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Financial Factors in Selecting Plan Investments rule (2020)

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The Financial Factors in Selecting Plan Investments rule was a significant rule issued by the U.S. Department of Labor (DOL) effective January 12, 2021, that amended the Employee Retirement Income Security Act of 1974 (ERISA) to prohibit retirement plans from considering certain environmental, social, and corporate governance (ESG) factors in investment-related decisions. The rule required that ERISA fiduciaries consider only financial returns and material risk factors in their decisions.[1]

The Biden administration's Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule, which took effect January 30, 2023, reversed the Trump rule and allowed retirement plans to consider certain (ESG) factors in investment-related decisions. For more information about the Biden administration's rule, click here.[2]

HIGHLIGHTS
  • Name: Financial Factors in Selecting Plan Investments
  • Agency: Employee Benefits Security Administration, Department of Labor
  • Action: Final rule
  • Type of significant rule: Economically significant rule

    • Timeline

    The following timeline details key rulemaking activity:

    Background

    Environmental, social, and corporate governance
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    • What is ESG?
    •     Enacted ESG legislation
    • Arguments for and against ESG
    • Opposition to ESG
    • Federal ESG rules
    • ESG legislation tracker
    • Economy and Society: Ballotpedia's weekly ESG newsletter
    See also: Environmental, social, and corporate governance (ESG)

    Title I of the Employee Retirement Income Security Act of 1974 (ERISA) governs private-sector employee benefit plans and establishes standards for fiduciary responsibilities. The Department of Labor issued Interpretive Bulletin 94-1 in 1994, requiring fiduciaries under ERISA to prioritize financial returns and material risk factors in their assessments of investments. Between 1994 and 2020, the department issued several more guidance documents, all requiring the prioritization of financial returns and risk mitigation factors in investment decisions but not prohibiting certain ESG or non-pecuniary investment considerations.[1]

    The Financial Factors in Selecting Plan Investments rule aimed to clarify the definitions binding ERISA plan fiduciaries and required managers to "focus solely on the plan's financial risks and returns and keep the interests of plan participants and beneficiaries in their plan benefits paramount," according to the Department of Labor.[1]

    Summary of the rule

    The following is a summary of the rule from the rule's entry in the Federal Register:

    “ The Department of Labor (Department) is adopting amendments to the “investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The amendments require plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.[1][3] ”

    Summary of provisions

    The following is a summary of the provisions from the final rule's entry in the Federal Register:[1]

    “ The final regulation sets forth fiduciary standards for selecting and monitoring investments held by ERISA plans, and addresses the scope of fiduciary duties surrounding non-pecuniary issues. The final regulation contains several important changes from the proposal in response to public comments. The fact that the loyalty principles of section 404(a)(1)(A) of ERISA are now coupled with the previous prudence regulation under section 404(a)(1)(B) confirms that, in making investment decisions of any kind, ERISA requires that both the principles of loyalty and of prudence must be considered. The final rule expressly applies 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.


    As more fully described below, the final rule makes five major amendments to the investment duties regulation under Title I of ERISA at 29 CFR 2550.404a-1. First, the final rule adds 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 term “investment course of action” is defined in paragraph (f)(2) of the final rule to mean “any series or program of investments or actions related to a fiduciary's performance of the fiduciary's investment duties, and includes the selection of an investment fund as a plan investment, or in the case of an individual account plan, a designated investment alternative under the plan.” Second, the final rule includes an express regulatory provision stating that compliance with the exclusive purpose (loyalty) duty in ERISA section 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 rule includes 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 rule includes a related documentation requirement for such decisions intended to prevent fiduciaries from improperly finding economic equivalence or making investment decisions based on non-pecuniary benefits without appropriately careful analysis and evaluation. Fifth, the final rule states 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. The final rule expressly provides that, in the case of selecting investment alternatives for an individual account plan that allows plan participants and beneficiaries to choose from a broad range of investment alternatives, as defined in 29 CFR 2550.404c-1(b)(3), a fiduciary is not prohibited from considering or including an investment fund, product, or model portfolio merely because the fund, product, or model portfolio promotes, seeks, or supports one or more non-pecuniary goals, provided that the fiduciary satisfies the prudence and loyalty provisions in ERISA and the final rule, including the requirement to evaluate solely on pecuniary factors, in selecting any such investment fund, product, or model portfolio. However, the provision prohibits plans from adding any investment fund, product, or model portfolio as a qualified default investment alternative described in 29 CFR 2550.404c-5, or as a component of such an investment alternative, if the fund, product, or model portfolio's investment objectives or goals or its principal investment strategies include, consider, or indicate the use of one or more non-pecuniary factors.[3]

    		”

    Significant impact

    See also: Significant regulatory action

    An agency rule can be deemed a significant rule if it has had or might have a large impact on the economy, environment, public health, or state or local governments. The term was defined by Executive Order 12866, which was issued in 1993 by President Bill Clinton. The following is drawn from the rule to determine its classification as economically significant or significant for some other reason:[1]

    “ OMB has designated this final rule as a “major rule,” as defined by 5 U.S.C. 804(2), because it would be likely to result in an annual effect on the economy of $100 million or more.[3] ”

    Text of the rule

    The full text of the rule is available below:[1]

