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DOL Issues Final Rule on ESG Investments DOL Issues Final Rule on ESG Investments

DOL Issues Final Rule on ESG Investments

On October 30, 2020, the Department of Labor ("DOL") issued its final rule on plan fiduciaries' investment duties and their application to the selection of environmental, social, and corporate governance ("ESG") investments ("Final Rule"). The DOL had released its proposed rule on June 22, 2020 ("Proposed Rule"). The Final Rule retains the Proposed Rule's general safe harbors and legal requirements for considering only pecuniary factors in the selection of plan investments. At the same time, it makes several changes to the Proposed Rule, most notably by removing all instances of ESG terminology to acknowledge the lack of a generally accepted definition for ESG-themed funds.


The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), requires that plan fiduciaries act prudently and solely in the interests of plan participants and beneficiaries. The U.S. Supreme Court held in Fifth Third Bancorp v. Dudenhoeffer that the interests of participants do not include nonpecuniary benefits. In addition, the DOL has long taken the position that in the selection of plan investments, fiduciaries must focus solely on a plan's financial returns.

Assets invested in ESG investments have steadily increased for many years and the trend is accelerating. Without regulation, fiduciary selection of ESG investments could improperly serve non-pecuniary interests.

On June 22, 2020, the DOL released its Proposed Rule requiring, among other things, that plan fiduciaries consider only pecuniary factors in selecting plan investments except when two investments are indistinguishable on that basis. The DOL received more than 8,700 comments and petitions in response to the Proposed Rule.

Final Rule

Prudence Safe Harbor

The Final Rule provides a safe harbor for satisfying ERISA's duty of prudence. The duty is satisfied if the fiduciary: (i) gives "appropriate consideration" to the facts and circumstances the fiduciary knows or should know are relevant to the investment, including the role of the investment in the plan's portfolio, and (ii) acts accordingly.

"Appropriate consideration" includes, but is not limited to, a determination that the investment is reasonably designed to further the purposes of the plan, taking into consideration the risk of loss and the opportunity for gain. It also includes consideration of the following factors:
  • The composition of the portfolio with regard to diversification;
  • The liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan; and
  • The projected return of the portfolio relative to the funding objectives of the plan.
Under the Final Rule, this safe harbor applies only to ERISA's requirement under Section 404(a)(1)(B) that a fiduciary act prudently. Under the Proposed Rule, the safe harbor applied to both the duty of prudence and the duty of loyalty under Section 404(a)(1)(A) of ERISA.
Fiduciaries Generally May Consider Only Pecuniary Factors

The Final Rule requires that a fiduciary's evaluation of an investment or investment course of action be based only on pecuniary factors, unless the fiduciary is unable to distinguish the investments on the basis of pecuniary factors alone. Pursuant to the Final Rule, a fiduciary may not "subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives and may not sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or goals."
The Final Rule focuses on the distinction between pecuniary and non-pecuniary factors and eliminates all reference to ESG terminology, recognizing that this terminology can be confusing. Thus, the Final Rule allows fiduciaries to consider ESG factors if they present an economic business risk or opportunity that an investment professional would appropriately treat as a material economic consideration under generally accepted investment theories.
Reasonable Alternatives

A fiduciary is permitted to consider non-pecuniary factors only when the fiduciary is unable to distinguish investment alternatives on the basis of pecuniary factors alone. In this circumstance, the fiduciary may use non-pecuniary factors as the deciding factor in the investment decision and to meet their prudence duties under ERISA.

In order to consider non-pecuniary factors, the fiduciary must document:
  • Why pecuniary factors were not sufficient to select the investment;
  • How the selected investment compares to alternatives with regard to factors specified in the Final Rule; and
  • How the non-pecuniary factor(s) are consistent with the interests of participants and beneficiaries and their financial benefits.
Notwithstanding this exception, according to the Preamble to the Final Rule the DOL "believes that investment options that cannot be distinguished on the basis of pecuniary factors occur very rarely in practice, if at all." However, reasonable alternatives are available to avoid suggesting fiduciaries “must scour the marketplace” for possible alternatives as part of their evaluation.
Investment Alternatives and QDIAs

Under the Final Rule, the standards described above apply to a fiduciary's selection or retention of designated investment alternatives available to participants and beneficiaries in an individual account plan. In a plan that allows participants and beneficiaries to choose from a broad range of investment alternatives, a fiduciary may consider and include an investment as a designated investment alternative even if that investment promotes, seeks, or supports a non-pecuniary goal, as long as the investment is not added as a qualified default investment alternative ("QDIA") and the fiduciary satisfies the standards described above applicable to selecting or retaining any such investment.


The Final Rule takes effect 60 days after its publication in the Federal Register and applies to all investments made and investment courses of action taken after that date. Until the Final Rule takes effect, the Proposed Rule applies.

Plans have until April 30, 2022 to make any changes to QDIAs for compliance with the rule. This means removing QDIAs that have an investment objective or goal or principle strategy that includes, considers, or indicates the use of one or more non-pecuniary factors.

For more information about the new fiduciary investment rule and how they it affect your employee benefit plans, please contact Gary Blachman, Melissa Proffitt, Austin Anderson, or the Ice Miller LLP Employee Benefits attorney with whom you work.
This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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