December 7, 2022

DOL Issues Final Rule on Climate Change, ESG Factors for Retirement Plan Investments

Holland & Knight Executive Compensation and Benefits Info Flash
John D. Martini | Ryan C. Meadows | Victoria H. Zerjav | Nicole F. Martini | Patrick Burri
Executive Compensation and Benefits Info Flash

The U.S. Department of Labor (DOL) on Nov. 22, 2022, announced its adoption of amendments to the regulation setting out retirement plan fiduciary duties of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (ERISA) as they relate to investment selection and management. Particularly, the final regulation clarifies the ability of fiduciaries to consider non-financial characteristics, such as climate change and environmental, social and governance (ESG) factors, when selecting plan investments.


Under ERISA, retirement plan fiduciaries are required to 1) administer the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing plan benefits and paying expenses, and 2) act prudently and diversify the plan's investments. For the past three decades, the DOL has followed the principle that participants' interests are financial first and foremost; however, the DOL has also considered whether fiduciaries may also consider non-pecuniary factors, including ESG factors, in selecting plan investments. The DOL previously determined that selecting "economically targeted investments" (i.e., investments considered for more than just their return) is not inherently incompatible with fiduciaries' duties under ERISA, but that such economically targeted investment choices must not reduce returns or increase risk. In accordance with Executive Orders calling for review of the regulation and in response to both private and governmental entities exploring ESG-related questions and investment practices, the DOL examined the applicable duties and polices to clarify the circumstances under which plan fiduciaries may choose ESG-focused investment options. The DOL's latest announcement sets out the final rule adopting the proposed regulation with revisions.

Amendments to the Fiduciary Rules

The final rule as adopted by the DOL amends Treasury Regulation Section 2550.404a-1, under Section 404 of ERISA, to clarify the fiduciary duties of prudence and loyalty as applied to investment selection and to reverse and modify certain prior amendments. In general, the final rule affects five key elements of the regulation:

  • Non-Pecuniary Factors May Be Considered. The final rule amends the current regulation to remove language regarding pecuniary and non‑pecuniary factors. Going forward, plan fiduciaries are not bound by the prior limitation that only pecuniary factors be considered in evaluations of investments.
  • Investment Decisions to Be Based on Factors Relevant to Risk and Return Analysis. The final rule amends the regulation to explain that fiduciary determinations on investments are to be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis, which may include climate change and ESG factors. Fiduciaries are given more discretion to determine the amount of weight that any factor should have on the risk-return analysis.
  • QDIA Investment Objectives May Be Non-Pecuniary. The final rule amends the regulation to remove a rule specific to any qualified default investment alternative (QDIA) that provides that an investment may not be included in a QDIA if the investment reflects a non-pecuniary interest in its investment objective or principal investment strategy. The revised regulation removes the distinction for QDIAs such that a fiduciary may consider the same factors as for any other investment.
  • Fiduciaries May Consider Non-Pecuniary Factors Even if Investment Options Are Not Indistinguishable Based on Pecuniary Factors Alone. The final rule amends the "tiebreaker" rule, which states that fiduciaries may not look to non-pecuniary factors of an investment to make decisions against a competing investment unless such investments are indistinguishable based on pecuniary factors alone. As amended, the regulation instead requires that fiduciaries prudently conclude that competing investments equally serve the financial interests of the plan over the appropriate time horizon when selecting investments based on collateral benefits other than returns.
  • Fiduciaries May Consider Participant Preferences for Investment Options. The final rule adds a provision that expressly permits fiduciaries to take participants' preferences into account when constructing a menu of investment options for participant-directed individual account plans (e.g., under a defined contribution 401(k) plan). A fiduciary who takes such preferences into account does not violate their duty of loyalty in doing so.

The changes to the regulation are designed to allow fiduciaries to consider the effects of a broader range of factors, including climate change and ESG factors, on investments. However, the DOL makes clear that the amended regulation still requires that plan fiduciaries focus on relevant risk-return factors. In addition, plan fiduciaries are not permitted under the final rule to subordinate the interests of participants and beneficiaries to non-pecuniary objectives (e.g., fiduciaries must not sacrifice returns or assume extraneous risk for such objectives). The DOL anticipates that the changes set forth in this rule may increase participants' interest in contributing to employer-sponsored retirement benefit plans as a result of fiduciaries being allowed to select investments that more closely align with participants' interests non-pecuniary investment goals.

If you are a retirement plan sponsor and would like assistance in evaluating your plan's investment selection and governance practices, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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