The DOL issued a final rule amending the "investment duties" regulation (under 29 C.F.R. 2550.404a-1) to provide that fiduciaries of plans subject to the Employee Retirement Income Security Act of 1974 ("ERISA") must make investment decisions based solely on risk-adjusted economic value. According to the DOL, the final rule is intended to provide a clear regulatory structure for ERISA Plan fiduciaries in light of recent trends relating to environmental, social and corporate governance investing.
The final rule amends the "investment duties" regulation in multiple significant ways by:
- providing that, to satisfy its duties of prudence and loyalty under ERISA Section 404, the fiduciary must select investments solely on the basis of pecuniary factors (i.e., factors that a fiduciary prudently determines are expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with a plan's investment objectives and funding policy);
- including a new provision expressly providing that compliance with the duty of loyalty in Section 404 of ERISA prohibits fiduciaries from subordinating the interests of participants to unrelated objectives, and bars fiduciaries from sacrificing returns or incurring additional risk to promote non-pecuniary goals;
- mandating that fiduciaries consider reasonably available investment alternatives to satisfy their duties of prudence and loyalty;
- setting forth analysis and documentation requirements in circumstances in which a fiduciary uses non-pecuniary factors when selecting between or among investments where the fiduciary is unable to distinguish such investments based on pecuniary factors alone; and
- providing that a fiduciary may include an investment fund that promotes non-pecuniary goals as an investment alternative for a defined contribution plan (e.g., a 401k plan) that provides for participant-directed investments if the fiduciary satisfies the duties of prudence and loyalty in Section 404 of ERISA and the final rule (including the requirement to evaluate the investment solely on pecuniary factors).
With respect to the fifth bullet point, the rule prohibits plans from adding any investment alternative as a "qualified default investment alternative" ("QDIA"), or as a component of a QDIA, if such alternative's investment objectives, goals or strategies include, consider or indicate the use of one or more non-pecuniary factors.
The final rule will go into effect 60 days after its publication in the Federal Register.
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