On the first of this month, the Employee Benefits Security Administration of the US Department of Labor (“DOL”) published a new rule titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (“the Rule”), which clarifies how and when fiduciaries of 401(k) and similar retirement plans subject to the Employee Retirement Income Security Act (“ERISA”) can make investment decisions that promote environmental, social, or governance (“ESG”) goals or reflect ESG considerations. The Rule will take effect on January 30, 2023.
What is the ERISA?
The ERISA establishes minimum standards for most voluntarily established retirement, pension, and health plans (including 401(k) and 403(b) plans) in the private industry to provide protection for individuals in these plans. It imposes fiduciary duties on those who are deemed to be “fiduciary” under the ERISA.
These fiduciaries, which include employers that sponsor retirement plans and individuals selected to serve on the committee that makes investment decisions for the plan, have duties of prudence and loyalty to the plan, its participants, and their beneficiaries. This includes exercising reasonable care when selecting investment options available to plan participants.
The New Rule Clarifies ERISA’s Fiduciary Duties
The DOL’s new Rule aims to “clarify the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments and investment courses of action”. Specifically, in exercising the duty of prudence, an ERISA fiduciary’s decision must be based on “factors that the fiduciary reasonably determines are relevant to a risk and return analysis”. Such factors may include “the economic effects of climate change and other environmental, social, or governance [ESG] factors”.
What Does This Mean for Employers?
If you are an employer offering 401(k) or similar retirement plans, you should familiarize yourself with the new Rule. While the new Rule provides a shift in consideration of ESG factors when selecting investments and investment courses of action, it does not override the longstanding principle that investment decisions are primarily driven by risk and return. As a fiduciary, you must continue to ensure that any investment option offered is financially sound.
For more information on the DOL’s new Rule, please contact us at firstname.lastname@example.org.
This material is provided for informational purposes only. It is not intended to constitute legal advice, nor does it create a client-lawyer relationship between MNK Law and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material.