Why Are 25 State Attorney Generals Suing the DOL?

A recent U.S. Department of Labor (DOL) rule that went into effect is facing a legal challenge as attorney generals from 25 states argue that it violates Employee Retirement Income Security Act of 1974's (ERISA’s) mandate that asset managers serve as fiduciaries in managing retirement plan assets. 

Why are ESG factors a point of contention?

The Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule went into effect on January 30, 2023, and allows retirement plan fiduciaries to consider Environmental, Social, and Governance (ESG) factors when choosing investments. The states argue the DOL rule “contravenes Erisa's clear command that fiduciaries act with the sole motive of promoting the financial interests of plan participants and their beneficiaries.”  

In their suit, the states assert that the new DOL rule would diminish their state revenues and lead to lost jobs due to reduced investments in fossil fuel companies. They view this rule as the Biden administration’s move to enforce its larger climate change agenda as it would result in more investments being directed toward companies that are more likely to take steps to lower their carbon footprints. 

401(k) plan participants have also filed suit to overturn the ruling and House Republicans have introduced a bill that would outright ban ESG factors from being considered for investing in retirement plan accoounts. Supporters of the DOL rule see ESG investing as advantageous to the beneficiaries, thereby putting it in their best interest to grant retirement fund managers more freedom in considering ESG factors. 

Leverage ML-technologies to keep up with compliance changes

Compliance professionals with institutional clients may find it challenging to keep up with changes to IMAs or addenda in normal market conditions. When changes occur to either ERISA regulation or the interpretation of those regulations, you may find yourself inundated with new documents. Leveraging new technologies, such as machine-learning assisted requirements analysis, can help. The focus on ESG is likely to remain in the political landscape for some time. We will continue to follow this legal battle and keep you updated.