DOL’s Final Rule for ERISA Plan Investments Significantly Restricts ESG Factors

On October 30, 2020, the Department of Labor (“DOL”) released a final rule under ERISA that redefines a plan fiduciary’s duties when making investment decisions.  Despite the overwhelmingly negative feedback in response to the DOL’s proposed rule in June, the final rule arguably goes even further to underscore the importance of financial factors in a fiduciary’s investment decisions.  (For more information on the proposed rule, click here.)

As background, ERISA requires plan fiduciaries to act solely in the interests of plan participants and beneficiaries when making investment decisions.  With this requirement in mind, it has been unclear whether a plan fiduciary violates his or her duties by considering policy goals if the fiduciary accepts greater risks or reduced expected returns in pursuing those goals.  

The final rule seeks to clarify the fiduciary standards for selecting and monitoring investments held by ERISA plans.  Specifically, the final rule requires fiduciaries to choose investments “based only on pecuniary factors.”  In effect, the rule significantly restricts plan fiduciaries from considering policy goals that would not achieve the highest possible return for the plan.  Such non-financial goals or policies include environmental, social, or governance (ESG) factors that many investors and companies consider important, if not crucial, when making investment decisions.

The final rule does not prohibit fiduciaries from considering ESG factors when making investment decisions.  But the rule sets forth a number of strict documentation and compliance requirements for the limited circumstances in which a plan fiduciary does consider non-pecuniary factors.  Many in the industry are concerned that, as a result of these barriers, plan fiduciaries will steer clear of ESG-type factors altogether.

The rule goes into effect on January 12, 2021, and applies to all investments actions taken after that date.  For ERISA plans that consider ESG factors when making investment decisions, this new rule may result in a significantly altered investment scheme.