    Responses

    The following sections provide a selection of responses to the final rule issued by the DOL:

    Support for the rule

    A coalition of 50 U.S. senators led by U.S. Senator Mike Braun (R-Ind.) introduced a Congressional Review Act (CRA) resolution on February 7, 2023, aiming to preserve the Financial Factors in Selecting Plan Investments rule and nullify the Biden administration's rule allowing ESG considerations in ERISA investments. U.S. Senator Rick Scott (R-Fla.) signed onto the resolution and issued the following statement arguing in favor of keeping the Trump rule in place:[4]

    “ Once again, Biden and his administration are putting their liberal priorities over the best interests of the American people by allowing ridiculous and illogical ESG policies into employer-sponsored retirement plans. This rule allows Wall Street fund managers to make choices on behalf of Americans based on their own beliefs and social agenda, not what’s financially sound. It jeopardizes the hard-earned nest egg millions of families rely on to retire comfortably. Families deserve better, and I’m glad to join my colleagues to fight this rule and reverse this horrible decision.[3] ”

    Opposition to the rule

    Secretary of Labor Marty Walsh issued a press release announcing the Biden rule that replaced the Financial Factors in Selecting Plan Investments rule. Walsh argued that the Trump rule was too restrictive and that the replacement would benefit workers:[5]

    “ Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits. ... Removing the prior administration's restrictions on plan fiduciaries will help America's workers and their families as they save for a secure retirement.[3] ”

    Aftermath

    President Joe Biden vetoes Congressional Review Act resolution regarding ESG retirement plan rule (2023)

    President Joe Biden (D) issued a veto on March 20, 2023, to block the Congressional Review Act resolution that would have upheld the Trump administration's Financial Factors in Selecting Plan Investments rule and nullified the Biden administration's 2023 rule allowing ESG considerations in ERISA investments. Biden stated in his message, "There is extensive evidence showing that environmental, social, and governance factors can have a material impact on markets, industries, and businesses. ... Retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country." As a result of the veto, the Financial Factors in Selecting Plan Investments rule was replaced.[6][7]

    Congress passes Congressional Review Act resolution aiming to uphold Financial Factors in Selecting Plan Investments rule (2023)

    The U.S. House of Representatives voted 216-204 on February 28, 2023, to pass a Congressional Review Act resolution (H.J. Res. 30) aiming to uphold the Financial Factors in Selecting Plan Investments rule and nullify the Biden administration's 2023 rule allowing ESG considerations in ERISA investments. Democratic Representative Jared Golden (Maine) joined Republicans in the vote to pass the measure. The U.S. Senate passed the resolution on March 1, 2023, by a 50-46 vote. Democratic Senators Joe Manchin (W. Va.) and Jon Tester (Mont.) joined Republican senators in the vote.[8] President Joe Biden (D) on February 27, 2023, released a statement on his intent to veto the CRA resolution.[9]

    Congressional Review Act resolution aims to uphold Financial Factors in Selecting Plan Investments rule (2023)

    See also: Congressional Review Act

    A coalition of 50 U.S. senators led by U.S. Senator Mike Braun (R-Ind.) introduced a Congressional Review Act (CRA) resolution on February 7, 2023, aiming to uphold the Financial Factors in Selecting Plan Investments rule and nullify the Biden administration's 2023 rule allowing ESG considerations in ERISA investments. “President Biden is jeopardizing retirement savings for millions of Americans” by encouraging “fiduciaries to make decisions with a lower rate of return for purely ideological reasons,” argued Braun in a statement.[10]

    Biden administration rule allows retirement plans to consider ESG factors in investments (2023)

    The Biden administration's Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule took effect January 30, 2023, replacing the Trump administration's Financial Factors in Selecting Plan Investments rule, and removing the requirement that ERISA retirement plans consider only financial returns and material risk factors in their investing decisions.[2]

    See also

    External links

    Footnotes

    1. ↑ 1.00 1.01 1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09 1.10 Federal Register, "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights," November 13, 2020
    2. ↑ 2.0 2.1 2.2 Federal Register, "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights," December 1, 2022
    3. ↑ 3.0 3.1 3.2 3.3 3.4 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
    4. ↑ Rick Scott, "Sens. Rick Scott & Mike Braun lead bipartisan challenge to Biden rule politicizing Americans’ 401(k)s," February 1, 2023
    5. ↑ U.S. Department of Labor, "US DEPARTMENT OF LABOR ANNOUNCES FINAL RULE TO REMOVE BARRIERS TO CONSIDERING ENVIRONMENTAL, SOCIAL, GOVERNANCE FACTORS IN PLAN INVESTMENTS," November 22, 2022
    6. ↑ The White House, "Message to the House of Representatives - President's Veto of H.J. Res 30," March 20, 2023
    7. ↑ NPR, "Biden has vetoed his first bill. Here's how that compares to other presidents," March 20, 2023
    8. ↑ Congress.gov, "H.J. Res. 30," accessed March 2, 2023
    9. ↑ White House, "Statement of Administration Policy," February 27, 2023
    10. ↑ Rick Scott, "Sens. Rick Scott & Mike Braun lead bipartisan challenge to Biden rule politicizing Americans’ 401(k)s," February 1, 2023
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