DOL Issues Final ESG Rule for Plan Fiduciaries

Over the past few years, a new investment framework focused on the environmental, social, and governance (ESG) framework has been introduced to help screen investment opportunities. The focus is on determining how a company safeguards the environment, manages relationships with employees, and suppliers, and considers internal controls, audits, shareholder rights, and more. The approach has become so popular there are a number of ESG rating agencies including MSCI, ISS ESG, and FTE Russell. They provide important information on the ESG quality of an investment. In other words, ESG has become an increasingly important framework to investors.

Given its popularity, many employer-sponsored retirement plans have investigated the possibility of offering such investments. While favored by many participants, the Department of Labor (DOL) had taken a stance cautioning plan fiduciaries about these investments. In Field Assistance Bulletin 2018-01, stated investments should be evaluated based on financial factors that have an effort on risk and return. Based on this and other guidance there was reluctance to include ESG options.  

The good news is the DOL recently issued an updated final rule which reverses this earlier position. Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights allow plan fiduciaries to take into consideration the financial benefits of investments with ESG priorities. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

ESG Final Rule Changes

There were several important changes made that plan fiduciaries need to consider:

• Fiduciary Duty – The final moves to a position that is more supportive of ESG investing. In fact, it provides plan fiduciaries with an interpretation of their duties that permits the evaluation of ESG factors in investment offerings without violating duties outlined as part of the Employee Retirement Income Security Act (ERISA).
• Investment Evaluation – Clarifies that a fiduciary’s determination of an investment must be based on relevant risk and return analysis which can include the economic effects of climate change and other ESG factors. It is important to note that while the ESG factors can be included they are not required to be.
• Participant Preferences – The final rule clarifies how plan sponsors can respond to participant requests for ESG investment options. A new provision was added that says plan fiduciaries do not violate their duty of loyalty because they consider participants’ preferences when determining which investment options to offer.
• Updates to the Tiebreaker Rule – There were several changes streamlining the tiebreaker rule which allow a fiduciary when concluding an investment meets the financial interests of the plan to consider other ancillary benefits other than simply investment returns. The rule can now be used without additional documentation, and the additional disclosure requirement for designated investment alternatives has been removed.
• No Separate Standard for QDIAs – The final rule allows the standard to be applied to qualified default investment alternatives (QDIAs) as it does to other investment types. This stands in sharp contracts to prior regulations which prohibited the selection of an investment that included the use of non-financial related factors.

Contact Us

The recently released final rule provides important guidance to plan fiduciaries on how to evaluate plan investments while considering ESG factors. This is especially true when considering the inclusion of such factors is optional. If you have questions about the information outlined above or need assistance with a retirement plan audit, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.