The DOL’s Latest Guidance on ESG Investing and Proxy Voting—Key Implications for Plan Fiduciaries

December 16, 2022
26:44 minutes

In the latest installment of our Ropes & Gray podcast series addressing emerging issues for fiduciaries of 401(k) and 403(b) plans to consider, Josh Lichtenstein, head of the ERISA fiduciary practice, Ellen Benson, benefits consulting group principal, and Sharon Remmer, ERISA and benefits counsel, analyze the Department of Labor’s (“DOL”) recently amended regulation governing ERISA investment duties and its application to environmental, social, and corporate governance (“ESG”) considerations and proxy voting. The amended regulation generally adheres to the re-proposal the DOL introduced over a year ago, in that it removes the anti-ESG bias of the Trump Administration’s prior rule. Instead, the final regulation adopts a more neutral stance which recognizes that ESG factors may be relevant to a risk-and-return analysis to the same extent as any other relevant factor. This shift in policy, as well as the changes that the regulation makes with respect to exercises of shareholder rights, is likely to have important consequences on fiduciary decision-making and behavior.

In addition to monitoring these developments on the federal level, Ropes & Gray is proud to have launched an interactive website, Navigating State Regulation of ESG Investments, offering resources for monitoring the rapidly evolving legal and regulatory landscape concerning what role, if any, ESG factors should play in managing public retirement plan assets, and other related developments. To receive future, periodic updates, please be sure to sign up for our dedicated state ESG mailing list on this website.


Josh LichtensteinJosh Lichtenstein: Hello, and thank you for joining us today for another episode in our Ropes & Gray podcast series addressing emerging issues and trends to consider for 401(k) and 403(b) retirement plan fiduciaries. I’m Josh Lichtenstein, an ERISA and benefits partner based in New York and head of the ERISA fiduciary practice here. And I’m joined by my colleagues, Sharon Remmer, an ERISA and benefits counsel who is also based in New York, and Ellen Benson, a principal in our benefits consulting group, who is based in Boston. Welcome, Sharon and Ellen—happy to have you here today.

Over the last two years, our episodes have covered a wide range of topics from best practices in fiduciary decision-making and plan governance based on the lessons that we have learned from recent case law, to important retirement legislation on the horizon like the SECURE Act 2.0, which is currently pending in Congress, to innovations in retirement plan design like pooled employer plans, among other topics.

Perhaps the most frequently recurring topic in this series has been the ongoing pendulum swing of the DOL’s guidance regarding plan investments and how they can consider environmental, social and corporate governance (or “ESG”) considerations and proxy voting. When we last discussed the DOL’s 2021 re-proposal earlier this year (see episode here), the comment period had recently concluded, and we were speculating on what the final amendments to the DOL’s investment duties regulation (the ESG rule) might look like and how they might alter the investment landscape for ERISA plan fiduciaries.

This speculation has continued during the Department’s lengthy consideration period. But at last, just before Thanksgiving, the DOL has given us its answer. In my view, this rule is most striking for its neutrality on what a plan fiduciary may consider when making investment decisions. While the Department made some important changes to the proposal, which we’ll discuss shortly, I think it’s fair to say that the final amendments were not all that surprising overall. Would you agree with that, Sharon?

Sharon Remmer: I think that’s a fair assessment, Josh. Like the re-proposal, this rule is very different from the Trump Administration’s rule, but the final amendments generally track the 2021 re-proposal in clarifying the application of ERISA’s fiduciary duties of prudence and loyalty to selecting investments, including selecting QDIAs, exercising shareholder rights, and the use of written proxy voting policies. They also squarely address the chilling effect that the prior administration’s rule had engendered with regard to considering climate change and ESG factors when selecting investments and investment courses of action.

The final amendments reflect a core DOL principle that has been part of the Department’s ESG guidance for decades: that ERISA requires plan fiduciaries to focus on relevant risk-and-return factors in evaluating and selecting investments, and that fiduciaries cannot subordinate the interests of participants and beneficiaries to objectives unrelated to providing benefits. In particular, the rule lays out a few guidelines when it comes to making these decisions:

  1. The fiduciary should be using appropriate investment horizons consistent with the plan’s investment objectives, which take into account the funding policy of the plan established pursuant to ERISA;
  2. Risk-and-return factors may include the economic effects of climate change and other ESG factors on the particular investment—and whether any particular consideration is a risk-return factor depends on the individual facts and circumstances; and finally
  3. The weight that’s given to any factor by a fiduciary should appropriately reflect an assessment of its impact on risk and return.

