DOL’s Non-Enforcement Policy for 401(k) ESG Investments
On March 10, 2021, the U.S. Department of Labor (“DOL”) announced in an official statement that it will not enforce its recently issued regulations on the investment of 401(k) plan investments based on nonpecuniary factors, such as “environmental, social and governance” (“ESG”) factors. The announcement represents an unusual, though not totally unexpected, change of course with respect to the DOL’s prior stated position on this issue. Specifically, the statement follows an executive order issued by President Biden which directed Federal agencies to review existing regulations adopted during the Trump administration that could be inconsistent with the proposed policies of the incoming executive branch.
Background. ERISA requires that retirement plan fiduciaries manage plans solely in the interest of participants and beneficiaries, and for the exclusive purpose of providing benefits and paying plan expenses. (See our articles entitled “401(k) ERISA’s Duty of Care and Liability” and “401(k) Fiduciary and Non-Fiduciary Functions” for a general discussion on ERISA fiduciary duty.) In particular, the investment of plan assets — including investment choices made by 401(k) plan participants and beneficiaries from a pre-selected menu of funds — must meet ERISA’s high standards of care and prudence. In general, this means that investment decisions must be based solely on financial considerations, taking into account appropriate economic conditions and factors. Accordingly, other factors – such as ESG factors – may never constitute the primary consideration when choosing investments.
DOL Proposed Rule on ESGs. On June 30, 2020, the DOL issued a proposed rule that was widely perceived within the employee benefits community as having a discouraging effect on 401(k) plan investments based on ESG factors. (Please refer to our article entitled “DOL Keeps Its “Social Distance” From 401(k) Plan Investments in Environmental, Social and Governance Funds” for a general discussion on the history and issues surrounding 401(k) investments based on ESG factors, along with details on the proposed rule.)
Final Regulations Issued. On November 13, 2020, the DOL published final regulations entitled “Financial Factors in Selecting Plan Investments,” which generally require plan fiduciaries to select investments, and investment courses of action, based solely on consideration of pecuniary factors – in other words, considerations impacting the investments’ economic value. Although very similar in substance to the proposed rule released on June 30, unlike the proposed rule, the text of the final regulations itself (separate from the preamble) did not explicitly reference the terms “environmental, social and governance” or “ESG,” due to the inability to define such terms, and to keep from excessively narrowing the overriding goals stated in the final regulations.
OBSERVATION: Members of the employee benefits community have lamented that both the proposed and final version of these rules have only increased the confusion and controversy surrounding the types of investments that fiduciaries may permissibly include in 401(k) plans, along with the potential consequences of violations of the rules.
The New DOL Statement. Generally stated, the DOL’s March 10, 2021 announcement specifies that, pending the publication of further guidance — during which time the DOL will be reviewing the final rule for possible future changes — the DOL will not pursue enforcement actions against any plan fiduciary based on a failure to comply with the final regulations. As an example, if a plan fiduciary uses ESG factors along with other pecuniary factors in connection with its designation of a “qualified default investment alternative” (“QDIA”) for a 401(k) plan, the DOL will not at this time seek to apply enforcement principles based on the November 13, 2020 final regulations.
The DOL acknowledged that it received a large number of comments from a wide variety of concerned parties, including asset managers, plan sponsors, consumer groups, service providers, and investment advisers. Based on these comments, the DOL is concerned that the proposed and final rules may have created the unwarranted perception that fiduciaries are at risk if they include any ESG factors in the evaluation of plan investments. Time will tell whether, and the extent to which, this perception may be altered by future DOL guidance.
NOTE: The new nonenforcement policy does not, of course, preclude the enforcement of any requirement under ERISA or any other applicable statute or regulation, nor does it in any way negate or diminish the duties of prudence and loyalty that underly ERISA’s fiduciary responsibilities.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.