Department of Labor Issues Proposed Changes to Investment Duties Rule Under ERISA

by Ivelisse Berio LeBeau

The much-anticipated revised Investment Duties regulation drops ERISA fiduciaries into 21st century investment decision making, freeing fiduciaries to consider all relevant facts and circumstances that could affect an investment’s value, including, as appropriate, climate change and environmental, social, and corporate governance (“ESG”) factors. 86 Fed. Reg. 57272 (October 14, 2021).

These proposed rule changes are the latest chapter in a series of non-regulatory and regulatory guidance on the sticky subject of fiduciary consideration of an investment’s potential collateral benefits, loosely encompassing investments that promote or support social or other benefits or goals. DOL guidance dating back to the 1990s had explained that fiduciary evaluation of investment options must always prioritize and focus on a plan’s financial interests; cannot sacrifice potential investment returns to nonfinancial objectives; can consider all circumstances that could have an economic impact; and can consider nonfinancial collateral benefits in selecting among comparable investment options. Over time, however, the DOL’s guidance had shifted towards, or had been interpreted as, treating an investment’s economic characteristics and its collateral benefits or goals as separate factors pitted against each other to be considered independently.

The DOL’s proposed new Investment Duties regulation breaks from that dichotomy and clarifies that fiduciaries may, and should, prudently consider any factors that could affect the value of an investment, specifically acknowledging that climate change and ESG factors can be economic factors in the prudent risk/return evaluation of an investment option.

The proposed changes also reiterate that the fiduciary duty of loyalty requires that fiduciaries not subordinate plan financial interests to other objectives and to evaluate investment options based on factors they have prudently determined are material to investment value, which will be dependent on the relevant facts and circumstances. 

The DOL also reinstated its earlier “tie-breaker” standard under which fiduciaries may consider non-financial collateral benefits or objectives in selecting among comparable investment options, removing the rigid documentation requirements in the 2020 rule that the DOL recognized had served to discourage fiduciaries from considering collateral benefits or goals at all. The proposed rule includes a new gloss, requiring disclosure of any collateral benefit characteristics of designated investment alternatives selected for investment menus in participant-directed individual account plans.  The proposed rule also removed the 2020 prohibition on ESG considerations or goals in designating a Qualified Default Investment Alternative (“QDIA”).

The proposed revision also changes 2020 rules on proxy voting, eliminating provisions that critics argued made it unnecessarily difficult to vote proxies on behalf of benefit plans. Recognizing that exercising shareholder rights is a fiduciary function, the proposed regulation sets forth guidance on investment policy statements, including proxy voting policies. It provides mechanisms for reconciliation of conflicting investment policy statements relating to plan assets held in pooled investment vehicles. Reconciliation can be negotiated. This may mean that smaller plans will, in many cases, be required to accept the investment policy of the investment manager. 

The details of the proposed revised regulations will be scrutinized in the coming months, and comments are due on December 13, 2021, 60 days after publication in the Federal Register. Unlike the 2020 rules, however, this proposed revision of the Investment Duties rule arguably creates more room for the neutral exercise of fiduciary discretion with fewer regulatory constraints, and thus is likely not to generate a wave of opposition as its predecessor did.