Government Affairs Update

October 18, 2021


DOL Releases a New, Proposed Rule on ESG Investing and Proxy Voting

On Thursday, October 14, the Department of Labor (DOL) published its proposal in the Federal Register that would replace the ESG and proxy voting rules issued by the Trump administration last year (the 2020 rules). The proposal, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” was developed in response to Executive Orders issued by President Biden earlier this year on climate change and climate-based financial risk. Based on our initial review, it appears that EBSA seriously considered and thoughtfully addressed the comments and concerns raised by IRI and other industry groups on the 2020 rules. From a high-level perspective, the proposed rule is in line with IRI’s policy that ESG investments should be permitted, but treated the same as non-ESG investments, no better and no worse. The following are our initial key takeaways:

  • While the proposal does not expressly define “ESG,” the preamble and the operative text provide clear examples of “ESG” factors to help investment advisors and fiduciaries determine whether any particular fund or investment would be subject to the proposed rule.
  • Investment selection under the proposed rule is rooted in the related fiduciary obligations set forth in Section 404 of ERISA, making prudence and loyalty obligations paramount in investment selection.
  • The proposal recognizes that ESG factors in investment selection can be “financially material.” The impact of an ESG factor would be an appropriate consideration when evaluating particular investment options. Unlike the 2020 rules, the terms “pecuniary” and “non-pecuniary” have been omitted from the proposed rule.
  • QDIAs: The proposal would eliminate the 2020 rules’ prohibition on the use of ESG factors or investments as QDIAs. Instead, the general obligations of fiduciaries under ERISA Section 404 and the QDIA rules would govern the selection of QDIAs.
  • Tiebreaker: The proposed rule moves away from the “economically indistinguishable” standard included in the 2020 rules. As long as the fundamental fiduciary obligations where an investment has been determined by the fiduciary to be “financially material,” then both economic and non-economic factors may be considered in a tie-breaker situation.
  • Collateral Benefits: The proposal would also remove the additional documentation requirements set forth in the 2020 rules, providing instead that collateral benefits may be considered in the investment selection process following the fiduciary’s determination of its financial materiality. In doing so, it keeps the existing ERISA-based fiduciary obligations of the investment selection process as the primary and paramount standard of care. Once the determination of financial materiality of an investment has been made, collateral benefits may be considered.

In addition to the proposal itself, the DOL published a fact sheet, which can be found here, along with its press release. Comments on the proposal are due on December 13, 2021. IRI staff will be working closely with the Retirement Plans and Tax Committee in the coming weeks to more fully assess the proposal and to formulate our written comments.

Any questions should be referred to Emily Micale.

IRI Op-Ed Calls for Retirement Provisions in Reconciliation

CNBC published an op-ed authored by IRI President and CEO Wayne Chopus calling on Congress to retain the retirement security measures in the Build Back Better Act. The measure included in the bill would require businesses with 5 or more employees to offer and automatically enroll those employees into a workplace retirement savings plan. It would also require employers to offer employees with accumulated balances of $200,000 or more in a retirement account a choice to invest up to 50% of their vested balance in a protected lifetime income product.

The op-ed cited IRI-conducted research that found that of people over age 40, 51 percent have saved less than $50,000 for retirement and 57 percent saved less than 10 percent of their income. Chopus highlighted how the bill would improve the prospects of retirement security for many because “when employers offer a plan and automatically enroll employees, participation rates triple to 91% among new hires, compared with 28% under voluntary enrollment. Over time, 9 in 10 participants increase the amount they save, either automatically or on their own.” Another recent study found that the enactment of this legislation would “increase retirement savings by $7 trillion and create more than 60 million new retirement accounts – 98 percent of which would be among workers earning less than $100,000.” “The magnitude of what this legislation could accomplish,” said Chopus, “should spur our elected leaders to act now. […] We can address our nation’s retirement crisis, build economic equity, strengthen financial security and provide the means for workers to create sustainable lifetime income to last throughout their retirement years. Congress needs to use this unique opportunity to pass the retirement provisions the House has included in the reconciliation legislation.”

Congressional Democrats and the White House continue to negotiate the Build Back Better Act, with an eye towards reducing the total cost of the final package to an estimated $1.5 trillion to $2.1 trillion. IRI remains cautiously optimistic that this measure will remain in the package given the benefits it can produce to address the retirement insecurity of millions of America’s workers seeking to save for their retirement years. IRI is currently conducting outreach to key Congressional offices to educate and inform staff about the many benefits this measure offers to strengthening retirement security. IRI will continue to provide updates on the automatic contribution plans and arrangements provision and the Build Back Better Act.

Any questions should eb referred to Paul Richman or John Jennings.


House Financial Services Explores the Use of AI in Financial Sector

On October 13, the House Financial Services Task Force on Artificial Intelligence (AI) held a hearing entitled “Beyond I, Robot: Ethics, Artificial Intelligence, and the Digital Age.” The hearing was called, according to a memorandum, to examine possible solutions to ensuring the responsible use of AI to avoid discrimination and unintended market instability. In his opening statement, Task Force Chairman Bill Foster (D-IL) said, “We have to understand whether we should hold AI to standards that are higher than we would ordinarily expect of ordinary human-based decision-making processes. As we start defining frameworks for developing and performance testing AI, it seems possible that we’re starting to place requirements on AI that are more strict than we would ever place on human decision makers.” Task Force Ranking Member Anthony Gonzalez (R-OH) said in his opening statement, “It is vital though that we do not take steps backwards by overregulating this industry which may have a chilling effect on the deployment of these technologies. And if there are problems with AI and algorithms we should not abandon our push to innovate and move forward. It is through further innovation that we are likely going to be able to fix these issues and to improve the technology.”

IRI will continue to monitor the House Financial Services Committee for any action.

Any questions should be referred to John Jennings.


Nebraska Issues Bulletin on Annuity Training for Producers

The Nebraska Department of Insurance issued a bulletin to respond to questions regarding annuity training requirements for insurance producers wishing to sell annuity products. The “FAQs”-style bulletin has been updated to reflect the adoption of the NAIC’s latest amendments to its Suitability in Annuity Transactions Model Regulation.

Any questions should be referred to Sarah Wood.

New Mexico Releases Proposed Best Interest Regulation

The New Mexico Office of Superintendent of Insurance released their proposed best interest regulation and is seeking comments on the draft by November 15, 2021. The proposed regulation closely tracks the NAIC Suitability in Annuity Transactions Model Regulation, and deviations are mainly non-substantive in nature. The effective date proposed in the regulation was January 1, 2022, but IRI would seek an implementation date of six months after enactment. IRI will also express support for the proposed regulation unless other significant concerns are brought to our attention.

Any questions should be referred to Sarah Wood.