On December 1, 2022, the DOL published a final rule entitled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” The final rule clarifies that retirement plan fiduciaries may consider environmental, social and governance (ESG) factors when making investment decisions and exercising shareholder voting rights.
ERISA’s exclusive benefit rule requires a plan fiduciary to exercise duties, including the selection of plan investments, solely in the interest of participants and beneficiaries. Accordingly, the fiduciary must consider relevant risk-return factors when evaluating plan investments and courses of action. However, it has been unclear whether and to what extent the inclusion of ESG factors in an investment analysis is consistent with ERISA’s requirements. The Trump Administration released a rule in 2020 (the 2020 rule) that was viewed as limiting consideration of ESG factors in plan investment decisions. In 2021, the Biden Administration issued a non-enforcement policy with respect to the 2020 rule and proposed a new rule to address fiduciary obligations with respect to the investment selection and proxy voting processes. Please see our prior article on the proposed rule. The final rule adopts many of the provisions set forth in the proposed rule.
First, the final rule upholds the principle that ERISA duties of prudence and loyalty require plan fiduciaries to focus on relevant risk-return factors and not sacrifice investment returns or take on additional investment risk to achieve objectives unrelated to the provision of benefits under the plan. However, the economic effects of climate change and other ESG considerations (e.g., board composition and workforce practices) can be considered if material to the risk-return analysis.
Second, the final rule changes the “tie-breaker” standard, which allows plan fiduciaries to consider collateral benefits (i.e., benefits other than investment returns, such as ESG considerations) when making investment selections under certain circumstances. Under the 2020 rule, competing investments must be “indistinguishable” before fiduciaries can consider collateral factors as tiebreakers. The final rule replaces those provisions with a standard that instead requires the fiduciary to prudently conclude that competing investments or investment courses of action equally serve the financial interests of the plan over the appropriate time horizon. In such cases, the fiduciary is not prohibited from selecting an investment or investment course of action based on collateral benefits. The final rule also removes the special documentation requirement that previously applied to the tiebreaker provision.
Third, the final rule removes the 2020 rule’s special requirements for the selection of a Qualified Default Investment Alternative (QDIA). Under the final rule, the same investment standards apply to QDIAs that apply to other plan investments.
Fourth, the final rule clarifies that fiduciaries do not violate their duty of loyalty solely because they consider participants' non-financial preferences when determining the available investment options for participant-directed plans. Such consideration may further plan purposes by increasing participant deferral rates and retirement savings.
Finally, the final rule retains the core concept 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. However, the final rule removes 2020 rule language indicating fiduciary obligations do not require the voting of every proxy or the exercise of every shareholder right. The final rule also removes two proxy voting safe harbors that were viewed as encouraging abstention from voting. Additionally, the final rule eliminates specific record maintenance and monitoring obligations related to proxy voting activities required under the 2020 rule. (The final rule instead emphasizes that proxy voting and other exercises of shareholder rights should not be viewed differently from other fiduciary activities.)
Retirement plan sponsors should be aware of the final rule and may want to consult with their plan investment advisors for further information. The final rule is effective January 1, 2023.
Final Rule: Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights »
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