Two 401(k) plan participants filed a legal challenge aiming to overturn the Department of Labor's new rule permitting retirement plan fiduciaries to consider climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights.
The Wisconsin-based participants — Richard Braun an employee at SWAT Environmental, a soil, water and air technologies company, and Frederick Luehrs III, an employee at Petron Corp., a supplier of engineered lubricants — filed a lawsuit Tuesday in U.S. District Court in Milwaukee that alleges the Labor Department exceeded its authority when finalizing the new rule in November.
The Labor Department rule — Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights — went into effect Jan. 30 and is a reversal of two rules promulgated late in the Trump administration that said retirement plan fiduciaries could not invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk and outlined a process a fiduciary must undertake when making decisions about casting a proxy vote.
The new rule maintains the department's position that fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals, department officials have said.
In the lawsuit filed Tuesday — Braun et al. v. Walsh — the plaintiffs argue that the new rule hurts participants.
"A rule that endorses or provides cover for selecting investments based on factors other than financial returns necessarily disadvantages individual employees and participants," the lawsuit said. "These individual workers may be provided with the illusion of investment choices by plan administrators, but at bottom whether the participant is interested in the social causes ESG promotes or not is wholly irrelevant. Because Congress conferred special privileges, including tax advantages, on retirement funds to encourage retirement savings (and thereby relieve or at least lessen the public burden of supporting workers after they retire), it is inappropriate for the Department of Labor to encourage the use of these funds for other, collateral objectives instead."
A Labor Department spokesman directed comment requests to the Department of Justice; the Justice Department did not immediately respond. But Lisa M. Gomez, assistant secretary of labor for the Employee Benefits Security Administration, said in a webinar earlier this month that the rule is a "return to neutrality."
Ms. Gomez added, "The intent of the rule is to level the playing field so that plan fiduciaries can consider these ESG factors in investing in the same way they would consider any factors that would be relevant to a risk and return analysis."
The lawsuit in Wisconsin is similar in scope to one filed late last month by 25 Republican attorneys general in U.S. District Court in Amarillo, Texas.
Both lawsuits argue the new rule undermines key protections for retirement savers, oversteps the department's authority under the Employment Retirement Income Security Act, and is arbitrary and capricious.
