72846 Federal Register / Vol

72846 Federal Register / Vol. 85, No. 220 / Friday, November 13, 2020 / Rules and Regulations DEPARTMENT OF LABOR 404(a)(1)(A) to require fiduciaries to act term used was ‘‘economically targeted with ‘‘complete and undivided loyalty investments’’ (ETIs). The Department’s Employee Benefits Security to the beneficiaries,’’ 1 observing that objective in issuing IB 94–1 was to state Administration their decisions must ‘‘be made with an that ETIs 7 are not inherently eye single to the interests of the incompatible with ERISA’s fiduciary 29 CFR Parts 2509 and 2550 participants and beneficiaries.’’ 2 The obligations. The preamble to IB 94–1 RIN 1210–AB95 Supreme Court as recently as 2014 explained that the requirements of unanimously held in the context of sections 403 and 404 of ERISA do not Financial Factors in Selecting Plan ERISA retirement plans that such prevent plan fiduciaries from investing Investments interests must be understood to refer to plan assets in ETIs if the investment has ‘‘financial’’ rather than ‘‘nonpecuniary’’ an expected rate of return AGENCY: Employee Benefits Security benefits,3 and Federal appellate courts Administration, Department of Labor. commensurate to rates of return of have described ERISA’s fiduciary duties available alternative investments with ACTION: Final rule. 4 as ‘‘the highest known to the law.’’ The similar risk characteristics, and if the SUMMARY: The Department of Labor Department’s longstanding and investment vehicle is otherwise an (Department) is adopting amendments consistent position, reiterated in appropriate investment for the plan in to the ‘‘investment duties’’ regulation multiple forms of sub-regulatory terms of such factors as diversification under Title I of the Employee guidance, is that when making decisions and the investment policy of the plan. Retirement Income Security Act of 1974, on investments and investment courses Some commentators have referred to as amended (ERISA). The amendments of action, plan fiduciaries must be this as the ‘‘all things being equal’’ test require plan fiduciaries to select focused solely on the plan’s financial or the ‘‘tie-breaker’’ standard. The investments and investment courses of returns, and the interests of plan Department stated in the preamble to IB action based solely on financial participants and beneficiaries in their 94–1 that when competing investments considerations relevant to the risk- benefits must be paramount. serve the plan’s economic interests The Department has been asked adjusted economic value of a particular equally well, plan fiduciaries can use periodically over the last 30 years to investment or investment course of such non-pecuniary considerations as consider the application of these action. the deciding factor for an investment principles to pension plan investments decision. DATES: The final rule is effective on selected because of the non-pecuniary January 12, 2021. benefits they may further, such as those FOR FURTHER INFORMATION CONTACT: relating to environmental, social, and investment and granted a variety of prohibited Jason A. DeWitt, Office of Regulations transaction exemptions to both individual plans corporate governance considerations. and pooled investment vehicles involving and Interpretations, Employee Benefits Various terms have been used to investments that produce non-pecuniary benefits. Security Administration, (202) 693– describe this and related investment See Advisory Opinions 80–33A, 85–36A and 88– 8500. This is not a toll-free number. behaviors, such as socially responsible 16A; Information Letters to Mr. George Cox, dated Jan. 16, 1981; to Mr. Theodore Groom, dated Jan. Customer Service Information: investing, sustainable and responsible Individuals interested in obtaining 16, 1981; to The Trustees of the Twin City investing, environmental, social, and Carpenters and Joiners Pension Plan, dated May 19, information from the Department of corporate governance (ESG) investing, 1981; to Mr. William Chadwick, dated July 21, Labor concerning ERISA and employee impact investing, and economically 1982; to Mr. Daniel O’Sullivan, dated Aug. 2, 1982; to Mr. Ralph Katz, dated Mar. 15, 1982; to Mr. benefit plans may call the Employee targeted investing. The terms do not Benefits Security Administration William Ecklund, dated Dec. 18, 1985, and Jan. 16, have a uniform meaning and the 1986; to Mr. Reed Larson, dated July 14, 1986; to (EBSA) Toll-Free Hotline, at 1–866– terminology is evolving.5 Mr. James Ray, dated July 8, 1988; to the Honorable 444–EBSA (3272) or visit the The Department’s first comprehensive Jack Kemp, dated Nov. 23, 1990; and to Mr. Stuart Cohen, dated May 14, 1993; PTE 76–1, part B, Department of Labor’s website guidance addressing these types of (www.dol.gov/ebsa). concerning construction loans by multiemployer investment issues was in Interpretive plans; PTE 84–25, issued to the Pacific Coast SUPPLEMENTARY INFORMATION: Bulletin 94–1 (IB 94–1).6 There, the Roofers Pension Plan; PTE 85–58, issued to the Northwestern Ohio Building Trades and Employer A. Background Construction Industry Investment Plan; PTE 87–20, 1 Donovan