This article is, in large part, an unfortunate story about the perils of politicians and their use of the regulatory system to accomplish political objectives.

For decades, Republican and Democratic administrations engaged in a tug-of-war on the use of certain factors for the selection and monitoring of plan investments. Think of ETI—economically targeted investments; SRI—socially responsible investments; and ESG—environmental, social and governance factors.

The back-and-forth was done with low level, or sub-regulatory, guidance. Sub-regulatory guidance simply reflects the beliefs of that administration. It is not legal authority.

It was done that way until the first Trump administration, when the DOL issued a regulation that is seen as anti-ESG. Unlike sub-regulatory guidance, a regulation is legally binding. Part of the regulation was consistent with all of the low-level guidance over the years, that is, fiduciaries should focus on selecting investments based on economic considerations, that is, fiduciaries should focus on factors which are materials to a risk and return analysis (which the Trump-era regulation called “pecuniary factors”). However, it went on to prohibit QDIAs (“qualified default investment alternatives”) that used ESG factors to select investments. It also made it difficult for fiduciaries  to choose from among equally qualified investments if the “tie breaker” was that one of the equivalent investment managers used ESG factors.

Then, when the Biden administration came into office, it could only impose the Democratic policy (which favors ESG investing) by writing a new regulation, which it did. It took out the two anti-ESG provisions. In their place, the new regulation said that ESG factors could be used if they were material to the risk-and-return profile of an investment. Unfortunately—from a political perspective, the new regulation actually used the words “environmental, social and governance” in one place in its discussion of investment selection.

The Biden regulation was challenged in a Texas Federal District Court. Somewhat surprisingly, the judge, who is considered to be very conservative, found that the regulation was properly issued and within the authority of the DOL.

The case was appealed to the Fifth Circuit of Appeals, which remanded it back to the District Court for further consideration.

However, the new administration’s DOL has told the courts that it is dropping the defense of the lawsuit and would be issuing a new regulation to replace the Biden era rule.

So, where does that leave fiduciaries of ERISA-governed retirement plans and their advisers?

Notwithstanding the considerable effort, time and money spent by the government on this, the path forward for fiduciaries is what it has always been…to act in the best interest of providing retirement benefits to participants. That means selecting good quality, reasonably priced investments. In that process, fiduciaries should consider all factors that are material to the risk and return profiles of the investments. Where fiduciaries are evaluating pooled investment vehicles, such as mutual funds and CITs, they should make sure that the investment managers of those vehicles are only using investment selection criteria that are material to the risk-and-return profile of the investments. Or if you prefer, and which the new regulation will probably say, “pecuniary factors.” Secondary factors which are not material to performance, volatility, and other financial considerations, should not be used.

In some ways, the more things change, the more they stay the same. But the private sector has to weather stormy waters to get there.

By the way, plans can still offer investments based on non-pecuniary factors, but not as a part of the core lineup. Funds based on factors such as ethical considerations, religious standards, ESG and other collateral factors, can be offered through a mutual fund or brokerage window. The investments in a window are not considered to be selected by a plan’s fiduciaries and do not need to be monitored by the fiduciaries.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.