Whose Responsibility is Socially Responsible Investing?

We sometimes complain when the federal agencies that oversee retirement plans drag their feet and fail to issue badly needed guidance.  Occasionally, however, the reverse is true, and we get an answer to a question that few – if anyone – has asked, or perhaps even anticipated.  Sometimes it’s an answer that makes things more complicated, rather than easier.  This may be the case with the Department of Labor’s recent issuance of Interpretive Bulletin 2015-01, released by its Employee Benefits Security Administration (EBSA).   It addresses the issue of retirement plans and investment options that might be considered “socially responsible” or “economically targeted.”  IB 2015-01 became effective on October 26^th, the date of its publication in the Federal Register.

Socially responsible or economically targeted investments are loosely defined as those which, in addition to meeting the primary objective of generating sound returns for a participant or beneficiary, may have the potential to positively influence the growth of a community, or have a positive social impact.  EBSA’s clearly stated intention is that IB-2015-01 should make plan administrators more comfortable choosing plan investments that fall into this category. 

IB 2015-01 withdraws a prior interpretive bulletin on this issue, IB-2008-01, which EBSA now feels may have “unduly discouraged fiduciaries from considering so-called economically targeted or socially responsible investments.”  Notice 2015-01 notes that “Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”   

What kinds of things could be considered socially responsible or economically targeted investing?  The range is probably wide, but it’s not hard to come up with several examples that many would find meet that definition.  Because mutual funds are such meat-and-potatoes investing options for retirement plans, particularly participant-directed individual account investing, I’ll focus on those.

The characteristics that define a mutual fund as socially responsible or economically targeted can be measured both in terms of what they include, and what they exclude.  Some funds may invest in alternative or renewable energy companies, such as wind generation, geothermal, biodiesel, or ethanol production.  These funds might, due to this focus, exclude holdings in fossil fuels, such as coal mining or offshore oil drilling.  Some exclude holdings in companies associated with the nuclear power industry.

Some such funds exclude defense contractor stock.  Others exclude the stock of such high-performing companies as Apple, because factory working conditions in some of the countries where certain Apple products are made are considered substandard.  Some of these funds are actually titled in a manner that touts their emphasis on social consciousness, including such terms as “social choice” or “social equity,” as part of their formal naming.

A little bit of EBSA interpretive bulletin history is called for here.  In 1994, EBSA’s IB-94-01 stated that socially responsible or economically targeted investments were not incompatible with retirement plan investment selections, as long as such investments have “an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics.”  As a follow-up in 2008, a brief clause in IB-2008-01 seemed to be a vote of no-confidence for socially responsible or economically targeted investing.  It stated that “consideration of collateral, non-economic factors in selecting plan investments should be rare, and when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.”

EBSA now believes that its 2008 guidance may have put a chill on retirement plan fiduciaries selecting and offering such investments.  Actually, IB-2015-01 and an accompanying news release seem to have turned the 2008 guidance more or less on its head.  The news release states that while socially responsible or economically targeted investment considerations “may not accept lower returns or take on greater risks,” they are “more than just tiebreakers, but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.” 

Furthermore, an accompanying EBSA fact sheet addressing the documentation issue seems to directly counter IB-2008-01, stating that “no special documentation is presumptively required for such investments…” and that “the appropriate level of documentation would depend on the facts and circumstances.” 

Two things, at least, are troublesome here.  One is EBSA’s inconsistency over time in the emphasis it places on fiduciary caution, and the embrace of investment considerations that have little if anything to do with generating returns for participants and beneficiaries.   Second is the unmentioned, but no less real, matter of just what is “socially responsible.”  One need look no farther than America’s democratic political system to know that there is no fool-proof consensus on what is moral, ethical, or socially responsible. 

One citizen may think nuclear power is a destructive genie that should be kept corked in a bottle, and would shun any related investment.  Another, however, may believe that nuclear power should be made safer and promoted to help the nation move away from fossil fuels.  One investor may believe that only by maintaining a world-leading defense capability can the U.S. remain free and defend the interests of democratic peoples; therefore, invest in defense companies.  Another may believe that the military industrial complex bears responsibility for our involvement in conflicts around the globe, and owning an interest in them should be avoided.  I could certainly come up with more examples of such conflicting views.

Should a plan administrator or investment committee be encouraged to make such thumbs-up or thumbs-down decisions on investment availability?  Is it possible to be even-handed and take into consideration very divergent views on social issues when selecting an investment lineup?  Is it even fair to put plan fiduciaries in a position of feeling pressure to weigh issues of social responsibility in the selection of investment options? 

There are readily understood standards for selecting and continuing to monitor an investment for its financial suitability.  Picking investments that are compatible with a participant’s conscience is another matter altogether.  IB-2015-01’s suggestion that social responsibility considerations “are proper components of the fiduciary’s analysis … of investment choices” is quite likely to raise more questions than it answers.