The rule comes after two rules promulgated late in the Trump administration that said retirement plan fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk and outlined a process a fiduciary must undertake when making decisions about casting a proxy vote.
In January, Republican attorneys general from 25 states, filed a lawsuit — State of Utah et al. v. Su et al. — in U.S. District Court in Amarillo, Texas, arguing that the Labor Department's rule undermines key protections for retirement savers, oversteps the department's authority under the Employee Retirement Income Security Act and is arbitrary and capricious.
The current rule and the Trump administration rule are largely the same, Mr. Iwry, former senior adviser to the secretary of the Treasury and deputy assistant secretary for retirement and health policy and currently a visiting scholar at University of Pennsylvania's The Wharton School and non-resident senior fellow at the Brookings Institution, said in an amicus brief filed April 5 in support of the Labor Department. Covington & Burling LLP served as legal counsel on the brief.
Both the current rule and Trump administration rule, which Mr. Iwry referred to as the "prior rule," are within the bounds of ERISA because they make clear that a fiduciary is not permitted to make an investment management decision for any other reason aside from the exclusive purpose of maximizing risk-adjusted financial returns.
"With respect to ESG factors, the current rule accurately states that, in appropriate circumstances, such factors may be relevant to a risk-return investment analysis," Mr. Iwry said in the brief. "Because the ultimate touchstone of that analysis is a financial goal — i.e., achieving the optimal risk and return profile — this approach is fully consistent with the statute, binding case law, and, indeed, the prior rule."
He added, "While the prior rule was silent on what particular factors might be relevant to a risk-return analysis, the preamble to the prior rule makes clear that failing to consider risk-return factors, including ones that fall under the umbrella of ESG, could in some circumstances amount to a violation of the duty of prudence under ERISA."
When it comes to the tiebreaker provision, Mr. Iwry said both rules allow fiduciaries to break a tie "between two potential investment choices by taking into account collateral purposes — which could, but need not, be ESG purposes — provided that risk-adjusted investment returns are not sacrificed."
The current rule "uses slightly different language to articulate when a 'tie' can be declared and removes a special requirement in the prior rule to document the tie," Mr. Iwry noted. "But while the current rule's textual formulation differs slightly from the prior rule's, the basic substantive requirement does not."
Mr. Iwry urged the court to toss out the plaintiffs' case. "The current rule's provisions relating to the consideration of ESG factors, including the tiebreaker provision, do not mark a meaningful substantive departure from the prior rule, and are reasonable, lawful, and fully consistent with ERISA's structure," he said.
A similar lawsuit challenging the rule was filed in February by two Wisconsin-based 401(k) plan participants.
