Recommendation: The Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) should clarify whether an Employee Retirement Income Security Act of 1974 plan may incorporate material ESG factors into the investment management for a qualified default investment alternative (QDIA). (Recommendation 1)

Agency: Department of Labor
Status: Open

Comments: DOL neither agreed nor disagreed with this recommendation. On April 23, 2018, while DOL was reviewing our report, the agency issued Field Assistance Bulletin 2018-01 regarding retirement plans' use of ESG factors. While this new bulletin specifically mentions the use of ESG factors in a QDIA and reiterates the conditions under which an investment option may generally be considered a QDIA, it focuses on the use of ESG factors for collateral benefits rather than on cases where ESG factors are considered in investment decisions because they have been determined by fiduciaries to be material to financial performance. For example, the new field assistance bulletin states that the QDIA regulations do not suggest that fiduciaries should select a QDIA based on collateral public policy goals. ESG factors can be used to address material risks, which might otherwise be ignored, and there is interest in considering such factors within a QDIA. The use of ESG factors in this manner can be distinct from pursuing collateral public policy goals. Additional clarification from DOL that explicitly addresses plans' use of financially material ESG factors in investment options designated as a QDIA could enhance the agency's effectiveness in assisting plan fiduciaries with understanding and fulfilling their obligations under ERISA. In June 2019, DOL stated that it would be appropriate to engage with stakeholders before reaching any conclusions about the necessity or appropriateness of issuing further guidance in this area. Additional information about DOL's efforts to engage with stakeholders, including the outcome of such efforts and rationale for any conclusions reached would help determine the effectiveness of the agency's actions.

Recommendation: The Assistant Secretary of Labor for EBSA should provide further information to assist fiduciaries in investment management involving ESG factors, including how to evaluate available options, such as questions to ask or items to consider. (Recommendation 2)

Agency: Department of Labor
Status: Open

Comments: DOL neither agreed nor disagreed with this recommendation. GAO believes that while DOL's new field assistance bulletin provides information on the limitations of using ESG factors for pursuing collateral benefits, additional clarifying information could help sponsors conduct due diligence in considering whether ESG factors are material to an investment's financial performance and, if so, how to address those material risks. DOL's written comments recognize that additional clarification could be appropriate, depending on responses to the new field assistance bulletin from the public. We appreciate the consideration of the need for additional information, particularly as some have noted the new field assistance bulletin could create a chilling effect that leads fiduciaries to avoid considering ESG factors that could address material risks in their investments, to the detriment of plan participants' best interests. In June 2019, DOL stated that it would be appropriate to engage with stakeholders before reaching any conclusions about the necessity or appropriateness of issuing further guidance in this area. DOL further stated that the agency added a new project to the Spring 2019 regulatory agenda related to proxy voting. Additional information about DOL's new project on proxy voting and efforts to engage with stakeholders, including the outcome of such efforts and rationale for any conclusions reached, would help determine the effectiveness of the agency's actions.