The Employee Benefits Security Administration (EBSA) of the U.S. Department of Labor (DOL) has issued a final rule adopting amendments to the Investment Duties regulation under Title I of the Employee Retirement Income Security Act (ERISA). These amendments, which become effective on January 30, 2023, change certain amendments to the Investment Duties regulation adopted in 2020 and are part of the Biden administration’s push to advance public policy on climate change.
The final rule clarifies how to apply the fiduciary duties of prudence and loyalty in selecting investments and investment courses of action. In addition, the rule outlines the conditions under which retirement plan managers can consider environmental, social, and governance (ESG) factors.
The need for clarification in these amendments has arisen due to language in the current regulation as a result of the 2020 amendments. EBSA found that the current language discourages and deters ERISA fiduciaries from considering climate change and other ESG factors in connection with selected investment activities. The amendments also resulted from Executive Orders 13990 and 14030, which directed federal agencies to review their regulations according to the policies promoting environmental and public health.
The final rule leaves intact the core principles underlying the duties of prudence and loyalty that ERISA requires of plan fiduciaries. ERISA mandates that plan fiduciaries focus on relevant risk-return factors and place the interests of participants and beneficiaries above objectives unrelated to the provision of benefits under the plan. Additionally, the fiduciary duty to manage properly shares of stock that are plan assets includes the management of shareholder rights concerning those shares, such as the right to vote proxies.
The major changes to the Investment Duties regulation outlined in the final rule include the following:
- Deletion of the “pecuniary/non-pecuniary” terminology, which creates uncertainty and discouragement of potentially financially beneficial choices;
- Clarification of the fact that a fiduciary’s investment decision must involve the consideration of factors that it believes to be relevant to a risk and return analysis, including the economic effects of climate change and other ESG factors;
- Removal of the stricter rules for qualified default investment alternatives (QDIAs) and application of the same standard to QDIAs as to other investments;
- Replacement of the current regulation’s “tiebreaker” test, which allows fiduciaries to consider collateral benefits as tiebreakers in certain circumstances, with a standard that allows fiduciaries to base investment decisions on collateral benefits rather than on investment returns in selected cases, which hearkens back to the pre-Trump era;
- Removal of the current regulation’s special regulatory documentation requirements, in favor of the applicable statutory duty of prudent documentation of plan affairs under ERISA;
- Clarification that fiduciaries do not violate the duty of loyalty because they take the preferences of participants into account when creating a menu of investment options for participant-directed individual account plans; and
- Addition of various provisions clarifying proxy voting policies to treat the activity as equivalent to other fiduciary activities.