Now, you may recall that the proposed rule had stated that the projected return of the portfolio “may often require an evaluation of the economic effects of climate change and other ESG factors.” In response to public comments, the DOL declined to keep the “may often require” clause. The DOL also eliminated the specific ESG examples from the proposal. The DOL explained that this was done so that, like you mentioned earlier, the regulation can maintain a more neutral posture, and to make it clear that there is no mandate to consider the economic effects of climate change and other ESG factors. In fact, the preamble indicates that ESG factors do not need to be treated differently than other relevant investment factors.

Josh Lichtenstein: Thanks for that high-level overview, Sharon. So, to recap, the DOL has essentially leveled the playing field here by removing barriers to a fiduciary’s consideration of all financially relevant factors, which may include ESG, as part of their prudent and loyal process of investment decision-making.

So, climate change and other ESG factors sometimes may be relevant to a risk-and-return analysis and sometimes they will not be—but when they are relevant, these factors may be weighted and factored into investment decisions alongside other relevant factors, as the plan fiduciary has deemed appropriate. Most importantly, the DOL isn’t putting a thumb on the scale, and is leaving this determination up to individual fiduciaries, just like it does for other financial factors.

Now, what this means for asset managers, I think, is the rule could impact how they go about addressing ESG characteristics in their offering materials and marketing documentation and pitch decks. They can be more forthcoming about the ESG characteristics of a given fund or investment and how they tie into the fund’s overall investment thesis than they could under the prior administration’s rule. In addition, I think we may see more managers try to promote ESG funds to their retirement plan clients, but I think the emphasis will really be on the quality of those products and the strength of the rationale behind how ESG factors weigh into the investment process for that product.

Now, Ellen, how do you think the final rule will change fiduciary behavior from the plan sponsor’s perspective? Are you expecting investment committees are going to be clamoring to add new ESG options to their plan menus going forward?

Ellen Benson: Along the lines you said, Josh, I think this rule reverses the chilling effect of the 2020 rule and will allow fiduciaries and their investment advisors to openly discuss ESG factors during committee meetings as they see fit. As Sharon noted, with the removal of the presumptive “may often require” language that appeared in the proposed rule, the final rule really is neutral, so committees and their investment advisors will be able to develop their own approach to the consideration of ESG factors and ESG funds, much like they can and do on any other class of investment options.

Moreover, for plans that already have one or more ESG funds on their lineups (which may have pre-dated the 2020 rule), I think these amendments provide some reassurances to fiduciaries that these ESG funds can stay on the menu—assuming they remain prudent investment options from a risk-return perspective.

So, in terms of what will change, I expect fiduciaries will spend time in 2023 reacting to the final rule and developing their thinking around ESG investing in close partnership with their investment advisors. I’m not really expecting to see fiduciaries “clamoring” to add ESG funds to their plan menus, at least not in the short term. Fiduciaries will still face open questions—including whether and how to incorporate consideration of ESG aims in their investment process as well as an uncertain litigation landscape where plans are being sued not for just having more expensive funds in their menus, but also for offering low-cost funds that allegedly underperform. As the DOL said in the preamble, the rule is not intended to channel assets into any particular type of investment or create an apparent regulatory bias in favor of certain strategies. Said differently, while the final amendments remove the perceived anti-ESG bias of the 2020 rule, they do not go 180 degrees in the other direction either.

As you and Sharon described, the DOL has taken a more balanced and neutral approach, which eliminates the prohibitions on plan fiduciaries from managing against or taking advantage of climate change or other ESG risk factors in selecting investments but, at the same time, prevents fiduciaries from sacrificing investment returns or assuming greater risks as a means of promoting collateral policy goals.

It’s really only in the tiebreaker scenario, where you have competing investments that equally serve the financial interests of the plan over the appropriate time horizon, that fiduciary decision-makers will be able to—but are not required to—look to other factors that are not relevant to a risk-and-return analysis (that is factors that offer collateral benefits other than investment returns). How often this scenario will actually come up though, is a different question.

