The Final Rule requires that fiduciaries evaluate investment opportunities based upon pecuniary (financial) factors, essentially amending the DOL’s long-standing “investment duties” regulation, which previously focused only on how fiduciaries could satisfy their duty of prudence under the Employee Retirement Income Security Act of 1974 (“ERISA”). The Final Rule amends that regulation by adding “minimum standards” to satisfy the duty of loyalty under ERISA. The Final Rule is intended to ensure plan fiduciaries are not sacrificing investment returns or increasing risk to promote non-financial goals (i.e. socially responsible mandates) that may not be in the best interest of all participants and their beneficiaries. However, if fiduciaries are unable to distinguish investments based on pecuniary factors alone, the Final Rule permits fiduciaries to consider non-pecuniary factors as a tie-breaker (provided that they comply with the Final Rule’s documentation requirement). The Final Rule does, importantly, apply restrictive conditions relative to selection of a plan’s qualified default investment alternative (“QDIA”). Specifically, the Final Rule prohibits fiduciaries from including investments whose investment strategies “consider, include, or indicate the use of non-pecuniary factors” as the plan’s QDIA.
By focusing the Final Rule on the use of financial factors, the Department of Labor ultimately addressed the issue of socially responsible/ESG investing via a much broader context. (But, wait. There's more to come! Announced today, President Biden will sign executive orders that will, among other things, press for a review of the Labor Department’s recent ruling on ESG investments. We'll keep you updated!)
For questions about how the DOL’s Final Rule impacts your plan’s investment line-up, please contact your Plan Advisor or Plan Consultant.