v. Mazzola, 716 F.2d 1226, 1238 (9th issued to the Racine Construction Industry Pension Title I of the Employee Retirement Cir. 1983) (quoting Freund v. Marshall & Ilsley Fund; PTE 87–70, issued to the Dayton Area Bank, 485 F. Supp. 629, 639 (W.D. Wis. 1979)). Income Security Act of 1974 (ERISA) Building and Construction Industry Investment 2 establishes minimum standards that Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. Plan; PTE 88–96, issued to the Real Estate for govern the operation of private-sector 1982). American Labor A Balcor Group Trust; PTE 89–37, 3 Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. issued to the Union Bank; and PTE 93–16, issued employee benefit plans, including 409, 421 (2014) (the ‘‘benefits’’ to be pursued by fiduciary responsibility rules. Section to the Toledo Roofers Local No. 134 Pension Plan ERISA fiduciaries as their ‘‘exclusive purpose’’ does and Trust, et al. In addition, one of the first 404 of ERISA, in part, requires that plan not include ‘‘nonpecuniary benefits’’) (emphasis in directors of the Department’s benefits office fiduciaries act prudently and diversify original). authored an influential article on this topic in 1980. plan investments so as to minimize the 4 See, e.g., Tibble v. Edison Int’l, 843 F.3d 1187, See Ian D. Lanoff, The Social Investment of Private risk of large losses, unless under the 1197 (9th Cir. 2016). Pension Plan Assets: May It Be Done Lawfully 5 For a concise history of the current ESG Under ERISA?, 31 Labor L.J. 387, 391–92 (1980) circumstances it is clearly prudent not movement and the evolving terminology, see Max (stating that ‘‘[t]he Labor Department has concluded to do so. Sections 403(c) and 404(a) also Schanzenbach & Robert Sitkoff, Reconciling that economic considerations are the only ones require fiduciaries to act solely in the Fiduciary Duty and Social Conscience: The Law which can be taken into account in determining interest of the plan’s participants and and Economics of ESG Investing by a Trustee, 72 which investments are consistent with ERISA Stan. L. Rev. 381, 392–97 (2020). standards,’’ and warning that fiduciaries who beneficiaries, and for the exclusive 6 59 FR 32606 (June 23, 1994) (appeared in Code exclude investment options for non-economic purpose of providing benefits to of Federal Regulations as 29 CFR 2509.94–1). reasons would be ‘‘acting at their peril’’). participants and beneficiaries and Interpretive Bulletins are a form of sub-regulatory 7 IB 94–1 used the terms ETI and economically defraying reasonable expenses of guidance that are published in the Federal Register targeted investments to broadly refer to any and included in the Code of Federal Regulations. investment or investment course of action that is administering the plan. Prior to issuing IB 94–1, the Department had issued selected, in part, for its expected non-pecuniary Courts have interpreted the exclusive a number of letters concerning a fiduciary’s ability benefits, apart from the investment return to the purpose rule of ERISA section to consider the non-pecuniary effects of an employee benefit plan investor. VerDate Sep<11>2014 19:05 Nov 12, 2020 Jkt 253001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\13NOR3.SGM 13NOR3 jbell on DSKJLSW7X2PROD with RULES3 Federal Register / Vol. 85, No. 220 / Friday, November 13, 2020 / Rules and Regulations 72847 Since 1994, the Department’s sub- The Department cautioned, however, As ESG investing has increased, it has regulatory guidance has gone through an that ‘‘[t]o the extent ESG factors, in fact, engendered important and substantial iterative process, but the Department’s involve business risks or opportunities questions with numerous observers emphasis on the primacy of plan that are properly treated as economic identifying a lack of precision and participants’ economic interests has considerations themselves in evaluating consistency in the marketplace with stayed constant. In 2008, the alternative investments, the weight respect to defining ESG investments and Department replaced IB 94–1 with given to those factors should also be strategies, as well as shortcomings in the Interpretive Bulletin 2008–01 (IB 2008– appropriate to the relative level of risk rigor of the prudence and loyalty 8 01). In 2015, the Department replaced and return involved compared to other analysis by some participating in the 10 IB 2008–01 with Interpretive Bulletin relevant economic factors.’’ The ESG investment marketplace.13 There is 9 2015–01 (IB 2015–01), which is Department further emphasized in FAB no consensus about what constitutes a codified at 29 CFR 2509.2015–01. Each 2018–01 that fiduciaries ‘‘must not too genuine ‘‘ESG’’ investment, and ESG Interpretive Bulletin has consistently readily treat ESG factors as rating systems are often vague and stated that the paramount focus of plan economically relevant to the particular inconsistent, despite featuring fiduciaries must be the plan’s financial investment choices at issue when 14 returns and providing promised benefits making a decision,’’ as ‘‘[i]t does not prominently in marketing efforts.

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