February 10, 2023
Department of Labor Guidance and Regulations on Selecting
Private-Sector Pension Plan Investments
Introduction
November 2020 Regulation
The fiduciary standards in the Employee Retirement
On November 13, 2020, DOL, under the Trump
Income Security Act of 1974 (ERISA; P.L. 93-406, as
Administration, issued a final rule relating to the selection
amended) require that individuals who make decisions for
of investments by a pension plan fiduciary. The DOL rule
private-sector pension plans (referred to as fiduciaries)
said that the evaluation of an investment by a pension plan
adhere to specified standards of conduct. The standards
fiduciary must be based on economic factors only—what
include an obligation to act prudently and for the exclusive
the regulation called pecuniary factors—and that a pension
purpose of providing benefits to participants and
plan could not subordinate the interests of participants and
beneficiaries. Among those who are fiduciaries are
their retirement income to non-pecuniary objectives.
individuals who choose plan investments. The standards
apply to defined benefit (DB) plans, in which retirees
The regulation defined a pecuniary factor as “a factor that a
usually receive monthly payments (sometimes referred to as
fiduciary prudently determines is expected to have a
a traditional pension) and defined contribution (DC) plans,
material effect on the risk and/or return of an investment
in which participants have individual accounts (like a
based on appropriate investment horizons consistent with
401(k) plan).
the plan’s investment objectives and the funding policy
established pursuant to section 402(b)(1) of ERISA.” The
Over the years, investors—including pension plan sponsors
fiduciary could use non-pecuniary factors in instances
and participants—have taken an interest in investment
where the fiduciary was unable to choose based on
features beyond the standard risk and return relationship.
pecuniary factors alone, though DOL noted that such
Examples of such investments include those that consider
situations would be “rare.” DOL referred to this as a tie-
the effect of climate change (e.g., preferring renewable
breaker scenario. If a plan made a tie-breaker decision
energy companies to fossil fuel companies), a firm’s supply
based on non-pecuniary factors, the regulation required that
chain practices (e.g., ensuring that seafood is not caught
the plan document its decision making process.
with forced labor), faith-based approaches (e.g., investing
based on the Bible or Sharia law), or corporate governance
The regulation specifically addressed participant-directed
structures (e.g., considering the diversity of a corporation’s
individual account plans: DC plans in which individuals
board of directors). These investments have been referred to
choose their investments from options provided by the plan
with various names, such as economically targeted
sponsor. It noted that these plans were not prohibited from
investments, socially responsible investments, and
including an investment option that supported non-
environmental, social, and governance (ESG) investing.
pecuniary goals, provided that (1) fiduciary duties were
Policymakers’ opinions vary as to the appropriateness of
followed, (2) the investment decision was based on
these types of investments within pension plans. Some
pecuniary factors, and, (3) if non-pecuniary factors were
Members of Congress are interested in facilitating these
used to choose among investments selected using
investments while others are interested in limiting them.
pecuniary factors, the decision making process was
documented.
Earlier DOL Guidance
In 1994, 2008, and 2015 the Department of Labor (DOL)
However, the regulation explicitly prohibited an investment
issued guidance in the form of Interpretive Bulletins and, in
that supported non-pecuniary goals from being included as
2018, a Field Bulletin, on the extent to which pension plan
part of a Qualified Default Investment Alternative (QDIA),
fiduciaries can consider factors beyond an investment’s risk
which is an investment alternative used in DC plans with
and return relationship. The guidance generally emphasized
automatic enrollment features. Participants who are
that investment decisions must be made with the objective
automatically enrolled in DC plans and who do not make a
to provide economic benefits to plan participants. The
choice about their accounts’ investments have their
guidance also described scenarios in which consideration of
contributions placed in a QDIA. Target Date Funds (TDFs),
investments that have goals beyond providing income to
which change the investment mix between equities and
participants could be consistent with a fiduciary’s duties.
bonds as an individual approaches retirement, are
For example, if a plan found that two investments were
commonly used as QDIAs.
equal on an economic basis, then the plan could—but
would not be required to—choose based on non-economic
On March 10, 2021, DOL, under the Biden administration,
factors. DOL, in Interpretive Bulletin (IB) 2015-01,
announced that it would not enforce the November 2020
construed that ERISA prohibits “a fiduciary from
final rule or pursue enforcement actions and that it intended
subordinating the interests of participants and beneficiaries
to revisit the rule in the future.
in their retirement income to unrelated objectives.”
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Department of Labor Guidance and Regulations on Selecting Private-Sector Pension Plan Investments
December 2022 Regulation
generally applicable statutory duty to prudently
On December 1, 2022, DOL, under the Biden
document plan affairs.
