Pension & Benefits News EBSA final regs update and clarify plan fiduciaries’ investment duties
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Monday, November 30, 2020

EBSA final regs update and clarify plan fiduciaries’ investment duties

By Pension and Benefits Editorial Staff

The Department of Labor’s Employee Benefits Security Administration (EBSA) has announced final regulations to update and clarify the investment duties, providing clear regulatory guideposts for plan fiduciaries on environmental, social, and governance (ESG) investing.

EBSA said that the Labor Department has periodically been asked to consider the application of the fiduciary duties of prudence and exclusive purpose under ERISA Sec. 404(a)(1)(A) and (B) to pension plan investments selected because of non-financial objectives, such as environment, social, and public policy goals, that the investments may further. The different iterations of sub-regulatory guidance may have created confusion with about these investment issues.

The final regulations amend the DOL’s longstanding investment duties regulations, first issued in 1979, to require plan fiduciaries to select investments and investment courses of action based on pecuniary factors - that is, any factor that the responsible fiduciary prudently determines is 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 funding policy.

“Protecting retirement savings is a core mission of the U.S. Department of Labor and a chief public policy goal for our nation,” said U.S. Secretary of Labor Eugene Scalia. “This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.”

Five amendments. The final regulations make five major amendments to the investment duties regulation. First, the final regulations add provisions to confirm that ERISA fiduciaries must evaluate investments and investment courses of action based solely on pecuniary factors—financial considerations that have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy. The final regulations expressly apply these principles not just to investments and investment courses of action, but also to the selection of available investment options for plan participants in individual account plans.

Second, the final regulations include an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA Sec. 404(a)(1)(A) 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.

Third, the final regulations include a provision that requires fiduciaries to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA. Fourth, new regulatory text sets forth required investment analysis and documentation requirements for those circumstances in which plan fiduciaries use non-pecuniary factors when choosing between or among investments that the fiduciary is unable to distinguish on the basis of pecuniary factors alone. The final regulations include a related documentation requirement for these decisions.

Fifth, the final regulations state that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of designated investment alternatives to be offered to plan participants and beneficiaries in a participant-directed individual account plan.

Effective/applicability dates. The final regulations will be effective 60 days after publication in the Federal Register (the current regulation applies until then), but plans will have until April 30, 2022, to make any changes to certain qualified default investment alternatives, where necessary to comply with the final regulations.

Source: EBSA News Release No. 20-1886-NAT.

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