DOL finalizes amendments to ESG/Proxy Voting rules

The Department of Labor has released its final amendment to the ESG/Proxy Voting rules, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (hereafter, the “2022 rules”). The 2022 rules amend the (Trump) DOL’s 2020 amendments to ERISA fiduciary regulations (the “2020 rules”) on the same issues.

The Department of Labor has released its final amendment to the ESG/Proxy Voting rules, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (hereafter, the “2022 rules”). The 2022 rules amend the (Trump) DOL’s 2020 amendments to ERISA fiduciary regulations (the “2020 rules”) on the same issues.

The new rules significantly relax restrictions on ESG investing, eliminating special restrictions on ESG investments in defined contribution default investments (such as 401(k) plan target date funds), making the “tie-breaker” rule – which allows consideration of non-financial issues in certain circumstances – more flexible, and eliminating recordkeeping and disclosure requirements with respect to the tie-breaker rule.

In this article we are going to review the highlights of the new rules, focusing on what changes the 2022 rules make to the 2020 rules. In a follow-on article we will provide a comprehensive discussion of the new rules.


There has been, since the 1990s, a tug of war between Administrations over the content and (even more) the tone of DOL guidance with respect to environmental, social, or governance (ESG) investing and plan fiduciaries’ obligations with respect to the exercise of shareholder rights (e.g., proxy voting) for plan-held securities. At the end of the Trump Administration (in 2020), DOL finalized amendments to its ERISA investment duties and proxy voting rules, “tightening” in some respects the rules with respect to ESG investing and to some extent “downplaying” fiduciaries’ obligations to exercise shareholder rights.

On taking office, President Biden issued an Executive Order instructing DOL to review those 2020 rules. And on March 10, 2021, DOL issued a news release announcing a nonenforcement policy with respect to them. Then (in October 2021), DOL proposed amendments to the 2020 rules, addressing some of their more controversial provisions.

That proposal has now been finalized.

Highlights of the final ESG/Proxy Voting rules

2022 rules for ESG investing:

  • The 2020 rules’ “pecuniary/non-pecuniary” terminology has been eliminated. The 2020 rules distinguished between decisions that would be permitted if based on “pecuniary factors” or not permitted if based on “non-pecuniary factors.” (E.g., “A fiduciary’s evaluation of an investment … must be based only on pecuniary factors.”) This language was believed “to chill and discourage fiduciaries from considering relevant investment factors that prudent investors otherwise would consider.” Instead, DOL has adopted “risk-return” terminology: “[A] fiduciary’s determination with respect to an investment or investment course of action must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis.”

  • Language in the 2021 proposal stating that prudence “may often require” evaluation of “climate change and other ESG factors” has been deleted. Instead, the 2022 rules simply say that “[r]isk and return factors may include the economic effects of climate change and other environmental, social, or governance factors.”

  • The 2020 rules’ prohibition of qualified default investment alternatives (QDIAs) (e.g., a 401(k) plan’s default target date fund) that “include, consider, or indicate the use of one or more non-pecuniary factors” has been eliminated. Under the 2022 rules, “the same standards apply to QDIAs as to investments generally.”

  • The 2020 rules only allowed consideration of non-pecuniary factors as a “tie-breaker” where “the plan fiduciary is unable to distinguish [between alternative investments] on the basis of pecuniary factors alone.” The 2022 rules provide a more flexible tie-breaker rule, “require[ing] the fiduciary to conclude prudently that competing investments … equally serve the financial interests of the plan over the appropriate time horizon.” The 2022 rules also eliminate the 2020 rules’ more elaborate documentation requirement for these tie-breaker decisions.

  • The 2021 proposal included a requirement that, where the tie-breaker rule was used in a participant-directed DC plan, e.g., to include an ESG fund in the fund menu, “the plan fiduciary must ensure that the collateral-benefit characteristic of the fund [e.g., that it is an ESG fund] … is prominently displayed in disclosure materials provided to participants and beneficiaries.” The final 2022 rules do not include this special disclosure rule – it was believed to present too many issues, including that it “would effectively act as an invitation to litigation.”

  • The 2022 rule includes a new provision that fiduciaries do not violate ERISA’s duty of loyalty by taking into account participant preferences in constructing a participant directed DC plan fund menu. The duty of prudence would, however, still apply. Thus, an “imprudent” investment could not be included in the plan fund menu even if participants wanted it.

2022 rules for proxy voting:

  • The 2022 rules eliminate the statement in the 2020 rules that “the fiduciary duty to manage shareholder rights … does not require the voting of every proxy or the exercise of every shareholder right.” DOL believed that this language could be “misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.”

  • The 2022 rules eliminate the two “proxy non-voting” safe harbors, allowing sponsors to adopt a non-voting position where (1) a proposal is not “substantially related to the issuer’s business activities or … expected to have a material effect on the value of the investment” or (2) “the plan’s holding in a single issuer relative to the plan’s total investment assets is below a quantitative threshold.”

  • The 2022 rules eliminate the 2020 rules’ special monitoring obligations with respect to investment managers and proxy voting firms and specific records requirements with respect to proxy voting/exercises of shareholder rights.

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The new rules are generally effective 60 days from publication in the Federal Register, with exceptions for certain rules for pooled investment vehicle proxy voting and the requirement that fiduciaries review the proxy voting guidelines of proxy advisory firms to determine their consistency with the fiduciaries’ obligations.

As noted at the top, we are going to provide a follow-on article the deals comprehensively with the new ESG/Proxy Voting rules.