Responsible investing: Now it can be part of your employee pension plan

Such considerations no longer have "cooties"

For more than seven years, many Colorado business owners keen on offering responsible investment options in employee retirement plans have been dissuaded by U.S. Department of Labor (DOL) regulations.

More colorfully, Secretary of Labor Thomas Perez described the impact of DOL rules implemented in 2008 as giving "cooties" to responsible investing strategies. He said this resulted in a "chilling effect" on widespread adoption of investments that strive for positive community impacts and integration of environmental, social and governance (ESG) analysis.

That's right, the rules actually drove a cabinet member to utter the word “cooties” in an official capacity.

Today, however, investments that consider such factors are no longer taboo for business owners who adhere to the Employee Retirement Income Security Act of 1974 (ERISA). Thanks to new DOL guidance announced by Perez in late October, the law once again reflects rules originally put in place in 1994 that allowed for plan fiduciaries to weigh non-financial factors in considering investment choices, as long as the investment offered similar risk and return potential.

As such, the late-2015 move freed impact-minded business owners to consider responsible investing options—and respond to employee requests for such choices—in company-sponsored retirement plans without fear of charges that they aren't being responsible plan sponsors.

More than 20 years of rules

Fiduciary standards are outlined in ERISA, where rules provide guidance on many employee benefits, including retirement plans and pensions, and must be followed by companies with more than 25 employees. Maintained by the DOL, the regulations refer to responsible investments as economically targeted investments (ETIs), defining them as investments that create "collateral" benefits beyond investment returns.

Prior to 2008, fiduciary regulations regarding 401(k) plans, pension plans and other employee-sponsored plans were rooted in a 1994 rule that said that ETIs may be employed as long as the return expectations, risk profile and diversification elements conformed to the plan’s investment policy. The 1994 rule also clearly stated that potential returns or risk may not be sacrificed for non-financial impacts.

In 2008, DOL officials issued guidance that trumped the 1994 rules. The regulations enacted then said that "consideration of non-economic factors should be rare" and in "compliance with ERISA's rigorous fiduciary standards."

Acknowledging concerns that such language hindered plan sponsors from exploring responsible investments, the DOL issued a revision late last October. The new standards stress that investment returns are paramount, but that non-financial matters such as ESG factors may be:

* used as a tie-breaker between investments with similar profiles

* important considerations for fiduciaries as they weigh an investment’s risk factors and potential return

Reflecting the broader investment landscape

Away from the ERISA realm, ESG analysis has evolved since 2008, and investor demand, in turn, has grown. According to The Forum for Sustainable and Responsible Investment, the professional association known as US SIF, slightly more than $2.7 trillion in assets were invested in sustainable and responsible investments in 2007. At that time, ESG analysis was primarily used to screen out holdings based on social and environmental factors—a process commonly referred to as negative screening.

By 2014, as reported in its most recent study, US SIF said that assets under management in sustainable and responsible investments totaled nearly $6.6 trillion. Furthermore, ESG analysis is currently used to identify degrees of constructive impact—not simply in a negative fashion.

Essentially, by giving the green light to company-sponsored investment plans, the DOL validated what many in the responsible investment world have been saying for years: there's more to investment returns than the singular focus on quarterly profits. Now, individuals who rely on an employer's retirement plan may have more of a chance to integrate such a philosophy in their long-range savings efforts.

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