Final Rule Restricts Retirement Investment Fiduciary Considerations

On October 30^th, 2020, the Department of Labor (DOL) released final rule “Financial Factors in Selecting Plan Investments.” In an earlier proposed rule, the DOL aimed to regulate environmental, social, and corporate governance (ESG) investing by employee benefit plans. These were plans that fall subject to the Employee Retirement Income Security Act (ERISA). In the final rule, however, the DOL rejected the ESG language as too unclear. The final rule instead removes all ESG terminology, focusing instead on whether a factor is “pecuniary,” or relates to money.

Summary of the Final Rule

Overall, the final rule largely dismisses the materiality of ESG factors when making investment decisions. It instead adopts the idea that considering ESG is at odds with financial factors and fiduciary responsibilities of plan sponsors. As such, considering ESG factors when making investment decisions are now prohibited if not pecuniary in nature. Plan fiduciaries must select investment courses of action based solely on financial considerations relevant to the economic values of those items. The final rule pivots on two ERISA duties required of fiduciaries:

• Fiduciary Duty of Prudence. A fiduciary has to perform a financial analysis of reasonably available alternative investment options. Decisions take into account the risk of monetary loss and opportunity for monetary gain. These decisions are consider the opportunity of diversification, liquidity, and projected returns. Only when a comparison of these factors yields no difference, then fiduciaries can consider non-pecuniary factors.
• Fiduciary Duty of Loyalty. The rule language focuses on whether an investment factor is pecuniary or non-pecuniary. A fiduciary has a duty of loyalty to investors to determine a course of action based on pecuniary factors. The financial interests of participants cannot only be non-financial objectives. Any fiduciaries that choose funding using non-pecuniary objectives would therefore be in violation of the final rule.

The final rule is effective on January 12th, 2021.

Employer Takeaways

Any employer or employer-associated group who acts as the fiduciary for company benefit plans needs to comply with this rule. While fiduciaries aren’t prohibited from considering ESG factors if “pecuniary,” they may want to avoid ESG factors when making decisions. This will help avoid additional documentation and compliance requirements, and any regulatory adherence to fiduciary obligations under the final rule. This final rule is not the only guidance that the DOL has released recently regarding benefit plans. In October, the agency updated a resource to help plan administrators determine information about their group plan or insurance issuer. Specifically, the tool helps employers check if their plan or insurance complies with provisions of ERISA. Employers can also verify if their plan or insurance complies with the Mental Health Parity and Addiction Equity Act (MHPAEA).