Final Rule: The DOL and ESG



The U.S. Department of Labor has released it’s final rule on ESG factors in retirement accounts: while plan fiduciaries may consider environmental, social and governance factors when selecting investments for the plan, they are not obligated to do so.


Duties of Prudence and Loyalty: Unchanged!

According to the National Association of Plan Advisors, the DOL’s final rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” brings clarity to the vacillating policy efforts on environmental, social and governance factors that plan fiduciaries have had to navigate:


The U.S. Department of Labor has unveiled its much-anticipated final ESG rule that it says will allow “plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.”The operative word for plan fiduciaries is MAY, not must consider ESG factors—a concern that had arisen in the wake of the proposed regulation previously issued….“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,” said Secretary of Labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”


The DOL reminds plan fiduciaries that there are no changes to the duties of prudence and loyalty which ERISA requires of all retirement plan fiduciaries. Accordingly, plan fiduciaries must continue “to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan, and that the fiduciary duty to manage plan assets that are shares of stock includes the management of shareholder rights appurtenant to those shares, such as the right to vote proxies.”


Plan sponsors are also reminded that even with great diligence, errors and oversights occur, and under the high standards of ERISA law, mistakes can result in fiduciary breach allegations.That’s why it’s critical for plan sponsors to protect themselves from personal liability. Colonial Surety is here to help with an affordable Fiduciary and Cyber Liability Insurance Package that includes:


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Good To Know

The National Association of Plan Advisors (NAPA) provides a full summary of the final rule on ESG factors related to retirement plans right here and points out:


A new and interesting provision “clarifies” that fiduciaries “do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, as suggested by commenters, then it could lead to greater retirement security.” Thus, in this way, giving consideration to whether an investment option aligns with participants’ preferences can be relevant to furthering the purposes of the plan. It appears this provision is intended to clarify that ESG-type investments can be added to a 401(k) menu based on the interests of participants, provided they satisfy the applicable fiduciary standards.


Of course even the most responsible plan sponsor, following all regulations and best practices, can never fully eliminate the fiduciary risks associated with the role, making protection essential. With ERISA lawsuits on the rise, the U.S. Chamber of Commerce reports that there’s been a corresponding increase in the cost of fiduciary liability insurance—making it harder then ever for plan sponsors and other fiduciaries to mitigate their risks. Colonial Surety is here to help: as a longstanding and trusted national provider of ERISA Fidelity Bonds, we are committed to ensuring that plan sponsors from businesses of every size can afford protection.


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