Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
On March 10, 2021, the Department of Labor’s Employee Benefits Security Administration (EBSA) announced that it will not enforce or otherwise pursue enforcement actions with respect to two recently issued final rules amending the “investment duties” regulation under Title I of the Employee Retirement Income Security Act (ERISA). It further announced plans to revisit these rulemakings. Plan sponsors should be aware that the Department’s non-enforcement policy has no impact on a plan participant’s ability to bring a private cause of action under these final and effective rules. Plan sponsors should additionally be on the lookout for further updates to the Department’s policies in this area.
EBSA Rules at Issue
The Department issued its final rule on “Financial Factors in Selecting Plan Investments” on November 13, 2020. The rule clarifies that the fiduciary duties of prudence and loyalty under ERISA require a plan fiduciary to select plan investments and investment courses of action based only on pecuniary factors. The rule became effective on January 12, 2021, but plans have until April 30, 2022, to make changes to qualified default investment alternatives where necessary to comply with the rule. The rule was promulgated amidst a rapid increase in environmental, social, and governance (ESG) investing in employee benefit plans. Although the Department had published several iterations of guidance on the topic over the past 30 years, consideration of ESG factors had not previously been addressed through rulemaking.
On December 16, 2020, the Department published its final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” further amending its investment duties regulation to address the application of the prudence and exclusive purpose duties to the exercise of shareholder rights. This rule became effective on January 15, 2021, although compliance with certain recordkeeping and proxy voting policy requirements is not required until January 31, 2022. The proxy-voting rule clarifies that the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights associated with those shares, and like the rule on selection of plan investments, provides that when exercising such rights, a fiduciary may not subordinate the interests of plan participants and beneficiaries to any non-pecuniary objective.
The Department’s current non-enforcement policy was issued in response to Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” issued on January 25, 2021, which directs federal agencies to consider suspending, revising, or rescinding any regulations issued under the previous administration that are inconsistent with the promotion and protection of public health. Both EBSA rules were issued through notice and comment, which may require the Department to follow a similar process in revoking or reissuing the rules. This lengthy process may slow down any Department efforts to quickly amend its regulations.
Plan sponsors and employers should continue to carefully review and comply with all legal requirements. We will continue to monitor the situation and keep you updated on any significant developments.