Sharon Remmer: To build on what Ellen said, when it comes to assembling plan menus, what the DOL is ultimately saying here is that fiduciaries need to ask themselves, how does a given fund fit within the menu to enable participants to construct an overall portfolio suitable to their needs, including allowing them to diversify their accounts? Moreover, how does a given fund compare to a reasonable number of alternative funds to fill the fund’s role in the overall menu? Maybe there’s a spot for an ESG-themed fund in the plan lineup, which meets the needs of participants and serves a valuable role in the menu, but that will ultimately be a judgment call for the fiduciaries.

Josh Lichtenstein: Those are all great points, Sharon and Ellen. I think it’s also important to remember that, as with any other investment that is selected for a plan lineup, fiduciaries are going to have an ongoing duty to monitor them to ensure that they remain prudent and appropriate for the plan, as compared to other alternative funds that could be available on the market. When a plan sponsor is choosing a fund in part for its ESG characteristics, I think that means the sponsor needs to make sure that its diligence and monitoring process actually includes a review of whether the manager is living up to its statements on the use of ESG. This ongoing duty to monitor could present some unique challenges in the short term, while robust benchmarking data may not be widely available. So, at least at this stage, I think there are some additional challenges with respect to the diligent monitoring of ESG funds that a fiduciary should be aware of—it doesn’t mean that they can’t select this type of investment, but they should be thinking about these factors. I would also expect consultants to develop diligence and monitoring processes. As I said before, I think that in a lot of ways, this comes down to quality. Plan sponsors will find well performing ESG funds with compelling ways that the ESG factors help to drive performance or mitigate risk as much more viable options than funds that lack that strong economic justification for inclusion in the fund lineup for a plan.

Now, I want to go back to the tiebreaker rule that Ellen touched on though. This concept of using ESG or other non-economic factors to break ties has been a feature of the DOL’s ESG guidance for decades, and this new guidance is actually very similar to prior guidance on this point, putting the Trump rule to the side. By preserving some version of it in the amendments—albeit, a more lenient version that omits the extra disclosure requirements where you make a decision for a designated investment alternative using the tie-breaker—I think the DOL has afforded plan fiduciaries a strategy for getting an ESG fund into the plan lineup. But as you mentioned, I wonder how often this scenario will actually come up. In the real world, ESG is normally included in an investment fund’s process as a part of the return seeking strategy, so there should usually be an economic angle to consider. If I’m a plan fiduciary, I’d always rather find some way to differentiate between competing investments based on risk-return factors—which may very well include ESG factors that have a risk-return impact—and make a selection on that basis. That way, the tiebreaker standard can be used more as an alternative argument for making the investment decision, which can be kept in a fiduciary’s back pocket in case of a challenge rather than being the primary basis for making the investment decision itself.

Sharon Remmer: I agree with you and Ellen. How often will ties actually come up in practice? For sure, the fact that the Department eliminated the so-called “stickering” requirement in the case of designated investment alternatives definitely eases the tiebreaker rule’s compliance requirements, should you need to rely on the tiebreaker rule.

That said, the DOL left open the possibility that it may revisit the need for collateral benefit disclosure depending on where the SEC ends up with its concurrent rulemaking projects. These projects address (and here I’m going to quote) “certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks” as well as ESG disclosures by mutual funds, other SEC-regulated investment companies and investment advisers. Finally, the DOL’s decision to not adopt a collateral benefit disclosure requirement in the final amendment doesn’t alter fiduciaries’ existing duty to prudently document the tiebreaking decisions in accordance with Section 404 of ERISA—in fact, it’s this already-existing duty of documentation that’s one of the reasons why the DOL decided no further documentation was needed. So, plan sponsors need to keep traditional requirements in mind while still looking at how the market and the regulatory environment continue to evolve.

Josh Lichtenstein: That’s another really great point, Sharon. You know, this rule is new and it’s forward-looking, but you know in a lot of ways, it’s very important for plan sponsors to go back to basics and keep in mind the traditional requirements and duties. Another aspect of the tiebreaker rule that I find intriguing is the language in the preamble where the DOL seems to suggest that the tiebreaker standard may be less applicable—or maybe not even applicable at all—in the 401(k) or individual account plan context when adding an additional menu option instead of choosing a fund to replace an existing option. As the DOL explains in the preamble, adding additional investment options is not necessarily a zero-sum game, such that the fiduciary has to choose just one option. Rather, a plan fiduciary may just look to add both options to the menu, assuming both are prudent choices for participants, and then presumably, there’s no tie to break. Ellen, what’s your take on this language?

