During the week of Thanksgiving, the Department of Labor (DOL) released its final rule regarding environmental, social and governance (ESG) factors in the investment selection and monitoring process for retirement plan fiduciaries. The final rule had been originally proposed in October 2021. The amendments in the final rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” seek to provide guidance that clarifies the application of the Employee Retirement Income and Security Act of 1974 (ERISA) fiduciary duties when selecting investment options that incorporate ESG. The effective date for the rule is Jan. 30, 2023.
Key Highlights
The following summarizes the initial key highlights of the final rule from the DOL:
- The DOL clarifies that fiduciaries may consider climate change and other benefits as part of investment decision-making and exercising shareholder rights, but there is no requirement to do so per the final rule.
- The final rule removes a standard of pecuniary factors only in the context of investment decisions, which was included in a previous version of the rule in October 2020.
- Fiduciaries are given a broader description of factors deemed relevant to a risk-return analysis, such as ESG factors.
- The tie-breaker test will now incorporate ERISA’s statutory duty to act prudently.
- Fiduciaries of participant-directed plans will not be in violation of duty of loyalty since the fiduciary accounts for participant preferences.
- Restrictions that did not allow funds to serve as Qualified Default Investment Alternative (QDIA) if they included non-pecuniary factors are now removed from the final rule.
- Two previous proxy voting safe harbors are removed from the final rule.
For more information about how the new final rule impacts your fiduciary responsibilities, talk to your Windham Brannon advisor, or reach out to Anne Morris.
