Today’s Federal Register includes the DOL’s final rule prescribing fiduciary obligations when selecting plan investments—guidance initially focused on restricting the use of environmental, social, and governance (ESG) investments. The final rule codifies several requirements for fiduciaries to consider regarding the promotion of non-financial objectives when selecting plan investments.
- The final rule confirms that ERISA fiduciaries must evaluate investments 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 final rule includes an express regulatory provision stating 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.
- The final rule also includes a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
- The final rule added new regulatory text that sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone.
- The final rule indicates 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. A fiduciary is not prohibited from considering an investment fund or product merely because it 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. However, the provision prohibits adding such a fund as a qualified default investment alternative if the fund or product includes non-pecuniary factors.
The rule is effective 60 days after publication in today’s Federal Register: January 12, 2021.