Ellen Benson: Yes, that preamble language is interesting—it’s a little hard to know what to make of it at this point. Given the current litigation environment and the push by plaintiffs’ firms to streamline plan menus and limit the number (and, in some cases, the types) of investment options offered, I’m not sure whether plan fiduciaries and their investment advisors will feel comfortable with the suggestion to just add multiple funds in the case of a true tiebreaker scenario, depending on their preferred approach to menu construction. Again, though, it really remains to be seen how often fiduciaries will actually face a tiebreaker scenario.

Josh Lichtenstein: That makes sense, Ellen, and it’s also a good reminder that everything plan sponsors do can impact litigation risk. Now, I want to go back to something Sharon mentioned in passing before. One of the more notable changes in the final rule, in my mind, was the removal of the specific ESG examples in the operative language of the regulation—as a quick refresher for our audience, this is the language in the proposal that explicitly described certain climate change-related factors, governance factors and workforce practices as non-exclusive examples of factors that may be material to an investment’s risk-return analysis. While the DOL removed these examples from the final amendments, it moved them up to the preamble, and noted how they may still remain relevant to the risk-return analysis.

The preamble also identifies numerous examples of more traditional financial factors and considerations that “prudent investors commonly take into account” in the DOL’s words in evaluating investments. I wonder whether in their effort to avoid creating a checklist, the DOL has actually effectively created a new, de facto checklist for fiduciaries to consider, and I’m thinking about both plan sponsors and asset managers running ERISA funds here. In other words, will there actually be litigation risk if a fiduciary doesn’t consider this list of factors enumerated in the preamble going forward?

Ellen Benson: Looking over that list, I think most plan fiduciaries already utilize many of these factors to evaluate investments, so I don’t think this language will really alter fiduciary behavior that much. But, I can see that it could provide a sense of comfort in the absence of a true safe harbor in the final rule itself—that these are examples of factors a fiduciary can or should be considering as it is constructing a defined contribution plan’s menu or determining a pension plan’s portfolio, so we may see fiduciaries and their advisors seek to reflect their utilization of these factors in their governance materials.

Josh Lichtenstein: I think that makes sense. I would also expect asset managers to take a hard look at this list to make sure that their investment processes are including a review of these items, or they have a clear, articulable reason for why they would not include them when making investment decisions on behalf of plan asset funds.

Sharon Remmer: Well, speaking of “intriguing language,” let’s talk about participant preferences. The final amendments include a new provision that says plan fiduciaries do not violate their duty of loyalty under ERISA solely because they take participants’ preferences into account when constructing a menu of prudent investment options for individual account plans. According to the DOL, the rationale for this language is that if accommodating participants’ preferences will lead to greater participation and higher deferral rates, it could lead to greater retirement security. Of course, this language also specifically states that the new investment option must satisfy the prudence requirements.

Ellen and Josh, what do you make of this new language? If a sponsor receives participant requests for a type of fund, how should they be handled?

Ellen Benson: On the one hand, I think it’s helpful that the Department is affirmatively stating here that participant preferences can be considered in a fiduciary’s evaluation, selection and retention of designated investment alternatives without triggering a violation of ERISA’s duties. Many plan fiduciaries are facing plan-related requests from different segments of their workforces. But, going back to something we mentioned earlier, this doesn’t alleviate the fiduciary’s overarching duty to ensure these funds are, and remain, prudent investments, as the DOL makes clear in the regulation and the Supreme Court made clear in the Hughes v. Northwestern case back in January. In other words, ERISA’s fiduciary obligations could compel plan fiduciaries to disregard participants’ preferences to the extent they are imprudent or to the extent that fiduciaries determine that a different approach to the menu is more prudent. This may not be intuitive to the participants who are requesting fund changes based on their preferences.

Josh Lichtenstein: I completely agree. This is definitely helpful language, but it still doesn’t change the fact that plan fiduciaries may not add imprudent investment options to menus just because participants request them or would prefer they be available. Looking beyond ESG funds, though, one thing I wonder is if this language will actually be used as additional support for offering other types of investments such as alternative assets, including private equity funds and hedge funds, through broadly diversified investment options such as target date funds. As listeners are probably aware, the DOL has issued two different pieces of guidance over the last couple of years, which confirm its view that it is not per se imprudent for 401(k) plan investment menus to include commingled investment products with a targeted, limited allocation to private funds (assuming that the appropriate guardrails are in place). Then, of course, there is also the question of including cryptocurrency as part of a 401(k) investment lineup.