Administration, issued a final rule that it said would clarify
the application of fiduciary duty when selecting plan
adds a new provision that, as indicated by DOL, clarifies
investments. DOL said that the November 2020 regulation
that fiduciaries do not violate their duty of loyalty solely
had a “chilling effect and other potential negative
because they take participants’ preferences into account
consequences” on the appropriate use of ESG in investment
when constructing a menu of investment options for
decisions in pension plans. The final rule also addressed
participant-directed individual account plans.
proxy voting and the exercise of shareholder rights that
were the subject of a separate regulation in 2020. These are
DOL indicated that if accommodating participants’
not discussed here. The final rule became effective on
preferences led to greater participation and higher deferral
January 30, 2023.
rates then it could lead to greater retirement security. DOL
indicated that giving consideration to whether an
Among other things, DOL noted the final rule
investment option aligns with participants’ preferences can
be relevant to furthering the purposes of the plan.
retains, what it calls, “the core principle” that the duties
of prudence and loyalty require ERISA plan fiduciaries
Response to DOL December 2022 Regulation
to focus on relevant risk-return factors and not
On January 26, 2023, a coalition of 23 states filed suit to
subordinate the interests of participants and
block the rule saying that DOL overstepped its authority
beneficiaries (such as by sacrificing investment returns
under ERISA to issue the rule.
or taking on additional investment risk) to objectives
unrelated to the provision of benefits under the plan.
In the 118th Congress, H.J.Res 30 and S.J.Res. 8 would
nullify the regulation using the Congressional Review Act
deletes the “pecuniary/non-pecuniary” terminology in
(CRA; enacted as part of P.L. 104-121).
the 2020 regulation. DOL indicated it did so based on
concerns that the terminology caused confusion and had
For More Information:
a chilling effect on financially beneficial choices.
CRS In Focus IF11716, Introduction to Financial Services:
Environmental, Social, and Governance (ESG) Issues
amends the 2020 regulation to, according to DOL, make
it clear that a fiduciary’s determination with respect to
Pension and Welfare Benefits Administration, “Interpretive
an investment or investment course of action must be
Bulletin Relating to the Employee Retirement Income
based on factors that the fiduciary reasonably
Security Act of 1974,” 59 Federal Register 32606 - 32608,
determines are relevant to a risk and return analysis.
June 23, 1994,
DOL indicated that the factors could include the
https://archives.federalregister.gov/issue_slice/1994/6/23/32
economic effects of climate change and other
485-32611.pdf#page=122.
environmental, social, or governance factors on the
particular investment or investment course of action.
Employee Benefits Security Administration (EBSA),
“Interpretive Bulletin Relating to Economically Targeted
removes the provisions in the 2020 regulation for
Investments,” 73 Federal Register 61734 - 61736, October
QDIAs, such that, under the final rule, the same
17, 2008, https://www.govinfo.gov/content/pkg/FR-2008-
standards apply to QDIAs as to investments generally.
10-17/pdf/E8-24551.pdf.
amends the 2020 regulation’s “tie-breaker” test, which
EBSA, “Interpretive Bulletin Relating to the Fiduciary
permits fiduciaries to consider collateral benefits as
Standard Under ERISA in Considering Economically
tiebreakers in some circumstances. DOL indicated that
Targeted Investments,” 80 Federal Register 65135 - 61736,
the 2020 regulation imposed a requirement that
October 26, 2015,
competing investments had to be indistinguishable
https://www.govinfo.gov/content/pkg/FR-2015-10-
based on pecuniary factors alone before fiduciaries
26/pdf/2015-27146.pdf.
could have turned to collateral factors to break a tie.
DOL also noted that the 2020 regulation imposed a
EBSA, “Financial Factors in Selecting Plan Investments,”
special documentation requirement on the use of such
85 Federal Register 72846 - 72885, November 13, 2020,
factors. The final rule replaces those provisions with a
https://www.govinfo.gov/content/pkg/FR-2020-11-
standard that requires the fiduciary to conclude
13/pdf/2020-24515.pdf.
prudently that competing investments, or competing
EBSA, “Prudence and Loyalty in Selecting Plan
investment courses of action, equally serve the financial
Investments and Exercising Shareholder Rights,” 87
interests of the plan over the appropriate time horizon.
Federal Register 73822 – 73886, December 1, 2022,
In such cases, the fiduciary is not prohibited from
https://www.govinfo.gov/content/pkg/FR-2022-12-
selecting an investment based on collateral benefits
01/pdf/2022-25783.pdf.
other than investment returns.
John J. Topoleski, Specialist in Income Security
removes the 2020 regulation’s special regulatory
documentation requirements in favor of ERISA’s
Elizabeth A. Myers, Analyst in Income Security
IF12328
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Department of Labor Guidance and Regulations on Selecting Private-Sector Pension Plan Investments
Disclaimer
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https://crsreports.congress.gov | IF12328 · VERSION 1 · NEW