At the end of 2020, the (Trump) Department of Labor finalized amendments to ERISA fiduciary rules (1) requiring fiduciaries to “select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action” and (2) addressing the application of ERISA’s prudence and exclusive purpose duties to “the exercise of shareholder rights, including proxy voting.”
Both regulations were controversial, and there was considerable pushback from Congress (particularly from Democrats) and various stakeholders, including “including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers.” And, on taking office (on January 20, 2021), President Biden issued an Executive Order instructing DOL to review these regulations.
On March 10, 2021, DOL issued a news release announcing a nonenforcement policy with respect to these regulations, pending further review. In the news release’s operative language DOL stated:
Until the publication of further guidance, the department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative [QDIA], or investment course of action or with respect to an exercise of shareholder rights.
We note that the reference to the treatment of QDIA ESG investments is particularly significant, as most new fund flows go into QDIAs (overwhelmingly, target date funds) and this was an ESG investment singled out for special, more stringent treatment. Under the final ESG regulation QDIAs could not include a fund “if its investment objectives or goals or its principal investment strategies include, consider, or indicate the use of one or more non-pecuniary factors.”
Somewhat unusually, the news release quotes a DOL official (Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar) as explicitly critical of the (Trump) DOL regulations, stating: “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”
The nonenforcement policy only applies to the Department of Labor, and, theoretically, a private lawsuit could still cite the regulations in support of a fiduciary claim. But as a practical matter – given DOL’s implicit disavowal of those regulations (and announced intention to amend them) in this news release – it is hard to imagine a court giving them (the Trump DOL’s “final” regulations) much deference.
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We will continue to follow these issues.