Experiential Wealth

DOL Propose Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights

Oct 25, 2021 | Plan Sponsors, Regulations


On October 14, 2021, the Department of Labor (DOL) issued proposed rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights , which replaces the current regulation, the Financial Factors in Selecting Plan Investments rule  (“Current Regulation” or “Investment Duties Regulation”).  The Current Regulation could expose plans’ investments and portfolios to avoidable climate-change-related risks which negatively impact performance, particularly over longer time horizons. DOL is proposing the new rule in selecting plan investments and exercising shareholder rights.  Overall, the proposed new rule allows fiduciaries to consider environmental, social, or governance (“ESG”) factors as material to the risk-return analysis as any other such factors; although this is not a requirement.


For many years, the DOL’s non-regulatory guidance has recognized that, under the appropriate circumstances, ERISA fiduciaries can make investment decisions that reflect climate change and ESG considerations, including climate-related financial risk, and choose economically targeted investments (“ETIs”) selected, in part, for benefits apart from the investment return. The Department’s non-regulatory guidance has also recognized that the fiduciary act of managing employee benefit plan assets includes the management of voting rights as well as other shareholder rights connected to shares of stock, and that management of those rights, as well as shareholder engagement activities, is subject to ERISA’s prudence and loyalty requirements.

On June 30 and September 4, 2020, the DOL published proposed rules to remove prior non-regulatory guidance and to amend the DOL’s Investment Duties regulation under Title I of ERISA at 29 CFR 2550.404a-1 (Current Regulation or “Investment Duties Regulation”).The stated objective was to address perceived confusion about the implications of nonregulatory guidance with respect to ESG considerations, Economically Targeted Investments (ETIs), shareholder rights, and proxy voting. The 2020 proposals expressed concern that some ERISA plan fiduciaries might be making improper investment decisions, and that plan shareholder rights were being exercised in a manner that subordinated the interests of plans and their participants and beneficiaries to unrelated objectives.

On November 13, 2020, the DOL published a final rule titled “Financial Factors in Selecting Plan Investments,” 85 FR 72846, which adopted amendments to the Investment Duties regulation that generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.” The Current Regulation also contains a prohibition against adding or retaining any investment fund, product, or model portfolio as a qualified default investment alternative (QDIA) if the fund, product, or model portfolio reflects non-pecuniary objectives in its investment objectives or principal investment strategies. On December 16, 2020, the DOL published a final rule titled “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties Regulation to establish regulatory standards for the obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.

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