Regulatory changes occur that can impact how you manage your plan, its investment policy statement (IPS) or your asset allocation. As a fiduciary and steward of the plan assets, it’s critical to stay up to date on the most current changes, and more importantly, understand how they may impact your decisions about the plan. In the latest regulation, the U.S. Department of Labor (DOL) finalized the regulations entitled “Financial Factors in Selecting Plan Investments,” or herein referred to as the “Final Rule.”

Like many industries, making investment decisions that are in the best interest of the long-term financial goals is our duty. While the proposed regulations issued earlier were generally referred to as the Proposed ESG Rule for Employee Retirement Income Security Act of 1974 (ERISA) plans and appeared to focus on environmental, social, and governance (ESG) investment strategies, it was changed due to public comment. The Final Rule removed reference to ESG, but is otherwise similar to the proposed, requiring focus on financial goals alone in selecting investments for ERISA plans.

This rule helps to ensure that those responsible for the investment decisions on behalf of ERISA plans must only consider pecuniary factors. The Final Rule prohibits sacrificing investment return to promote non-financial gains and applies to any investment option.

What does that mean for clients?

The Final Rule, once effective, can be cited in enforcement actions and litigation. For this reason, ERISA plan fiduciaries (including managers of plan asset pooled investment vehicles) and managers of investment funds marketed to ERISA plans should review the new standards to ascertain whether their current practices are consistent with a “pecuniary factors only” standard or fit into one of the exceptions.

Fiduciaries of participant-directed plans will want to review the disclosures of funds that serve as designated investment alternatives (and, in particular, as QDIAs¹) to determine whether the fund disclosures describe potential reduced return or increased risk based on what could be considered non-pecuniary factors, requiring further evaluation under the standards of the Final Rule.

Further, with respect to participant directed plans, the DOL emphasized that a limited exception applies only if the alternatives can be justified solely on the basis of pecuniary factors. Choosing investments with expected reduced returns or greater risks to secure non-pecuniary benefits would not meet this standard. Thus, fiduciaries should carefully review all applicable documents.

We suggest plans ensure that those making investment decisions on clients’ behalf take into consideration only pecuniary factors, this includes investments beyond just ESG. With this regulation, now would be a great time to review your IPS and make sure nothing in the IPS could be found questionable under the new rule.

We will continue to follow this issue in case the new administration should take this matter up again.

Ask Jon a Question

Legal Note

¹A Qualified Default Investment Alternative (QDIA) is a default investment used when money is contributed to an employee’s 401(k) account, but the employee has not made their investment election.
Information provided by SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company.
Investing involves risk including possible loss of principal. Environmental, social and governance (ESG) guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider ESG guidelines when making investment decisions.