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Rep. Rick Allen (R-GA), chair of the Subcommittee on Health, Employment, Labor, and Pensions, has introduced legislation – the “Protecting Prudent Investment of Retirement Savings Act” – amending ERISA to incorporate (more or less) key provisions of the Trump 1.0 Department of Labor ESG (environmental, social, and governance) investments and proxy voting regulations.
ESG investments
The bill would provide that, with respect to a plan investment, a fiduciary complies with ERISA’s exclusive purpose rule (duty of loyalty) “only if the fiduciary’s action … is based solely on pecuniary factors.” Non-pecuniary factors may be considered if the fiduciary “is unable to distinguish between or among investment alternatives … on the basis of pecuniary factors alone” and certain other requirements are met.
A participant-directed defined contribution plan may generally (and subject to certain requirements) include “an investment option … that … promotes, seeks, or supports one or more non-pecuniary benefits or goals,” but may not include such an option as part of the plan’s default investment.
For these purposes, “pecuniary factor” means “a factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and … funding policy.”
No discrimination in selection of plan officials and service providers
The bill would add a provision to ERISA’s general fiduciary rules requiring fiduciaries to select “any fiduciary, counsel, employee, or service provider of the plan … without regard to race, color, religion, sex, or national origin.”
Proxy voting
The bill provides that ERISA “does not require the voting of every proxy or the exercise of every shareholder right.”
Under the bill, when deciding whether and how to exercise a shareholder right (e.g., voting a proxy), the fiduciary must:
Act solely in accordance with the economic interest of the plan and its participants
Consider any costs involved
Evaluate material facts
Maintain a record of any proxy vote or related activity (“including any attempt to influence management”)
And the fiduciary may not subordinate participant interests “to any non-pecuniary objective, or promote non-pecuniary benefits or goals.”
The bill provides that ERISA’s prudence rule applies to the selection of any proxy advisory firm (or similar entity). And where proxy voting authority has been delegated to an investment manager or a proxy advisory firm, the “plan fiduciary shall prudently monitor the proxy voting activities of such investment manager or advisory firm.”
Proxy voting policies/safe harbors
The plan’s fiduciary “may adopt a proxy voting policy, including a safe harbor proxy voting policy, providing that the authority to vote a proxy shall be exercised pursuant to specific parameters designed to serve the economic interest of the plan.”
In this regard, the bill specifies two safe harbor proxy voting policies:
A policy that “limits voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the business activities of the issuer or are expected to have a material effect on the value of the plan investment.”
A policy “that the fiduciary will refrain from voting on proposals … when the assets of a plan invested in the issuer relative to the total assets of such plan are below 5 percent.”
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Similar legislation passed the House in 2024, but approval by the Senate is thought to be unlikely. Action by the Trump 2.0 DOL on these issues is, however, very much a possibility.
We will continue to follow these issues.