False and exaggerated information about the environmental, social and governance (ESG) merits of investment options have gotten the attention of the Securities and Exchange Commission (SEC). Plan sponsors: are you sure you know what’s included in the investment options offered to the participants in your retirement plan?
Misstatements and Omissions
More investigation, more enforcement and more costly settlements are anticipated, as the SEC digs into misstatements and omissions in company statements about environmental, social and governance funds. As Plan Sponsor reports:
The SEC is following through on its commitment to curb the practice of “greenwashing,” in which financial services institutions make unsupported claims about their approach to vetting investments based on ESG factors…SEC’s Climate and ESG Task Force launched in March 2021 to analyze disclosure and compliance issues around advisers’ and funds’ ESG strategies. The agency named ESG investing as one of its priorities for this year, citing the risk that false or misleading disclosures could result in misinformed investors.
Investment Options Require Care
Extreme diligence is needed related to the investment choices offered to retirement plan participants. Indeed, decision-making and sign off on investment options has become more and more challenging for plan sponsors. Lawsuits on behalf of participants have successfully alleged that flaws in both investment choices and fees have resulted in losses to retirement savings. The tactics of these lawsuits are being replicated, tangling more plans—including smaller ones—in costly litigation.
Under the high standards of ERISA law, lawsuits continue to scrutinize how the investment options offered participants are selected, benchmarked, and, if warranted, removed from the plan. Because failure to remove poorly performing options can result in reduced retirement savings for participants, inaction has also been deemed a fiduciary breach. Bottom line: despite diligence in our duties as plan sponsors, it’s vital to have protection against allegations of a fiduciary breach. Colonial is here to help with affordable Fiduciary Liability Insurance. For added protection and value, special packages for plan sponsors even include Basic Cyber Liability Insurance. Get covered, in minutes, here, now: Fiduciary with Cyber Liability Insurance.
Participant Interest in ESG Investments?
Although previous regulatory guidance from the Department of Labor has dampened efforts to include environmental, social and governance (ESG) investment options in retirement plans, inclusion of these options remains of interest to many plan participants. For example, Schroder’s 2022 U.S. Retirement Survey “found that nearly three-quarters of plan participants said they would or might increase their overall contribution rate if their plan offered ESG options.” Underscoring that the addition of ESG investment options to retirement plans requires careful consideration, experts experts point out that doing so is possible: “Such investments do not need to be avoided if the ERISA fiduciary gives appropriate consideration to the facts and circumstances relevant to a particular investment or course of action, including the role of the investment in the portfolio, and acts accordingly…All things being equal, an ESG option may be chosen as an investment option as long as it does not present greater risks or reduced returns.” Clearly, ESG options also need to be accurate in their claims about positive impact.
Of course, for plan sponsors, fiduciary responsibilities don’t end with decisions about investment options: the duty of prudence requires continuous monitoring. JD Supra reminds us: “A collection of investment options that includes prudent choices does not erase the breach of fiduciary duty of also offering imprudent investment options, so the risk and returns must continually be monitored. As long as these precautions are taken there is no need to automatically rule out ESG investments for your ERISA portfolio.”
Keep in mind that defense against even the allegation of an ERISA fiduciary breach can be ruinous. Armed with Colonial’s Fiduciary-Cyber Insurance Pack, if you face claims of alleged or actual breaches of duty in connection with the employee retirement plan, you’ll be covered for defense costs and penalty limits up to $1,000,000. Plus, in the event of a cyber breach, your business—and plan—will receive support at every stage of incident investigation and breach response, as well as coverage against lawsuits or regulatory actions related to the breach.
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Colonial’s comprehensive, multi-year packages offers plan sponsors the greatest value, protection and efficiency. Conveniently, Colonial provides: the required ERISA bond to protect the assets of the retirement plan from theft; Fiduciary Liability coverage to protect you and your assets from personal liability; and, Cyber Liability coverage to safeguard your company and plan from covered losses and expenses in the event of a cyber breach.
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