The U.S. Department of Labor (DOL) recently issued a new interpretive bulletin for fiduciaries of employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) on investing benefit plan assets in economically targeted investments.

“Economically targeted investments” are investments that are selected for benefits they create apart from their investment return for the plan. Economically targeted investments include investments designed to address social conditions such as affordable housing, environmental factors, or which are intended to aid a specific local economy or provide a needed service to a specific community. The bulletin rescinds a 2008 bulletin and reinstates a 2004 bulletin on the same subject. While the new guidance does not change the existing ERISA fiduciary standard, it provides some protection for a plan fiduciary’s selection of investments that are focused on not only investment return but also social or corporate responsibility.

ERISA requires fiduciaries to act solely in the interest of plan participants and beneficiaries and to diversify plan investments so as to minimize the risk of large losses, unless under the circumstances, it is clearly prudent not to do so. These fiduciary duties apply to the selection of benefit plan investments or the options made available to employees for investment of defined contribution (such as 401(k) and 403(b)) plan assets.

In 2004, the DOL indicated that a fiduciary decision to select an investment based on benefits other than its investment return would not be prudent unless the investment is expected to provide an investment return commensurate to an alternative investment with the same risk. Thus, the 2004 guidance provided that plan fiduciaries should not select an economically targeted investment unless the investment provided a similar return with the same degree of risk as other investments available to the plan.

The 2015 bulletin refers to this as the “all things being equal” test, under which a fiduciary decision to invest in an economically targeted investment is prudent only if the investment has an equal or better return with the same amount of risk as other available investments, or offers the same return with lesser risk than other available investments. A 2008 interpretive bulletin further explained that instances in which fiduciaries consider factors unrelated to a plan’s investment returns should be rare, and when considered, should be documented in a manner that demonstrates compliance with ERISA’s fiduciary standards.

In rescinding the 2008 bulletin, the DOL indicated that it believes it may have unnecessarily dissuaded fiduciaries from pursing investment strategies that consider economically targeted investments that are equal to or superior than more traditional investments. The 2015 bulletin provides that economically targeted investments may have benefits to be factored into a fiduciary’s analysis apart from only being treated as a tie breaker against other investment alternatives. The 2015 bulletin also provides that the selection of an economically targeted investment does not require a different documentation process from more traditional benefit plan assets. However, by reinstating the 2004 bulletin, in order for fiduciaries to select an economically targeted investment for an employee benefit plan, they must determine that it is in the best interests of the plan’s participants and beneficiaries to forgo all other available investments.

If you have further questions about the proposed regulations, please contact Brian M. Pinheiro, Jean C. Hemphill, Diane A. Thompson, Robert S. Kaplan, or the member of the Employee Benefits and Executive Compensation Group with whom you regularly work. 

Copyright © 2015 by Ballard Spahr LLP.
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