DOL’s Final Rule under ERISA on Prudence and Loyalty in Selecting Plan Investment and Exercising Shareholder Rights

January 8, 2024
DOL released the final rule under the ERISA to protect the savings of workers

On November 22, 2022, the U.S. Department of Labor (DOL) released the final rule under the Employee Retirement Income Security Act (ERISA) relating to empowering plan fiduciaries to protect the savings of American workers citing that fiduciaries may take Environmental, Social and Governance (ESG) principles into consideration when making investment decisions and when exercising shareholder rights including voting on shareholder resolutions and board nominations. This final rule comes after an estimated four decades of the DOL’s consideration of how ERISA’s fiduciary duties of prudence and loyalty apply to a plan’s investments’ which promote ESG objectives. While ESG considerations were never prohibited under ERISA and the voting rights of shareholders was recognized by DOL, there was confusion by stakeholders as to the agency’s position.

Evolution of the Final Rule

In 2020, the DOL published two “final rules” to address the uncertainty. They were:

  • On November 13, 2020, it issued the “Financial Factors in Selecting Plan Investments.” It adopted amendments to ERISA’s “Investment Duties” regulation and required plan fiduciaries to select investments and investment measures based on “consideration of pecuniary factors (i.e., factors defined in the regulation).
  • On December 16, 2020, the DOL published another final rule. The “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” which, like the November 13 rule, adopted amendments to ERISA’s “Investment Duties” regulation, addressing plan fiduciaries’ ERISA obligations regarding voting proxies and when exercising other shareholder rights related to plan investments in shares of stock.

Confusion Remains

While the intent was to provide clarification, confusion remained with the DOL receiving inquiries from various stakeholders ranging from asset managers, investment advisors, labor organizations, businesses and consumer groups to workers and service providers. A primary question posed was whether the 2020 rules correctly reflected the full scope of fiduciaries’ duties under ERISA to act in the best interests of plan participants and beneficiaries. Also questioned was if the DOL may have rushed its rulemaking and, in doing so, failed to fully consider and address evidence and public comments indicating how ESG considerations can improve investment value and long-term returns. The DOL was also informed that the confusion left by its rulemaking was having a negative effect on the integration of ESG factors in investment decisions. In addition, there were concerns that funds would not be treated as qualified default investment alternatives (QDIAs) because they explicitly considered ESG factors even if the funds were sound based solely on consideration to their financial attributes.

Back to the Table

As a result of the remaining confusion, the DOL went back to the table in 2021 which led to its October 14, 2021, publication of Notice of Proposed Rulemaking to amend the “Investment Duties” regulation. Ultimately, its work on the necessary changes, which took into consideration 900 written comments and over 20,000 petitions, led to the publication of the November 22, 2022, final rule.