep. Erin Houchin (R-Ind.), the legislation clarifies that the decision to exercise a shareholder’s right is subject to the prudence and loyalty duties under ERISA. It also states that proxies held by ERISA plans must be voted in the economic interest of the plan, and not used to advance “radical policies.”
- H.R. 5338, the No Discrimination in My Benefits Act. Sponsored by Rep. Bob Good (R-Va.), the bill declares that race, color, religion, sex, or national origin may not be taken into consideration when selecting a fiduciary, counsel, employee, or service provider of an ERISA plan.
- H.R. 5340, Providing Complete Information to Retirement Investors Act. Sponsored by Rep. Jim Banks (R-Ind.), the legislation would implement a notice requirement on defined contribution plans to explain the difference between choosing from investments selected by ERISA fiduciaries and choosing from investments through a brokerage window.
The legislation will now go to the U.S. Senate, where it faces an uncertain future.
The Biden Rule
As to what prompted this legislation, in December 2022, the DOL under the Biden administration issued a final rule rescinding the Trump rule, and instead, finalized a rule allowing fiduciaries to consider collateral benefits when choosing among or between investment alternatives.
That rule – officially titled Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights – took effect on Jan. 30, 2023. The regulation permits – but does not require – plan fiduciaries to consider the potential financial impact of ESG factors alongside other financial considerations when they select investments to offer within a retirement plan and exercise shareholder rights, such as proxy voting.
When the Biden administration’s rule was finalized, Congress attempted to block it under the Congressional Review Act by passing a resolution stating that it could not go into effect, but President Biden vetoed the resolution. The Republican-led House attempted to override the veto, but fell well short of the votes needed.
Not surprisingly, the Biden administration has already issued a statement opposing H.R. 5339, noting that it would “severely restrict the ability of fiduciaries of job-based retirement plans to make informed investments on behalf of plan participants and beneficiaries.”
In noting that ERISA already requires fiduciaries to act solely in the interest of plan participants and beneficiaries, the statement argues that “this bill undermines that longstanding framework by preventing fiduciaries from considering certain material factors that may affect the best financial interests of ERISA plan participants and beneficiaries. Artificially limiting fiduciaries’ ability to consider material information in making sound investments will reduce savings and retirement security for Americans and runs contrary to the purpose of ERISA.”
Pending Litigation
In the meantime, the DOL’s rule continues to be the subject of (at least) two legal challenges (in addition to a suit brought against American Airlines). Among those are a suit brought in January 2023 by a coalition of 25 State Attorneys General (along with a plan sponsor and an unrelated plan participant) before the U.S. District Court for the Northern District of Texas, along with a suit filed by DC plan participants in February 2023 before the U.S. District Court for the Eastern District of Wisconsin.
The AG suit in Texas was dismissed last fall, but after the U.S. Supreme Court’s decision setting aside the so-called Chevron doctrine, the U.S. Court of Appeals for the Fifth Circuit remanded the case back to the district court to reconsider its decision. As last checked, the participant suit in Wisconsin is still pending; that case is Braun and Luehrs v. Walsh.
Both suits make similar arguments, contending, among other things, that the ESG rule violates the Administrative Procedure Act and ERISA, and is arbitrary and capricious.
The text of H.R. 5339 as amended can be found here.