Sharon Remmer: Well, based on its guidance in Compliance Assistance Release 2022-01 and the DOL’s ensuing litigation with ForUsAll, the DOL has indicated that it has some concerns about the process that fiduciaries follow when they’re evaluating whether or not crypto is an appropriate and prudent investment for retirement plans. But the dichotomy between the DOL’s guidance on crypto and what it is saying here is fairly striking. Here, the preamble makes it quite clear that the DOL wishes to remain neutral. They removed the chilling effect from the Trump rule and they removed the soft presumption in favor of ESG that was in the proposal, and instead, they seemed to bring us back to the core principle that fiduciaries are responsible for determining which risk-and-return factors should be taken into account in evaluating investments—regardless of whether those are traditional factors, such as capital expenditures and operating margins, or whether they’re ESG factors, or frankly, anything else. Then, the DOL added language saying that participant preferences can be considered without violating ERISA’s duty of loyalty. As we discussed, this language is intriguing, but perhaps it further confirms that the plan’s fiduciaries are responsible for determining what is appropriate based on their plan’s particular facts and circumstances.

This all suggests the DOL is trying not to show a preference in favor of any particular type of investment. But, by contrast—you have the crypto guidance, where the DOL explicitly calls for a heightened level of concern and cautions fiduciaries to “exercise extreme care” before they consider adding a cryptocurrency option to a 401(k) plan lineup.

Josh Lichtenstein: Excellent point, Sharon. In a way, the DOL’s stance on crypto is not all that different than the anti-ESG bias incorporated in the Trump Administration’s rule, which has now been reversed here. In its preamble to the new rule, I think the DOL makes it clear that it intended to remove all bias—either for or against—any particular asset class, and that’s consistent with other things that we’ve seen them do like the private equity guidance. The crypto guidance seems like it may be the odd man out here, and the Department of Labor is still on record as taking a position about heightened caution or scrutiny, although the ongoing litigation you mentioned may result in the DOL abandoning that stance.

Before we wrap up, I just want to spend a few minutes addressing the proxy voting provisions of the regulation. Now, the DOL largely left those intact from its re-proposal. The rule, as revised by these final amendments, reiterates the Department’s long-standing position that the fiduciary act of managing plan assets that involve shares of corporate stock includes making decisions about voting proxies and exercising shareholder rights. Moreover, prudent fiduciaries should take steps to ensure that the cost and effort associated with voting a proxy or exercising other shareholder rights is commensurate with the significance of the issues of the plan’s interests. In essence, fiduciaries should be prudent in incurring expenses to make proxy decisions and, wherever possible, rely on efficient structures such as proxy voting guidelines and proxy advisors, as appropriate. Ellen, is there anything else you want to add on this?

Ellen Benson: You mention using proxy advisors, and I think it’s important to emphasize that proxy advisors are just another type of plan service provider, and, as with hiring any service provider, a fiduciary should be using a diligent process that fully assesses and documents the qualifications of the provider, the quality of the services being offered and the reasonableness of the fees charged in light of the services being provided.

Sharon Remmer: I think it is also worth mentioning the provision that addresses the proxy voting obligations of managers of plan asset funds or commingled vehicles that include the assets of multiple plans. Here, the rule says managers have to either reconcile the proxy voting policies of each investing plan in proportion to the plan’s economic interest in the vehicle, or they have to develop its own proxy voting policy and obtain the investing plans’ approval. In practice, reconciling multiple policies is probably not going to be possible. Managers may currently have proxy voting policies, but rarely do they provide details of these policies to their investors. So, these proxy voting policies are something that managers that have plan asset funds will need to start thinking about. Fortunately, the DOL has given an extended compliance period of one year for this requirement, which is different from the 60-day compliance period that applies to most other provisions of the final amendments.

Josh Lichtenstein: I think that’s a great point on which to wrap up. Sharon and Ellen, thank you so much for joining me today for this very insightful and interesting conversation. For more information on the topics we’ve discussed, please visit our website at And of course, if we can help you navigate any of these topics, please don't hesitate to get in touch. You can also subscribe and listen to this series wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening, and please take care.

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