Flip A Coin?—New Congressional Efforts To Prohibit ESG In ERISA Plan Investment Selection And Proxy Voting

This year, there has been a continued increase in initiatives promoting an anti-ESG approach to investment selection and proxy voting for ERISA plans. The U.S. Department of Labor (DOL) announced in May that it will no longer defend the rules the Biden administration adopted in 2022 (which have been the subject of ongoing litigation brought by Republican state attorneys general), and it will instead issue a new regulation that reflects a shift in policy in the Spring. Separately, Congressional Republicans have proposed legislation to amend ERISA's fiduciary standards to exclude ESG considerations from plan investment selection and proxy voting. In April, Rep. Rick Allen (R-Ga.) introduced the “Protecting Prudent Investment of Retirement Savings Act” (H.R. 2988), and last week, Sens. Bill Cassidy (R-La.) (who is the Chair of the Senate Committee on Health, Education, Labor and Pensions (HELP)) and Jim Banks (R-Ind.) proposed the “Restoring Integrity in Fiduciary Duty Act” (S. 3086). The bills would essentially codify the first Trump administration's 2020 rules by (i) requiring fiduciaries to only consider “pecuniary” factors when making investment decisions, (ii) narrowing the tiebreaker scenario, (iii) barring non‑pecuniary default options in participant‑directed plans and (iv) codifying an approach to shareholder rights that permits not voting proxies under specified “safe harbor” policies.

Although broadly aligned, the bills diverge in important ways, most notably in the Senate's prescribed “coin flip” tiebreaker standard and its explicit bar on expending resources to weigh non‑pecuniary factors in dead‑heat scenarios.

Comparison: Senate Bill (S.3086) vs. House Bill (H.R. 2988)

• Pecuniary Baseline and Anti‑Subordination – Both bills would statutorily confine fiduciary analysis to pecuniary factors and disallow any intentional trade-off of return or risk for non-pecuniary aims. While current DOL standards anchor decisions in a risk/return assessment, they do not categorically exclude considering non-pecuniary elements where they bear on economic outcomes or where they are part of a documented tiebreaker. S.3086's definition of “material” would further limit permissible considerations by expressly excluding furtherance of nonpecuniary goals, and its “no resources” requirement would chill even incidental evaluation of such factors in dead-heat scenarios (as described below).
• More Prescriptive Tiebreaker Standard – Longstanding DOL guidance (which was reaffirmed in the 2022 rules) recognizes a tiebreaker standard that says a plan fiduciary is not prohibited from considering collateral benefits other than investment returns when evaluating financially equivalent investments. H.2988 permits use of non‑pecuniary factors as a tiebreaker; however, it imposes additional documentation requirements pertaining to process and alignment to participants' financial interests. S.3086 goes even further by outright prohibiting weighting non‑pecuniary factors in scenarios where a fiduciary is unable to distinguish between investment alternatives on the basis of financial characteristics alone and instead mandates a random‑choice “capita aut navia” method (basically, a coin flip) for making a selection. Such a choice must be accompanied by detailed documentation and an affirmative showing that no resources were expended on non‑pecuniary weighting.
• Default Investments (i.e., QDIAs) – Both bills prohibit using an investment option that promotes or supports non‑pecuniary goals as a default. H.2988 additionally bars default options whose objectives, goals or principal strategies “include, consider, or indicate” the use of non‑pecuniary factors, effectively foreclosing ESG‑branded QDIAs. Either bill would be a deviation from current law, which does not categorically prohibit default options that consider factors beyond traditional financial metrics so long as the investment otherwise meets prudence and QDIA standards.
• Proxy Voting – The two bills are substantially aligned when it comes to exercises of shareholder rights and proxy voting: (i) both codify that not every proxy must be voted; (ii) both require an economic‑interest focus, consideration of costs, evaluation of material facts, recordkeeping and prudent oversight of managers/proxy advisors; and (iii) both permit proxy policies with safe harbors for non‑voting (i.e., <5% asset threshold for the plan; where the fiduciary has prudently determined that the proposal is not substantially related to the business activities of the issuer or is not expected to have a material effect on the value of the plan's investment) and a presumption of compliance when a safe harbor is followed. H.2988 also includes an exception tailored to employer securities and non‑designated arrangements when rights are passed through pursuant to the terms of an individual account plan to participants and beneficiaries with accounts holding such securities. Either bill would mark a shift from current DOL guidance that disfavors blanket abstention policies and does not provide statutory safe harbors for not voting.

Practical Implications for Plan Fiduciaries and Investment Committees

If enacted in their current substantive form, both bills would require plan fiduciaries to revisit investment policy statements, their tiebreaker protocols, manager due diligence questionnaires and QDIA/designated alternative lineups to ensure strict pecuniary‑only analysis and to avoid any default fund whose objectives or strategies incorporate non‑pecuniary goals.

S.3086's coin flip approach to addressing the tiebreaker scenario is particularly concerning because it would likely trigger more participant second-guessing of fiduciary actions with respect to investment selection. A standard that promotes even more activity in this highly litigious area runs counter to President Trump's Executive Order on expanding 401(k) plan access to alternative investments, which directs the DOL Secretary to “prioritize actions that may curb ERISA litigation that constrains fiduciaries' ability to apply their best judgment in offering investment opportunities to relevant plan participants.” Moreover, it also contradicts the newly appointed EBSA Secretary's goal of eliminating “the ERISA litigation abuse that is turning benefit plans into liability traps.”

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.