EB Flash: DOL Finalizes "Investment Duties" Rule for Selecting and Monitoring ERISA Plan Investments
The Department of Labor (DOL) today issued a final rule on the fiduciary standards for selecting and monitoring investments held by Employee Retirement Income Security Act of 1974 (ERISA) plans, and the scope of fiduciary duties surrounding non-pecuniary issues (e.g., environmental, social, and governance (ESG) investing).
The effective date of final rule is 60 days after its publication in the Federal Register, and while it is effective on a prospective basis, it "shall apply in its entirety to all investments made and investment courses of action taken after such date." In addition, plans have until April 30, 2022 to make any changes to qualified default investment alternatives, where necessary to comply with the final rule.
Notably, the DOL explains that "[u]nlike the proposal, the final rule's operative text contains no specific references to ESG or ESG-themed funds .... EBSA concluded that the lack of a precise or generally accepted definition of 'ESG,' either collectively or separately as 'E, S, and G,' made ESG terminology not appropriate as a regulatory standard. Instead, the final rule refers to pecuniary factors and non-pecuniary factors in defining the relevant fiduciary investment duties."
U.S. Secretary of Labor Eugene Scalia states that "[p]rotecting retirement savings is a core mission of the [DOL] and a chief public policy goal for our nation...." He also reiterated that retirement plan fiduciaries should be "focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives."
Accordingly, today's final rule confirms that ERISA fiduciaries "must evaluate investments and investment courses of action based solely on pecuniary factors—i.e., factors that the responsible fiduciary prudently determines are expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy," the DOL notes.
The DOL received more than 1,100 written comments on the proposed rule, and more than 7,600 submissions as part of six separate petitions (form letters) from across the stakeholder spectrum. Thus, it should come as no surprise that the text of the final regulation (§2550.404(a)-1 – Investment duties) comprises just under seven of the 148 pages of today’s publication. Moreover, the tone of the preamble is rather stern in response to comments questioning the need for the regulation in light of existing law and requests for an extension of the 30-day comment period in light of the COVID-19 pandemic.
The DOL explains that the final rule includes five major updates to the investment duties regulation:
- Confirms that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan's investment objectives and funding policy. The term "investment course of action" is defined .... to mean "any series or program of investments or actions related to a fiduciary's performance of the fiduciary's investment duties, and includes the selection of an investment fund as a plan investment, or in the case of an individual account plan, a designated investment alternative under the plan."
- States that compliance with the exclusive purpose (loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
- Requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
- Sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between or among investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone. The final rule includes a related documentation requirement for such decisions intended to prevent fiduciaries from improperly finding economic equivalence or making investment decisions based on non-pecuniary benefits without appropriately careful analysis and evaluation.
- States that the prudence and loyalty standards set forth in ERISA apply to a fiduciary's selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan. The final rule expressly provides that ... a fiduciary is not prohibited from considering or including an investment fund, product, or model portfolio merely because the fund, product, or model portfolio promotes, seeks, or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule, including the requirement to evaluate solely on pecuniary factors, in selecting any such investment fund, product, or model portfolio.
This, and related communications, are protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices, and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this presentation without prior written consent of the copyright holder.