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SRIs Part Two: Follow the Bouncing Ball – DOL’s Reinterpretation of the Rules for Social Investing

Updated: Sep 9, 2019


In Part One of this series, we generally discussed socially responsible investments (SRIs) and environmental, social, and corporate governance (ESG) factors in plan investing under ERISA under DOL Field Assistance Bulletin 2018-01 (FAB 2018-01). We finish in this post with a discussion of the inclusion of ESG factors in investment policy statements and how SRIs can be included in 401(k) investment lineups.


Do investment policy statements have to include ESG factors? DOL’s answer is “no.” ESG factors, tools, and metrics do not have be used to evaluate investments or be made a part of an investment policy statement. Another way to say this is that if a plan decides not to consider ESG factors, the DOL does not regard the decision as having fiduciary responsibility implications.


However, in light of some of the research information referred to in our previous post (as well as what our colleague Ed Lynch’s forthcoming series will point out) about a large and growing body of academic and industry publications indicating the properly applied ESG factors can actually enhance the risk/return profile of investment portfolios, one wonders though whether the ERISA plaintiff’s bar might come to a different conclusion.



Might they, for example, argue that it is imprudent notto consider all of the factors reasonably relevant to an investment decision and that it is not reasonable to exclude ESG factors if they bear on the economic merits of the investment.

Because a field assistance bulletin is a sub-statutory/sub-regulatory guidance that does not enjoy much deference in the courts, consulting with an ERISA attorney about their inclusion or exclusion from a plan’s investment policy statement might be worth the time and expense.


Does the FAB permit SRIs in 401(k) plan investment lineups?


Given general DOL reticence about SRIs, it’s surprising the FAB provides daylight for their inclusion in 401(k) plan lineups if certain conditions are met.


These are:

  • The plan has an investment platform that allows participants to choose from a broad range of investment alternatives

  • The offered SRI fund is prudently selected, well-managed, and properly diversified

  • The SRI fund is added to the available options as part of a prudently constructed investment lineup (without requiring the plan to remove or forgo adding other non-SRI-themed investment options to the platform)

  • The SRI fund is not provided as a qualified default investment alternative (QDIA)


The broad range of investment alternatives requirement mentioned above (first bullet) is likely to be satisfied by plans that are also satisfying the ERISA 404(c) participant-directed account rules. The diversification requirement (second bullet) should likely be satisfied by reference to the criteria normally described in a plan’s investment policy statement.


The requirement relating to the addition of the SRI fund to a prudently constructed investment lineup (third bullet) is a bit trickier. It requires this be done without displacing other non-SRI-themed investment options. It would seem this would prevent removing a non-SRI fund and replacing it with an SRI fund (e.g., an SRI small cap fund cannot replace a non-SRI small cap fund. Also, the consideration of the removal and addition of non-SRI and SRI funds should be carefully documented to refute claims the investment platform was not prudently constructed.


Finally, an SRI cannot be a QDIA. Many plans will want to formalize this and the other conditions in their existing investment policy statements as the first step in the process of adding SRIs to their plans.


If you are interested in SRIs, we have prepared a checklist to help with this process, just send us an email at info@fiduciaryplangovernance.com to request it.


For those plan sponsors that do not take on the risks associated with including ESG options and have uncertainty about jumping through the fiduciary hoops implicit in the new guidance, there are two options: (1) not offering ESG investments or (2) adding brokerage windows that allow participants to make ESG investments. In the later case, plan fiduciaries would not have fiduciary responsibility for investments made by participants. Employers who are interested in ESG investments are well advised to seek experienced investment and legal counsel when considering them.


Please contact info@fiduciaryplangovernance.com for information regarding this post, for inquiries about FPG services or for information on investment management and advisory services from our related company, Dietz & Lynch Capital.


Chuck Humphrey focuses is practice on employee benefits and is the principal of Law CGH Benefits Law Firm, Buffalo, New York, a consultant to Fiduciary Plan Governance, LLC, and the author of The Fiduciary Responsibility eSource, available at ERISApedia.com. He may be reached at chumphrey@cghbenefitslaw.com or 716-465-7505.

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