You may have retirement plan clients who like the idea of their assets going to support worthy causes, such as companies that fight pollution, or local public works projects.
The U.S. Department of Labor chilled retirement plan fiduciaries' do-gooder instincts about nine years ago, in Interpretive Bulletin 2008-1. In that batch of guidance, issued while President George W. Bush was in office, DOL officials warned fiduciaries against putting any good causes before the interests of their clients.
While former President Barack Obama was in office, DOL officials issued an IB 2008-1 sequel, Interpretive Bulletin 2015-1. In IB 2015-1, DOL officials eased up on some of the IB 2008-1 wariness toward socially conscious investing at retirement plans.
But IB 2008-1 is still out there, it still shapes the IB 2015-1 rules, and it's one of the old DOL classics that could still come back in style.
Here's a short look at the IB 2008-1 rules, written by Frank J. Bitzer and Nicholas W. Ferrigno Jr.
"Economically targeted investments" are investments selected for the economic benefits they create apart from any investment returns they provide for an employee benefit plan.
DOL officials gave their views on how Section 403 and Section 404 of the Employee Retirement Income Security Act (ERISA) affect a plan fiduciary's efforts to make economically targeted investments in IB 2008-1.
Officials note in IB 2008-1 that ERISA requires a fiduciary to act solely in the interest of the plan's participants and beneficiaries, and for the exclusive purpose of providing benefits for the plan's participants and beneficiaries.
ERISA states that:
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"[A]ssets of a plan shall never inure to the benefit of any employer and shall be held for the exclusive purposes of providing benefits to participants in the plan and their beneficiaries."
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"[A] fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries."
DOL officials wrote in 2008-1 that ERISA's plain text does not permit fiduciaries to make investment decisions on the basis of any factor other than the economic interest of the plan.
Officials acknowledged, however, that, in some situations, two or more investment alternatives are of equal economic value to a plan. In those situations, officials said, fiduciaries can choose between the investment alternatives on the basis of a factor other than the economic interest of the plan.
DOL officials have interpreted the statute to permit this selection because:
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ERISA requires fiduciaries to invest plan assets and to make choices between investment alternatives;
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ERISA does not itself specifically provide a basis for making the investment choice in this circumstance; and
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the economic interests of the plan are fully protected by the fact that the available investment alternatives are, from the plan's perspective, economically indistinguishable.
Given the significance of ERISA's requirement that fiduciaries act "solely in the interest of participants and beneficiaries," DOL officials argued that, before selecting an economically targeted investment, fiduciaries must first conclude that the alternative options are truly equal, taking into account a quantitative and qualitative analysis of the economic impact on the plan.
ERISA's fiduciary standards expressed in ERISA Section 403 and ERISA Section 404 do not permit fiduciaries to select investments based on factors outside the economic interests of the plan until they have concluded, based on economic factors, that alternative investments are equal, officials said.
Officials said a less rigid rule might lead fiduciaries to use ERISA trust assets to "promote myriad public policy preferences," and to compromise or subordinate the interests of plan participants and their beneficiaries.
DOL officials stated that a plan fiduciary's analysis is required to comply with, but is not necessarily limited to, the requirements set forth in Labor Regulation Section 2550.404a-1(b).
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In evaluating the plan portfolio, as well as portions of the portfolio, the fiduciary must examine the level of diversification, the degree of liquidity, and the potential risk/return in comparison with available alternative investments, officials said.
The fiduciary must also perform the same type of analysis when choosing between investment alternatives. Potential investments should be compared to other investments that would fill a similar role in the portfolio with regard to diversification, liquidity, and risk/return, officials said.
In light of the rigorous requirements established by ERISA, DOL officials said they believed that fiduciaries who relied on factors outside the economic interests of the plan in making investment choices and subsequently found their decisions challenged would rarely be able to demonstrate compliance with ERISA, absent a written record demonstrating that a contemporaneous economic analysis showed that the investment alternatives were of equal value.
Examples
