How the DOL’s final rule on ESG impacts ERISA plan fiduciaries

July 19, 2023

financial professionals consulting with each other

Consideration of environmental social governance (ESG) factors in investment decision-making for ERISA retirement plans has been a contested issue for several decades. Various presidential administrations have sought guidance from the Department of Labor (DOL) about how — or if — ERISA plan fiduciaries should value ESG components.

Every DOL interpretation affirmed the same position: The investment decisions of plan fiduciaries must align with ERISA’s fiduciary duties of loyalty and prudence. ESG factors must be material economic criteria for retirement-based investments. And valuing ESG factors to advance non-economic or political agendas is prohibited.1

The financial factors rule

In keeping with this position, the DOL adopted financial factors in Selecting Plan Investments (the financial factors rule), which took effect on November 13, 2020. A related final rule, the Fiduciary Duties Regarding Proxy Voting and Shareholder Rights was published on December 16, 2020, which served to amend the “investment duties” regulation. The rules center around plan fiduciaries’ ERISA obligations when voting proxies and exercising other shareholder rights in connection with plan investments and stock shares. The goal was to address uncertainty in these areas and respond to the perception that certain products could be marketed to ERISA fiduciaries based on benefits other than financial performance.2,3

The proposed rule

Various stakeholders questioned whether or not the financial factors truly reflected fiduciaries’ ERISA duties to act prudently and in the best interests of plan participants. It also raised concerns that an inadequate amount of consideration was given to how ESG investment options could improve investment value and long-term returns for retirement investors, potentially preventing ESG investments from being treated as qualified default investment alternatives (QDIAs).4

In March of 2021, the DOL announced its review of the 2020 rules and that the department would not enforce the rules until publication of further guidance.

In October of 2021, the DOL published a Notice of Proposed Rulemaking (NPRM) that again amended the “investment duties” regulation. The intent was to clear up uncertainty for ERISA fiduciaries around considering climate change and ESG factors when making investment decisions, and to remove the perception that the 2020 rules deterred ERISA fiduciaries from considering ESG investments.4

The final rule

On November 22, 2022, the DOL released the “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” final ruling. The rule clarifies how the ERISA fiduciary duties of prudence and loyalty apply to selecting investments, investment courses of action, and exercising shareholder rights including proxy voting.4

At its core, the final rule retains two established principles:

  1. Duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries to objectives unrelated to the provision of plan benefits4
  2. When a plan’s assets include shares of stock, the fiduciary duty to manage those assets includes management of shareholder rights related to the shares, such as the right to vote proxies4

In March of 2023, the Senate approved House Joint Resolution 30, which overturned the final rule. In the same month, the Biden administration vetoed the resolution, reinstating the final rule as issued by the DOL.5  

How the final rule impacts the duties of plan fiduciaries

The final rule clarifies the application of ERISA’s prudence and loyalty fiduciary duties with respect to a plan fiduciary’s consideration of ESG factors by:

  1. Defining risk-return factors more broadly to include consideration of ESG factors as potential risk-return analysis elements4
  2. Delineating that a fiduciary may exercise discretion when determining risk-return analysis factors, and may or may not choose ESG investment options in participant-directed individual account plans without violating the duty of loyalty4
  3. Changing the investment duties “tiebreaker” language to no longer require competing investments to be indistinguishable before a fiduciary can consider collateral factors. The fiduciary must now prudently conclude that competing investments equally serve the financial interests of the plan over the appropriate time horizon. The fiduciary is not prohibited from selecting an investment based on collateral benefits, meaning benefits other than investment returns.4
  4. Removing QDIA rules that prohibited a fund from serving as a QDIA if it had non-pecuniary factors in its investment objectives, even if the fund was objectively economically prudent. The DOL found the language to be potentially harmful to participants because it prevented fiduciaries from considering QDIAs that include ESG strategies.4
  5. Eliminating language that stated fiduciary duty does not require voting on every proxy or exercising every shareholder right without changing the substance of how a fiduciary should decide when and how to vote; and, removing “safe harbor” examples that limited fiduciary voting decision-making based on the value of investment and threshold investment asset totals.4


1Reuters, DOL has a new vision for ESG: Which stakeholders need to take notice? March 14, 2022
2U.S. Department of Labor, Employee Benefits Security Administration, Federal Register, Financial Factors in Selecting Plan Investments, Vol. 85, No. 220, November 13, 2020
3Federal Register, Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, December 16, 2020
4U.S. Department of Labor, Employee Benefits Security Administration, Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, November 22, 2022
5, H.J.Res.30 - Providing for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Department of Labor relating to "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, March 1, 2023