by Ari Sonneberg and Barry Salkin
On the heels of the Department of Labor’s announcement that it is rescinding the Biden Administration DOL guidance cautioning 401(k) plan sponsors from offering cryptocurrency investment options to plan participants, the Trump Administration has indicated that it will also take action to rescind the final rule issued by the DOL in 2022 providing that fiduciaries can consider environmental, social and governance (ESG) factors, as well as other collateral benefits in making retirement plan investment decisions.
In a May 28th letter submitted to the Clerk of Court for the U.S. Court of Appeals for the Fifth Circuit (the “Court”), Trump Administration attorney Daniel Winik informed the Court that the administration intends to engage in rulemaking, set to appear on the DOL’s spring regulatory agenda, in relation to the 2022 final rule. The letter was sent in connection with the pending challenge to the 2022 final rule in the case of State of Utah v. Chavez-DeRemer, Docket No. 23-11097 (5th Cir. Oct 30, 2023). The DOL had requested an indefinite extension of time from the court to consider what action it should take with respect to the 2022 final rule, but the Fifth Circuit rejected that request. It is not clear whether the DOL intends to rescind the 2022 final rule and restore the rule from the first Trump Administration, or to issue a new rule.
There are currently several active lawsuits by retirement plan participants alleging breach of fiduciary duty by plan sponsors for losses related to investment decisions made in consideration of ESG factors. Perhaps most notably, Spence v. American Airlines, Inc., et al, Docket No. 4:2023cv00552 – Document 143 (N.D. Tex. 2024), in which plaintiffs alleged that plan fiduciaries violated their duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA), by including in the plan funds managed by its primary investment manager that pursued non-financial and non-pecuniary ESG policy goals by way of proxy voting and shareholder activism. The District Court in American Airlines found that while the duty of prudence was not violated because the conduct of the fiduciaries at least met current industry standards, the duty of loyalty had been breached. The case is currently in the damages phase.
Earlier this year, we wrote a Law Alert (available here) discussing the recent rocky history of the concept of considering ESG factors in retirement plan investment decision making. That alert discussed in detail the first Trump Administration final rule that, while not explicitly mentioning ESG, required fiduciaries to justify any decision to take into account non-pecuniary factors in choosing plan investments, as well as the ensuing Biden Administration final rule that deemed ESG factors as just another set of considerations for fiduciaries, no different from pecuniary considerations, and removed the procedural requirements surrounding the consideration of ancillary investment-related factors found in the prior Trump final rule. As the political tides turned, so now, again, has the fate of DOL regulation related to the consideration of ESG factors by fiduciaries in retirement plan investments. Ultimately, however, ERISA’s requirement that fiduciaries act in the best interest of plan participants remains constant, and the results of pending litigation in this area may be the arbiter of how plan fiduciaries approach the consideration of ESG and other ancillary factors in selecting retirement plan investments.
