Legislation to Restrict ESG Investing in Retirement Plans Resurfaces

As the Department of Labor works in court to defend its rule allowing the use of environmental, social and governance (ESG) factors by fiduciaries when selecting plan investments, legislation to restrict the use of ESG has been reintroduced in Congress, albeit with modifications.  

Rep. Greg Murphy, M.D. (R-NC) on March 21 introduced the Safeguarding Investment Options for Retirement Act (H.R. 7780), legislation to prohibit tax-advantaged retirement plan trustees from considering factors other than financial risk and return when making investment decisions on behalf of plan participants and their beneficiaries.

The bill was cosponsored by Reps. Mike Kelly (R-PA), Claudia Tenney (R-NY) and Beth Van Duyne (R-TX) and was referred to the House Ways and Means Committee. 

“Retirement plans, like 401(k)s, that are tax-advantaged to help individuals save for retirement should be managed to maximize return, not to invest in risky holdings like those propped up by ESG factors,” Rep. Murphy said in a statement. “Americans' nest eggs should be built on a solid foundation that confers the greatest growth probability, not investments that are unstable and whitewashed with fake ethical and sustainability scores. Such an endeavor may be noble for those willing to pursue it independently but not managed plans that millions rely on for retirement.”

Rep. Murphy had previously introduced the Safeguarding Investment Options for Retirement Act in October 2022, but that version provided more leeway for fiduciaries to consider “non-pecuniary” goals, provided that the fiduciary otherwise satisfied the pecuniary duties of the legislation and does not include such an investment as a default investment.

H.R. 7780 apparently removes that leeway, and instead would amend the Internal Revenue Code (and not ERISA) to specify that fiduciaries may only consider “risk and return” factors when making investment decisions for defined contribution plans, including 401(k), 403(b) and 457 plans.

In fact, the word “pecuniary” is not even used in this version of the bill, but instead states that “the term ‘exclusive benefit’ shall include a requirement that the corpus and income of the trust are invested exclusively on the basis of financial risk and return factors.”

In addition, the bill specifies that the prohibited transaction provisions in the legislation would be “administered exclusively by the Secretary of the Treasury or the Secretary’s designate.” 

“Built into our tax code are strict protections for seniors that require retirement plan trustees to make decisions for the exclusive benefit of retirees and beneficiaries. Congress must examine ways to strengthen these safeguards to protect seniors from dubious ESG investments that put their retirement at risk,” stated House Ways and Means Committee Chairman Rep. Jason Smith (R-MO).

The Ways and Means Committee already held a hearing on the topic of ESG in November 2023, where members traded frequent barbs over the use of ESG in retirement plan investments.  

DOL Responds

In the meantime, the Department of Labor (DOL) also on March 21 filed a brief to the U.S. Court of Appeals for the Fifth Circuit in response to a suit by more than two-dozen red-state attorneys general who are challenging a lower district court ruling that upheld the DOL’s rulemaking. 

“The rule reaffirms the Department’s longstanding view that ERISA permits fiduciaries to consider collateral factors—that is, factors unrelated to the expected risk and return of an investment—only as a tiebreaker in choosing among investments that ‘equally serve the financial interests of the plan,’” the DOL stated in its brief to the Fifth Circuit. 

The U.S. District Court for the Northern District of Texas in September 2023 ruled against the coalition of attorneys general, concluding that the Labor Department didn’t exceed its regulatory limits or violate federal benefits law in establishing the regulation.  

At this point, several bills have been introduced in both the House of Representatives and the U.S. Senate that either seek to restrict ESG investing in retirement plans, or that endorse the concept.

The DOL in November 2022 released its final rule—“Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”—stipulating that plan fiduciaries may (but not must) consider ESG factors when they are expected to have an impact on investment outcomes. The rule took effect on Jan. 30, 2023.

The text of H.R. 7780 is available here.