DOL Publishes Final Rule On ESG Investing

The U.S. Department of Labor today announced a final rule that updates and clarifies the Department's investment duties regulation in 29 CFR 2550.404a-1. The final rule intends to provide clear regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social and governance (ESG) investing.

During the last 30 years, the Department has periodically considered the application of the fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) to plan investments that promote non-financial objectives, such as furthering environmental, social and public policy goals. The Department has issued different iterations of sub-regulatory guidance during this period that may have created confusion about these investment issues, and the rapid increase in so-called ESG investments has also raised important and substantial questions about shortcomings in the rigor of the prudence and loyalty analysis by some participating in the ESG investment marketplace.

The final rule amends the Department's longstanding investment duties regulation, first issued in 1979, to codify a clear regulatory structure for considering investments for ERISA plans. The amendments require plan fiduciaries to select investments and investment courses of action based on pecuniary factors - i.e., any factor that the responsible fiduciary prudently determines is expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan's investment objectives and funding policy.

"Protecting retirement savings is a core mission of the U.S. Department of Labor and a chief public policy goal for our nation," said U.S. Secretary of Labor Eugene Scalia. "This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives."

"Our goal is to ensure that retirement security remains the top priority of those who manage the retirement assets that millions of Americans have worked so hard to earn," said Acting Assistant Secretary of Labor for the Employee Benefits Security Administration Jeanne Klinefelter Wilson. "Retirement plan fiduciaries vindicate the public policy behind ERISA - and comply with the law - when they manage plan assets with a clear and determined focus on participants' financial interests in receiving secure and valuable retirement benefits. Plan fiduciaries should never sacrifice participants' interests in their benefits to promote other non-financial goals."

The Department expects the final rule will result in higher returns by preventing fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions on financial factors. The final rule and a summary of the rule's key provisions are available on the EBSA website. The rule will be effective 60 days after publication in the Federal Register, but plans will have until April 30, 2022, to make any changes to certain qualified default investment alternatives, where necessary to comply with the final rule.

EBSA's mission is to assure the security of the retirement, health, and other workplace related benefits of America's workers and their families. EBSA accomplishes this mission by developing effective regulations; assisting and educating workers, plan sponsors, fiduciaries and service providers; and vigorously enforcing the law.

The Department of Labor's mission is to foster, promote and develop the welfare of the wage earners, job seekers and retirees of the U.S.; improve working conditions; advance opportunities for profitable employment; and assure work-related benefits and rights.