Fueled by concerns regarding investments made for environmental, social and corporate governance, or similar considerations (ESG) in retirement plans, the U.S. Department of Labor (DOL) has proposed amendments to the investment duties regulation under the Employee Retirement Income Security Act (ERISA). If enacted, the proposed changes would confirm that plan fiduciaries must select investments based solely on monetary return factors.

While conceding that ESG factors can affect the riskiness of an investment, the proposed regulations impose new documentation requirements on fiduciaries to show exactly how they took ESG factors into account. This advisory reviews the proposed changes and includes practical guidance for plan sponsors.


The DOL's longstanding position has been that fiduciary investment decisions must be focused solely on the plan's financial returns, not non-pecuniary considerations. Over the years, this has left some wiggle room to engage in "socially responsible investing" where plan returns will not be harmed.

The DOL is concerned by recent trends indicating that ESG-focused investments are increasing, and that plan fiduciaries are making investment decisions for purposes distinct from their ERISA fiduciary responsibilities, thereby exposing plan participants and beneficiaries to inappropriate investment risks.

In prior Interpretive Bulletins dealing with ESG Investing, the DOL warned fiduciaries of ERISA violations if they expected reduced returns or greater risks to secure ESG objectives. Now the DOL seeks to codify those warnings. Regulations would provide clearer guidance to plans—but also make it more difficult for a subsequent administration to use interpretive guidance to change direction.

Proposed Regulation

DOL's proposal would amend ERISA's investment duties regulation (29 CFR .2550.404a-1) to codify DOL's general fiduciary standards for selecting and monitoring investments. The proposed regulations reiterate ERISA's fiduciary rules under which plan fiduciaries must act solely in the interests of participants and beneficiaries, for the exclusive purpose of providing benefits and defraying reasonable expenses, and acting with the care, skill, prudence, and diligence of a prudent person.

Under the new proposal, fiduciaries would be required, in addition, to comply with the following:

Evaluate Investments Using Pecuniary Factors Only

Fiduciaries must evaluate investments based solely on pecuniary factors that have a material effect on the return and risk of an investment based on appropriate investment horizons and the plan's funding and investment objectives.

The proposed regulations would continue to require fiduciaries to give appropriate consideration to relevant facts and circumstances, such as portfolio composition regarding diversification, liquidity and current return relative to anticipated cash flow, and projected portfolio return relative to funding objectives.

In addition, the proposed regulations explain that ESG considerations are pecuniary only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.

Never Subordinate Financial Interests

Fiduciaries should never subordinate financial interests of participants and beneficiaries to promote goals unrelated to financial interests. This means, for example, fiduciaries cannot sacrifice investment return or assume additional investment risk to promote goals unrelated to those financial interests.

Competing Funds: ESG Funds Must Be Economically Indistinguishable

This would apply if there is a choice being made between two different funds (contrast an account-based plan line-up, discussed below). After evaluating funds based on pecuniary-only factors, if there is a choice between alternative investments that are economically indistinguishable, an ESG investment could be chosen ahead of the alternative, but the selection must be documented. The DOL cautions that "true ties rarely, if ever, occur," but because they theoretically occur and the DOL has insufficient evidence to say they do not, it is maintaining this "all things being equal" test from prior guidance, but with additional requirements.

  • Document Economically Indistinguishable Finding - Plans will be required to document specifically why the investments were determined to be indistinguishable, and why the selected ESG investment was chosen based on the purposes of the plan, diversification of investments, and interests of participants and beneficiaries. This will require careful drafting to cover the regulatory requirements but not provide too much detail that could damage any litigation defense.

Account-Based Plan Line-Up

Individual account-based plans can continue to offer ESG investments, but they must be chosen using pecuniary factors. The DOL acknowledges that a prudently selected, well-managed and properly diversified fund with ESG investment mandates chosen per the requirements of the investment duties regulation could be added to a defined contribution plan's investment platform in addition to, and without foregoing, other non-ESG investment options.

The "economically indistinguishable" concept does not apply to selection of investment options for account-based plans where the ESG fund is an addition to the line-up, but the fund must be evaluated using objective risk-return criteria such as benchmarks, expense ratios, fund size, long-term investment returns, volatility measures, investment philosophy, and mix of asset types.

In addition, the DOL will not tolerate expected reduced returns or greater risks just to facilitate inclusion of the ESG fund. This seems to be designed to discourage plan fiduciaries from adding ESG funds to plan options just to satisfy employee or management requests that they be available.

  • Document ESG Fund Addition - Fiduciaries should properly document their selection and monitoring of an ESG fund. As with the requirement to document for an "economically indistinguishable" finding, this requirement is intended to safeguard against any incentive for fiduciaries to improperly find economic justification and make decisions based on non-pecuniary factors without proper analysis and evaluation.
  • No QDIA - The ESG investment should not be any part of the plan's qualified default investment.

Practical Consequences for Plan Sponsors

Pending final regulations, plan sponsors with ESG investments, or those considering ESG investments, should discuss the proposed regulations with their investment consultants to ascertain whether any action needs to be taken. This is the time for fiduciaries to evaluate fund choices and line-ups, and ensure that ESG choices can be justified if the proposed regulations are adopted.

In addition, plan governance procedures should be reviewed, in particular, documentation regarding choice of funds. For example, plans may want the investment advisor and/or counsel to draft those sections of the committee minutes because this is likely an area for litigation, initiated either by the DOL, or by disgruntled participants. Plan committees should ensure they have received recent fiduciary training; those responsible for investments must ensure they are familiar with the proposed regulations and those responsible for taking minutes should understand the documentation duties.

The DOL has requested comments on or before July 30, 2020. Please contact your DWT attorney for further information or if you would like to submit comments.