In late 2021, the US Department of Labor (DOL) issued a proposed regulation with new standards for selecting investments in ERISA-governed retirement plans, in which an investment manager uses ESG (environmental, social, or governance factors) in its investment process. Applying to participant-directed plans, such as 401(k) plans, and non-participant directed plans, such as defined benefit pension plans, it’s expected that the final DOL regulation will be issued by the summer of 2022, in substantially the same form as proposed.
There are three key differences between the current regulation that governs the selection of plan investments and the new proposal:
While the prohibition on “sacrificing” return or taking additional risk is not new, the proposal goes on to say that prudence and loyalty “may often require an evaluation of the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”
In other words, where ESG factors are material, plan committees must consider those factors. However, fiduciaries “may not sacrifice investment return or take on additional investment risk to promote benefits or goals unrelated to interests of the participants and beneficiaries in their retirement income or financial benefits under the plan.”
The proposal, like the current rule, includes a “tie-breaker” provision for situations where a plan committee concludes that competing investment options would “equally serve the financial interests of the plan.” While that concept is not further defined, it could reasonably be viewed as a situation where a plan committee cannot decide (based on material risk and return factors) which investment option is better for the plan.
The new proposal reverses the current regulation’s prohibition of the selection or continuation of ESG-factor QDIAs (Qualified Default Investment Alternatives) for defaulting participants.
Current |
Prohibits the selection or retention of a QDIA (with an effective date of April 30, 2022) if the fund manager considers any “non-pecuniary” factors that are not material to the risk and return of the QDIA. In other words, even if the manager used material factors to select the investment for the QDIA, but also considered some non-material factors, the investment would not be a QDIA. |
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Proposed |
Does not limit the factors that can be considered for the selection of QDIAs above and beyond those that apply to plan investments generally. |
Learn more about the key differences between the current regulation and the new proposal and how fiduciaries and plan committees can navigate between the two before final regulation.
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These articles were prepared for US investors and may contain information that may be materially different for Canadian investors, particularly with respect to taxation matters and after-tax returns. These differences may affect suitability for Canadian investors, and these materials should not be relied upon by Canadians in making any investment decisions. This material is provided to you for informational purposes only and may not be distributed or shared with others. The information provided is general in nature and may not be relied upon nor considered to be the rendering of tax, legal, accounting or professional advice. Readers should consult with their own accountants, lawyers and/or other professionals for advice on their specific circumstances before taking any action. All figures in USD unless otherwise stated.
This article is provided for educational and informational purposes only and is not an offer of investment advice or financial products. This is not intended to be legal or tax advice or to offer a comprehensive resource for tax-qualified retirement plans.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The use of environmental, social and governance (ESG) factors to exclude certain investments for non-financial reasons may limit market opportunities available to funds not using these criteria. Further, information used to evaluate ESG factors may not be readily available, complete or accurate, which could negatively impact the ability to apply ESG standards.
Invesco is not affiliated with Faegre Drinker Biddle & Reath LLP.
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