U.S. Department of Labor
Employee Benefits Security Administration
October 30, 2020

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On October 30, 2020, the U.S. Department of Labor (Department) released a final rule that amends certain provisions of the “investment duties” regulation at 29 CFR 2550.404a-1, which is applicable to plans covered by the Employee Retirement Income Security Act (ERISA). The amendments codify fiduciary standards for selecting and monitoring investments, and provide clear regulatory guideposts for fiduciaries of private sector retirement and other employee benefit plans in light of recent trends involving environmental, social, and governance (ESG) investing.


Over the last 30 years, the Department has periodically considered the application of the fiduciary duties of prudence and loyalty under ERISA sections 404(a)(1)(A) and (B) to pension plan investments that promote non-pecuniary benefits, such as furthering environment, social, and other public policy goals.

The Department’s first comprehensive guidance in this area was Interpretive Bulletin 94-1 (IB 94-1), which focused on “economically targeted investments” (ETIs). IB 94-1 stated that an ETI investment is not inherently incompatible with ERISA’s fiduciary obligations as long as the investment has an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics that are available to the plan, and the investment is otherwise appropriate for the plan based on such factors as diversification and the plan’s investment policy. The preamble to IB 94-1 explained that when competing investments serve the plan’s economic interests equally well, plan fiduciaries can use non-pecuniary considerations as the deciding factor for an investment decision. Some commentators have referred to this test as the “all things being equal” or “tie-breaker” standard.

Since 1994, the Department’s guidance on considering non-pecuniary factors has gone through an iterative process, as the Department has considered, revised, and clarified its previous guidance. Thus, in 2008, the Department replaced IB 94-1 with Interpretive Bulletin 2008-01 (IB 2008-01), and seven years later, the Department, in turn, replaced IB 2008-01 with Interpretive Bulletin 2015-01 (IB 2015-01).

Each Interpretive Bulletin has emphasized that plan fiduciaries must focus their attention on the plan’s financial returns. As the Bulletins made clear, ERISA requires plan fiduciaries to treat the interest of plan participants and beneficiaries in their financial benefits under the plan as paramount. Accordingly, each Interpretive Bulletin, while restating the “all things being equal” test, also cautioned that fiduciaries violate ERISA if they accept expected reduced returns or greater risks to secure social, environmental, or other public policy goals.

IB 2015-01 also explained that “if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from ESG factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.” In 2018, the Department issued Field Assistance Bulletin 2018-01 that clarified that, in making its statement in 2015, “the Department merely recognized that there could be instances when ESG issues present material business risk or opportunities to companies that company officers and directors need to manage as part of the company’s business plan and that qualified investment professionals would treat as economic considerations under generally accepted investment theories.” The Department said that, in such situations, the issues are themselves appropriate economic considerations and “thus may be considered by a prudent fiduciary along with other relevant economic factors to evaluate the risk and return profiles of different investments.” The Department cautioned, however, that fiduciaries “must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.”

June 2020 Proposed Rule

In June 2020, the Department published a proposed rule to amend the “investment duties” regulation at 29 CFR 2550.404a-1. In publishing the proposal, the Department noted that confusion with respect to ESG investing issues persists, potentially generated in part by the different iterations of sub-regulatory guidance from the Department. The Department also expressed concern that current ESG trends suggest that plan fiduciaries may be making investment decisions for purposes distinct from the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan, and thus in violation of their fiduciary duty of loyalty.

The Department also noted that marketers may be inappropriately targeting ERISA individual account plans (or 401(k)-type plans) for investment products represented to promote benefits and goals unrelated to financial performance. As a result, participants may be offered funds that accept lower returns or higher investment risks in order to pursue ESG objectives. Moreover, these ESG funds may often come with higher fees, because additional investigation and monitoring are necessary to assess an investment from an ESG perspective.

The Department also pointed to available research and data showing a steady upward trend in use of the term “ESG” among institutional asset managers, an increase in the array of ESG-focused investment vehicles available, a proliferation of ESG metrics, services, and ratings offered by third-party service providers, and an increase in asset flows into ESG funds. The proposal pointed out that as ESG investing has increased, it has engendered important and substantial questions with observers identifying a lack of precision and consistency in the marketplace with respect to defining ESG investments and strategies, as well as shortcomings in the rigor of the prudence and loyalty analysis by some participating in the ESG investment market. The proposal’s regulatory text reiterated the Department’s view that plan fiduciaries must base decisions on investments and investment courses of action solely on pecuniary factors.

The Department received over 1,100 written comments submitted during the open comment period, and over 7,600 submissions made as part of six separate petitions (i.e., form letters). These comments and petitions came from a variety of parties, including plan sponsors and other plan fiduciaries, individual plan participants and beneficiaries, financial services companies, academics, elected government officials, trade and industry associations, and others, both in support of and in opposition to the proposed rule. These comments were available for public review on the website of the Department’s Employee Benefits Security Administration (EBSA) and on regulations.gov.

