Retirement Plans Newsletter

BULLETIN
June 23, 2020

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[Official Guidance]

Text of DOL Proposed Regs: Financial Factors in Selecting Plan Investments (PDF)

62 pages. "The [DOL] in this document proposes amendments to the 'Investment duties' regulation under Title I of [ERISA], to confirm that ERISA requires 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 investm ent or investment course of action.... The Department intends, by this proposal, to reiterate and codify long-established principles of fiduciary standards for selecting and monitoring investments, and thus to provide clarity and certainty regarding the scope of fiduciary duties surrounding non-pecuniary issues. The Department's longstanding and consistent position, reiterated in multiple forms of guidance and based on the explicit language of ERISA itself, is that plan fiduciaries when making decisions on investments and investment courses of action must be focused solely on the plan's financial risks and returns, and the interests of plan participants and beneficiaries in their plan benefits must be paramount. The fundamental principle is that an ERISA fiduciary's evaluation of plan investments must be focused solely on economic considerations that have a material effect on the risk and return of an investment based on appropriate investment horizons, consistent with the plan's funding policy and investment policy objectives. The corollary principle is that ERISA fiduciaries must never sacrifice investment returns, take on additional investment risk, or pay higher fees to promote non-pecuniary benefits or goals."

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

[Guidance Overview]

Text of EBSA Fact Sheet: Proposed Regs on Financial Factors in Selecting Plan Investments

"The proposal makes five core additions to the regulation:

  1. New regulatory text to codify the Department's longstanding position articulated in interpretive bulletins (IBs) published in 1994, 2008, and 2015 that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
  2. 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 plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
  3. A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA in furthering the purposes of the plan....
  4. New regulatory text sets forth required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among economically 'indistinguishable' investments (related to the so-called 'tiebreaker rule' in the 1994, 2008, and 2015 IBs). The documentation requirement is intended to provide a safeguard against the incentive for fiduciaries to improperly find economic equivalence and make decisions based on non-pecuniary benefits without a proper analysis and evaluation....
  5. A new provision on selecting designated investment alternatives for 401(k)-type plans.... The proposal describes the requirements for the selection of investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name."

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

[Guidance Overview]

DOL Proposes New Investment Duties Rule

"Periodically over the last 30 years, the Department has been asked to consider the application of the fiduciary duties of prudence and exclusive purpose under section 404(a)(1)(A) and (B) of [ERISA] to pension plan investments selected because of non-financial objectives, such as environment, social and public policy goals, that the investments may further.... The proposal is designed, in part, to make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives."

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

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