On November 13, 2020, the DOL issued final regulation, to promulgate principles of fiduciary standards for selecting and monitoring investments, and set forth the scope of fiduciary duties surrounding nonpecuniary issues.
The final rule makes five major amendments to the investment duties regulation under Title I of ERISA 404a–1 by:
- adding provisions to confirm that ERISA fiduciaries must evaluate investments and “investment courses of action”[1] based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.
- including an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars them from sacrificing investment return or taking on additional investment risk to promote nonpecuniary goals;
- including a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA;
- setting forth required investment analysis and documentation requirements[2] for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between or among investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone; and
- stating that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan.
Please find here the informational summary final rule.
[1] The term ‘‘investment course of action’’ means ‘‘any series or program of investments or actions related to a fiduciary’s performance of the fiduciary’s investment duties, and includes the selection of an investment fund as a plan investment, or in the case of an individual account plan, a designated investment alternative under the plan.’’
[2] The final rule includes a related documentation requirement for such decisions intended to prevent fiduciaries from improperly finding economic equivalence or making investment decisions based on nonpecuniary benefits without appropriately careful analysis and evaluation.