On June 23, 2020, the U.S. Department of Labor (the “DOL”) issued a proposed rule (which was published in the Federal Register on June 30, 2020) that would amend its “investment duties” regulation set forth at 29 C.F.R. § 2550.404a-1. The DOL states that the proposed rule is intended to “eliminate confusion” and limit when and how ERISA plan fiduciaries may (i) consider non-pecuniary factors, such as environmental, social and corporate governance (“ESG”) factors (also referred to as “socially responsible investments” or “economically targeted investments”), when making plan investment decisions for a defined benefit plan, or (ii) offer an ESG-themed investment option under an individual account defined contribution plan (e.g., a 401(k) plan). In particular, the proposed rule would:
- codify what the DOL describes as its longstanding position that ERISA plan fiduciaries of both defined benefit and defined contribution plans must make investment decisions based solely on the risk-adjusted value to plan participants and beneficiaries and may not subordinate the interests of the plan to unrelated goals or objectives;
- provide specifically that ERISA’s exclusive purpose rule and duty of loyalty prohibit fiduciaries from considering any non-pecuniary factors over the financial and retirement income interests of plan participants and beneficiaries;
- provide that ESG factors can be pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories;
- require ERISA plan fiduciaries to consider how an investment or investment course of action compares to available alternatives;
- require specific documentation in the “rare circumstances” where, after appropriate investment analysis, fiduciaries consider ESG factors as a “tie-breaker” in choosing between economically “indistinguishable” investments; and
- without limiting ERISA’s general rules, confirm that an ESG fund may be added to a 401(k)-type plan only if (i) the fund is well managed and adequately diversified, (ii) the fund is selected and monitored through a prudent process, based only on objective risk-return criteria, (iii) the relevant factors are documented, and (iv) the fund is not used as the plan’s qualified default investment alternative (or a component of the QDIA).
In its commentary, the DOL noted the confusion that persists for ERISA plan fiduciaries in regards to its ESG-investing rules, which the DOL acknowledged may be a result of varied statements it has made over the years in past guidance. In short, the proposed rule would codify the DOL’s view that the sole focus of ERISA plan fiduciaries must be the financial returns and risk to participants and beneficiaries. ERISA plan fiduciaries must not sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals.
The DOL invited comments from the public on all facets of the proposal (which are due by July 30, 2020, 30 days after the date of publication in the Federal Register). If finalized, these rules would become effective 60 days after publication of the final rule.