Retirement Funds: Performance vs ESG



As protocols for environmental, social and governance (ESG) investment options continue to be murky, a new class action complaint puts the spotlight on the fiduciary duty of prudence. Essentially, this latest class action lawsuit accuses the employer, investment firm and recordkeeper of sacrificing performance for ESG factors.


Damaging Allegations

Even as scores of unfinished–and costly–ERISA litigation cases continue to wind their way through courtrooms across the country, new allegations have been filed in the U.S. District Court for the Northern District of Texas. Plan participants are claiming financial losses “from poor performance and excessive fees linked to ESG strategies.” Specifically, the allegations claim the employer, plan committee and administrators of the 401k  “violated their fiduciary duties under the Employee Retirement Income Security Act” by investing in ESG strategies, which put “policy goals over the financial health of the plan,” jeopardizing “the retirement security of employees.” As Plan Sponsor further reports, the lawsuit seeks both “to remedy defendants’ breaches of fiduciary duties” and “injunctive relief to prevent further violations and mismanagement of the plan.”Pointing to the responsibilities of the fiduciaries associated with the plan, including the sponsor, the investment specialists and the recordkeeper, the claim argues:


Some ESG-based funds included in the plan are both more expensive for participants when compared to similar, non-ESG investment funds, and focused on shareholder activism to achieve policy agendas rather than maximizing plan outcomes….“A prudent fiduciary would have removed these funds, but the plan’s fiduciaries have failed to do so, costing the plan participants millions of dollars in lost earnings they would have earned had the Plan’s fiduciaries offered more prudent investments that were readily available at the time defendants selected and retained the ESG funds at issue,” the complaint alleges.


Being named in a lawsuit is not of course an automatic indication that the plan fiduciaries erred. Nonetheless, the need to mount a defense is disruptive and costly, especially because . litigation outcomes and settlements to date have set precedent for copycats. Accordingly, plan sponsors are advised not to go it alone: in the face of litigation, securing ERISA defense costs $600—per hour. Proactive protection is essential and Colonial Surety is here to help with affordable Fiduciary Liability Insurance. With this, for a few dollars a day, you’ll have coverage for defense costs and penalty limits up to $1,000,000 if faced with alleged or actual breaches of duty in connection with the employee retirement plan. Cyber Liability coverage is included at no extra cost, providing additional protection against regulatory actions related to data and privacy, as well as expert response services.


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A Long Lifespan…

Experts remind us that as fiduciaries, we can be held personally liable for damages, even decades into the future.” In fact, for the protection of participants, ERISA considers holds plan sponsors to the exceptionally high standards associated with being a “3(16)” fiduciary, and– even when contracting out services to other 3(16) fiduciaries, plan sponsors retain responsibilities under the high standards of the law. As experts explain:


Running a qualified retirement plan for employees is like running a business for clients. Just as with a business, the administrative responsibilities and liabilities of operating a plan are significant. The Department of Labor (DOL) views all business owners who sponsor retirement plans for employees as “3(16)” fiduciaries under federal law….A 3(16) fiduciary is responsible for ensuring the plan is operated in compliance with the strict rules of ERISA day in and day out. One can say, the ERISA “buck stops here” on the 3(16)’s desk.


While the harsh reality for plan sponsors is that risks can be mitigated but never eliminated, we don’t have to carry the risk alone. As national expert Richard Clarke advises: “Retirement plan sponsors have enough on their plates dealing with the elements under their control, so they should pursue remedies, like fiduciary liability insurance, that relieve the exceptional burden of things they cannot control.”  


Remember: Colonial Surety ensures that for a few dollars a day, plan sponsors can be covered in the event of claims of alleged or actual breaches of duty in connection with the employee retirement plan. Colonial’s fiduciary liability insurance includes defense costs and penalty limits up to $1,000,000. Uniquely, Colonial even includes Cyber Liability Insurance, locks in multi-year rates and offers installation payments. Why carry all the risks alone? Protect yourself and your business now:


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Pension plan professional?

Colonial can help you make sure your plan sponsor clients have the coverage they need—and we’ve got you too. From Errors and Omissions Insurance to Fiduciary Liability Insurance, Employment Practices Liability Insurance–and more, we’re HERE with the coverages pension professionals need to keep the business going—and growing.


Colonial Surety Company is rated “A Excellent” by A.M. Best Company, U.S. Treasury listed and in business all across the country. Serving customers since 1930, we are the trusted source for the pension industry to secure legally required ERISA bonds, fiduciary liability insurance and cyber-liability insurance. We help safeguard plan sponsors, pension professionals and financial advisors — and keep their businesses compliant — with pain-free, efficient, and friendly service every time.