DOL Issues Final Rule on ERISA Fiduciary Duties of Prudence and Loyalty in Selecting Plan Investments
Published December 01, 2022
The U.S. Department of Labor (DOL) issued a final rule that allows plan fiduciaries to consider climate change and other environmental, social and governance (ESG) factors when they select retirement investments and exercise shareholder rights, such as proxy voting.
After extensive consultations and feedback from a wide range of stakeholders, DOL concluded that two rules issued in 2020 unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.
The final rule:
- Retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan
- Reiterates a second core principle, which is that when a plan's assets include shares of stock, the fiduciary duty to manage plan assets includes the management of shareholder rights related to those shares, such as the right to vote proxies.
The final rule reverses and modifies certain amendments to the “Investment Duties” regulation currently codified at 29 CFR 2550.404a-1. The final rule changes the following areas:
- Consideration of ESG Factors
- Qualified Default Investment Alternative Provisions
- Application of the Tie-Breaker Test
- Shareholder Rights/Proxy Voting Provisions.
The final rule adds a new provision clarifying that fiduciaries do not violate their duty of loyalty solely because they take participants' nonfinancial preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans.
The final rule is effective on January 30, 2023.