Loading article...
On July 3, 2026, the Department of Labor released its 2026 Regulatory Agenda. In this article, we highlight two ERISA rulemaking projects of particular relevance to retirement plan sponsors – “Fiduciary Duties In Selecting Designated Investment Alternatives” and “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” Both of these projects have been included in the Administration’s Regulatory Plan, identified as “the most important significant regulatory actions that [DOL’s Employee Benefits Security Administration (EBSA)] reasonably expects to issue in proposed or final form in [the current] fiscal year or thereafter.”
In this article, we focus primarily on the “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rulemaking project, targeting ESG investing and proxy voting, but we begin with a brief note on EBSA’s (already proposed) rulemaking on “Fiduciary Duties In Selecting Designated Investment Alternatives.”
On March 24, 2026, the Department of Labor released a proposed regulation “Fiduciary Duties in Selecting Designated Investment Alternatives.” The regulation was in part responsive to President Trump’s Executive Order "Democratizing Access to Alternative Assets for 401(k) Investors.” But it did not just apply to alternative assets – it proposed a comprehensive set of rules for constructing/monitoring a participant-directed 401(k) plan fund menu. We provide a comprehensive discussion of this proposal in our article DOL Proposes Regulation on “Fiduciary Duties in Selecting Designated Investment Alternatives.” The proposal has been controversial, and there are reports that there have been as many as 47,000 comments. EBSA is currently reviewing those comments. It’s unclear when this regulation will be finalized.
In what follows, we begin with a review of where we stand now on the “rules for ESG and proxy voting,” discussing recent litigation, President Trump’s Executive Order, and DOL’s guidance on proxy advisory firms. We then review (very briefly) DOL’s policy objective(s). Finally, we discuss the critical questions likely to be addressed in this proposal. If you want to skip the background and go right to the critical issues, click here.
Utah v. Walsh. In September 2023, the United States District Court for the Northern District of Texas, in Utah v. Walsh, upheld DOL’s 2022 amendment of its 2020 ESG investing and
proxy voting rules, rejecting claims by 26 states and other interested parties that the rule violated ERISA and the Administrative Procedure Act (APA), finding that “[t]he 2022 Rule changes little in substance from the 2020 Rule and other rulemakings” and that the process by which DOL (in 2022) amended the 2020 Rule adequately addressed issues raised by plaintiffs and was therefore not “arbitrary and capricious.”
The plaintiffs in that case subsequently appealed this case to the Fifth Circuit. On May 28, 2025, the Fifth Circuit filed a “status update” with respect to that appeal, stating that:
The Department [of Labor] has determined that it will engage in a new rulemaking on the subject of the challenged rule. This rulemaking will appear on the Department’s Spring Regulatory Agenda, and the Department intends to move through the rulemaking process as expeditiously as possible.
Spence v. American Airlines. On January 10, 2025, the United States District Court for the Northern District of Texas, in Spence v. American Airlines, found that American Airlines, as a fiduciary of its two major 401(k) plans, had violated its ERISA duty of loyalty in allowing/not monitoring "ESG activism" (principally in proxy voting and "jawboning" management of portfolio companies) by the plans’ largest investment manager, BlackRock, with respect to stock held in plan index funds managed by BlackRock. On September 30, 2025, the court issued its decision with respect to remedies, granting broad injunctive relief, including significant limitations on the conduct of American Airlines (AA) and AA plan fiduciaries and imposing on them extensive disclosure obligations. It did not, however, require AA or AA fiduciaries to pay any monetary damages, finding that plaintiffs had failed to “establish a causal link between the fiduciary breach and actual economic loss [for which] monetary relief may be awarded.”
Trump Executive Order. On December 11, 2025, President Trump issued an Executive Order “Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors.” The EO focuses on the (in the view of the EO, sometimes negative) role proxy advisors play in affecting corporate policy with respect to DEI and ESG issues. It directs the Securities and Exchange Commission, the Federal Trade Commission, and the Department of Labor (with respect to “Pensions and Retirement Plans”) to “increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.” With respect to ERISA-covered retirement plans, the EO instructs DOL “to consider” revising the current advice fiduciary regulation.
DOL guidance on fiduciary status of proxy advisory firms. On April 1, 2026, the Department of Labor published Technical Release 2026-01, “Application of ERISA Fiduciary Requirements and Preemption Provisions to Proxy Advisory Services.” After reviewing the basic rules for what constitutes an advice fiduciary (the “five-part test”), DOL stated that “proxy advisory services concerning how to exercise shareholder rights based on the particular needs of an ERISA-covered plan on an ongoing basis, if rendered for a fee pursuant to a mutual understanding, will ordinarily satisfy the five-part test.” And DOL “reminds and cautions both plans and proxy advisory firms that mere written
disclaimers … are not necessarily determinative.” (We discuss this guidance in detail in our article DOL issues proxy voting guidance.)
EBSA describes this rulemaking project as follows:
This regulatory action is needed to ensure that plan fiduciaries select investments and exercise shareholder rights based only on financial considerations relevant to the risk-adjusted economic value of a particular investment, and not to advance social causes.
The Regulatory Agenda says that this proposal is to be finished by July 2026 – but these completion dates are (notoriously) aspirational.
Critical issues to be addressed by this rulemaking will include:
Concept. How tightly will the standard be framed, specifically what may legally be considered in determining “risk-adjusted economic value.”
Will there be any tie-breaker rule? In the past, DOL has suggested that non-financial (e.g., ESG) factors may be used as “tie-breakers” where ESG and non-ESG investments are financially equivalent. The current Administration may revisit (and revise or eliminate) this concept/approach.
ESG in default investments? The Trump DOL 1.0 regulation disallowed ESG funds in qualified default investment alternatives (QDIAs, such as, e.g., default target date funds). The Biden DOL revised the current rule to allow it. Best guess is that the Trump DOL 2.0 will again disallow it.
ESG as a designated investment alternative in a participant-directed DC plan? The Trump DOL 1.0 regulation explicitly allowed (prudently selected) ESG funds as (non-default) investments in a participant-directed DC plan. The current Administration may revisit (and revise or eliminate) this concept/approach.
Proxy voting. Our guess is that EBSA will further articulate (and tighten) the rules for plan fiduciary review of proxy voting policies/decisions by fund managers and trustees and reinstate “safe harbor” rules for when fiduciaries may choose not to vote proxies.
ESG investments/proxy voting has become a political football. It’s possible that this (anticipated) Trump 2.0 EBSA proposal will significantly tighten applicable ESG fiduciary rules. But if a Democratic Administration gets in in 2029, it is very likely that it will undo whatever the Trump 2.0 EBSA does, leaving sponsors in an ongoing state of uncertainty.
We will continue to follow this issue.
* * *
This is a publication of O3 Plan Advisory Services. If you have any comments or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com. The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor, or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.