Overview of Final Rule

The final rule adopts the proposed regulation with modifications in response to public comments. The Department expects the final rule to result in higher returns to plan investors by preventing fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions on financial factors. Although some plans will have to modify the way they select and monitor investments, the Department believes that the rule is broadly consistent with current practices and, for that reason, will not result in significant additional costs for the overwhelming majority of plans.

The final rule includes the following core additions to the current investment duties regulation at 29 CFR 2550.404a-1:

  • The final rule adopts the proposal’s addition of a general restatement of the loyalty duty under ERISA section 404(a)(1)(A). In reaction to comments, the final rule continues to treat the original 1979 regulation’s provisions on the fiduciary duty of prudence as a safe harbor. In addition, the rule separately sets out a new provision regarding a fiduciary’s duty of loyalty under ERISA section 404(a)(1)(A) as minimum requirements for meeting the statutory standard of loyalty.
  • In addition to the general restatement of the loyalty duty, the final rule adds a specific provision to confirm that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors—i.e., factors that the responsible fiduciary prudently determines are expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy. This provision also states that the duty of loyalty prohibits fiduciaries from subordinating the interests of participants to unrelated objectives and bars them from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  • The final rule adopts with modifications the provision in the proposal that explicitly requires fiduciaries to consider reasonably available alternatives to meet their prudence duties under ERISA. The Department modified the final rule’s text from the proposal, however, to avoid suggesting that fiduciaries must scour the marketplace or look at an infinite number of possible alternatives as part of their evaluation.
  • The final rule includes new regulatory text setting forth required investment analysis and documentation requirements for those limited circumstances in which plan fiduciaries may use non-pecuniary factors to choose between or among investments that the fiduciary cannot distinguish based on pecuniary factors alone. The documentation requirements are intended to prevent fiduciaries making investment decisions based on non-pecuniary benefits without appropriately careful analysis and evaluation.
  • The final rule states that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of a designated investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan or a defined contribution plan). The rule does not categorically prohibit the fiduciaries of such plans from considering or including, as designated investment alternatives, investment funds, products, or model portfolios that support non-pecuniary goals if the plans allow participants and beneficiaries to choose from a broad range of investment alternatives, as defined in 29 C.F.R. § 2550.404c-1(b)(3). However, the rule makes clear that the fiduciaries must first satisfy the prudence and loyalty provisions in ERISA and the final rule, including the overarching requirement to evaluate investments solely based on pecuniary factors when selecting any such investment fund, product, or model portfolio.
  • In response to public comments, the final rule modifies the provision in the proposal on qualified default investment alternatives (QDIAs), and prohibits plans from adding or retaining any investment fund, product, or model portfolio as a QDIA (as described in 29 C.F.R. § 2550.404c-5), or as a component of such a default investment alternative, if its objectives or goals or its principal investment strategies include, consider, or indicate the use of one or more non-pecuniary factors.

Unlike the proposal, the final rule’s operative text contains no specific references to ESG or ESG-themed funds. Many commenters expressed concern that the proposal could be read as improperly singling out, deterring, or prohibiting consideration of ESG factors even in cases where they were relevant to a risk/return evaluation of an investment or investment course of action. The Department clearly stated in the preamble to the proposal that ESG factors could be pecuniary in nature and that, in such cases, fiduciaries properly could consider the factors as part of their investment analysis. Nonetheless, EBSA concluded that the lack of a precise or generally accepted definition of “ESG,” either collectively or separately as “E, S, and G,” made ESG terminology not appropriate as a regulatory standard. Instead, the final rule refers to pecuniary factors and non-pecuniary factors in defining the relevant fiduciary investment duties.

With respect to the use of the “all things being equal test” or the “tie-breaker” rule, also unlike the proposal, the final rule does not refer to ties as involving instances in which investments are “economically indistinguishable”. Rather, in response to public comments questioning the workability of such an approach, the final rule provides that if, after completing an appropriate evaluation, a fiduciary cannot distinguish between alternative investments on the basis of pecuniary factors and the fiduciary chooses one of the investments on the basis of a non-pecuniary factor, the fiduciary must document why pecuniary factors alone did not provide a sufficient basis to select the investment or investment course of action, how the selected investment compares to the alternative investments with regard to certain factors listed in the rule, and how the chosen non-pecuniary factor or factors are consistent with the interests of participants and beneficiaries in their retirement income or financial benefits under the plan. In addition, the preamble of the final rule encourages fiduciaries to break ties using their best judgment on the basis of pecuniary factors alone.

Effective Date

The final rule becomes effective 60 days after the date of publication in the Federal Register so that the final rule applies prospectively in its entirety to investments made and investment courses of action taken after such date. The current 404a-1 regulation applies until then. The final rule also includes a provision that gives plans until April 30, 2022 to make any changes that are necessary to comply with the requirements related to the selection of qualified default investment alternatives. Of course, nothing in the regulation forecloses the Department from taking enforcement action based on prior conduct that violated ERISA’s provisions, including the statutory duties of prudence and loyalty, based on the statutory and regulatory standards in effect at the time of the violation.

Contact Information

For questions about the proposed rulemaking, contact EBSA’s Office of Regulations and Interpretations at 202-693-8500.