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Financial Factors in Selecting Plan Investments.

The impact on environmental, social and governance (ESG) investing.


The Department of Labor (DOL), on November 13, 2020, published its final rule on Financial Factors in Selecting Plan Investments to provide greater clarity regarding environmental, social and governance (ESG) investing.

The final rule will take effect on January 12, 2021. However, the rule also provides an extended compliance date of April 30, 2022 for any required changes to qualified default investment alternatives (QDIAs) in defined contribution (DC) or other participant-directed plans. In addition, it is possible that the Biden Administration may decide to amend the regulation through a future notice and comment period.

A look at the final rule

With the goal of helping plan sponsors understand the ruling and its potential impact on their retirement plan(s), here are some important details from the DOL’s final rule. It:

  • Introduces a new reference to “reasonably available alternatives,” and a requirement that plan fiduciaries consider these reasonably available alternatives in order to meet their prudence duties under ERISA. The DOL indicated its expectation that a focus on reasonably available alternatives should help avoid any implication that fiduciaries must “scour the marketplace” or evaluate an “infinite” number of possible alternatives as part of their evaluation.
  • Retains the concept of a “tie-breaker” rule allowing a fiduciary to use one or more non-financial factors to break a tie between or among available investment alternatives.
  • Requires that the fiduciary must document how a considered non-financial factor is consistent with the interests of participants in their retirement income or financial benefits under the plan.
  • Indicates that a fiduciary is not prohibited from including an investment fund in a DC or other participant-directed plan solely because it promotes, seeks or supports one or more non-financial goals if the plan allows participants to choose from a broad range of investment alternatives and the plan fiduciary meets its duties of prudence and loyalty, including evaluating the fund solely based on financial factors.
  • Prohibits plans from designating an investment fund as a QDIA (or component of a QDIA) if its objectives or goals or principal investment strategies include, consider or indicate the use of any non-financial factors.

Next steps

It is important that plan sponsors take steps to understand how ESG is incorporated into investment funds and evaluate their plan’s investment options to determine which funds, if any, may be impacted by the DOL rule. As you begin your evaluation process, here are some of the questions that a plan sponsor may want to consider:

Regarding fund lineups

  • What is the desired outcome of including ESG-themed options?
    • Do the ESG-themed options align with my organization’s values and mission?
    • Do the ESG-themed options satisfy my participants’ desires to express values, morals, and ethics in their investment choices?
  • For ERISA plans:
    • Are there any concerns about my fund lineup in respect to the DOL rule?
    • Are ESG-themed fund options included?
    • Does my plan offer sufficient ESG-themed/non-ESG-themed options?
    • Will I need to change the QDIA?

Regarding ESG-themed fund due diligence

  • Are fees reasonable given the specialized nature of ESG-themed investments?
  • Does the fund advisor maintain ESG-focused adequate resources?
  • What oversight mechanisms ensure the fund adheres to its ESG mandate?
  • How does the ESG mandate impact market risk and exposures?
  • Are the benchmark and peer group properly aligned?

In light of this new guidance, plan sponsors may wish to schedule a fund lineup review with their investment advisor, plan consultant, or relationship manager.

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