The Department of Labor (“DOL”) has issued a new final rule regarding the investment duties of plan fiduciaries under the Employee Retirement Income Security Act of 1974 (“ERISA”). The final rule, published on December 1, 2022, retains the previous rule’s directive that fiduciaries focus on economic factors in making investment decisions, but advises that environmental, social, and governance (“ESG”) factors may be included in this analysis.
As discussed in our November 17, 2020 Benefits Update, a previous final rule issued under the Trump administration required fiduciaries to rely solely on “pecuniary” factors when making investment decisions, appearing to limit the ability of fiduciaries to consider ESG factors. Some commenters warned that this language could discourage the consideration of ESG factors by fiduciaries even when such factors are relevant to a risk/return analysis of an investment.
The revised final rule preserves many aspects of the 2020 final rule and previous guidance, including the core principle that the duties of prudence and loyalty prohibit plan fiduciaries from sacrificing investment returns or assuming greater investment risk by subordinating the interests of participants and beneficiaries to objectives unrelated to the provision of benefits under the plan. However, rather than require a focus solely on pecuniary factors, the revised final rule acknowledges that climate change and other ESG issues may factor into the risk/return analysis of a particular investment or investment course of action. The revised rule also provides that fiduciaries are allowed to consider collateral benefits as a tie-breaker when choosing between two investment options that equally serve the financial interests of the plan over the appropriate time horizon. The previous rule had required that investments be indistinguishable before collateral benefits could be considered, making it difficult to know when fiduciaries were permitted to consider collateral factors. In explaining how the tie-breaker would work, the preamble to the rule gives the example of an investment that stimulates employment and results in continued or increased contributions to a multiemployer plan as an example of collateral benefits that could be considered in this context.
With respect to participant-directed individual account plans, the rule makes clear that fiduciaries do not violate their duty of loyalty solely because they take participants’ preferences into account when selecting investment options, particularly since doing so may encourage greater participation in a plan. Additionally, the revised rule removes the prohibition on designating as a Qualified Default Investment Alternative (“QDIA”) any fund that reflects non-pecuniary considerations. Under the revised rule, QDIAs are subject to the same fiduciary standards as other investment alternatives with respect to the consideration of ESG factors.
The final rule also makes several revisions to the 2020 rule related to proxy voting, including the elimination of specific proxy voting safe harbors, third-party provider monitoring obligations and voting record requirements. However, the rule is clear that these functions remain subject to the overall fiduciary requirements of ERISA. It eliminates language from the 2020 rule suggesting that fiduciaries are not required to vote proxies, reiterating the DOL’s longstanding view that, unless a plan fiduciary determines that voting proxies are not in the plan’s best interest (for example, because the cost exceeds the potential benefit), proxies should be voted as part of the process of managing a plan’s investments.
The final rule generally is effective beginning on January 30, 2023. Please contact Slevin & Hart for more information about how this guidance affects your plan.
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