Pump the “Pecuniary” Brakes: DOL Won’t Enforce the New Rule on Financial Factors in Selecting Plan Investments

Employee Benefits Alert

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The Department of Labor (DOL) has released a short statement announcing that it will not enforce the final rule on “Financial Factors in Selecting Plan Investments” that it published on November 13, 2020. The statement also notes that the DOL will not enforce the final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” that it published on December 16, 2020. We discussed the final rule regarding financial factors and its impact to plan fiduciaries in a prior article.

As reasoning for its change of heart, the DOL noted concerns brought by a variety of stakeholders as to whether the two final rules properly reflected the scope of fiduciaries’ duties of prudence and loyalty under ERISA. The DOL also described questions raised as to whether the rulemaking was unnecessarily rushed and failed to fully consider substantial evidence submitted regarding the impact environmental, social, and governing (ESG) considerations may have on improving long-term investment returns. The DOL further described concerns that the rules would have a chilling effect on fiduciaries being able to incorporate ESG factors into investment decisions.

The final rule on financial factors did not entirely foreclose fiduciaries from considering ESG factors, which clearly can have a pecuniary impact, when selecting plan investments. However, the final rule undoubtedly steered some fiduciaries away from investments where ESG considerations figured prominently if for no other reason than to avoid the need to further document the investment decision-making process. With this statement from the DOL, fiduciaries should, in the nearer term, have more comfort to consider ESG factors and, in the longer term, expect that consideration of such factors may be explicitly required.

If you have any questions about the final rules or the DOL nonenforcement policy, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.