New DOL regulations require fiduciaries to reevaluate ESG investments

The Department of Labor (DOL) issued final regulations that, beginning on Jan. 12, 2021, require plan fiduciaries to only consider financial factors when selecting plan investments. While not specifically targeting Environmental, Social and Governance (ESG) investments, the regulations significantly alter the fiduciary process needed to support a plan’s decision to offer them.


On June 30, 2020, the DOL published a proposed regulation titled “Financial Factors in Selecting Plan Investments.” That proposal said fiduciaries could only consider pecuniary (risk, return, expense, i.e., money) factors when selecting investments, therefore creating significant additional fiduciary requirements to offer ESG funds. In addition, the original proposal prohibited an ESG investment from being a qualified default investment alternative (QDIA).

When the proposal was opened for public comment, the DOL received more than 8,700 (a typical proposal receives around 100) negative comments from participant groups, plan sponsor groups, and the financial services industry, most of which believed that such a rule would limit ESG investments in retirement plans. After reviewing the comments, the DOL issued its final rule that does not appear to give consideration to the public’s concerns.

The final rule

On Oct. 30, 2020, the DOL released its final rule. While the final rule eliminates the specific reference to ESG investments and applies to all plan investments, the preamble still clearly focuses on ESG investments. Simply put, fiduciaries are not allowed to sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or any other non-pecuniary goals. The final rule considerably impacts the fiduciary process to use ESG funds, and requires that:

  • Fiduciaries must consider diversification, liquidity and projected returns for each investment as it relates to the entire plan portfolio and compare each investment to reasonably available alternatives with similar risks.

  • A fiduciary’s evaluation of an investment can only consider pecuniary factors (risk, return and cost), and no other objectives may be considered that could sacrifice investment returns or create additional investment risk.

  • The two standards above apply to both the fiduciary’s selection and retention of an investment.

  • In order to maintain a fiduciary’s 404(c) protections, even if the above factors are met, non-pecuniary goals are not permitted to be considered if the investment is a QDIA.

One exception where a plan fiduciary may use non-pecuniary factors is in a “tie-breaking” situation in which the fiduciary is unable to distinguish investment alternatives based on pecuniary factors alone. In this case, the fiduciary may use non-pecuniary factors as the deciding factor. Investments are not required to be identical in each and every respect before the tie-breaker provisions become available; however, to consider non-pecuniary factors as tiebreakers, a plan fiduciary must document:

  • Why pecuniary factors were not sufficient to select the investment;

  • How the selected investment compares to the alternative investments; and

  • How the chosen non-pecuniary factor or factors are consistent with the interests of participants and beneficiaries in their retirement income or financial benefits under the plan.


The final rule will be effective Jan. 12, 2021, and applies prospectively to investment decisions made after that date, including the decision to continue to offer existing investment options. The DOL recognizes that plans may need to make adjustments and have delayed enforcement until April 30, 2022, to allow time to make any necessary changes to QDIAs that currently may consider non-pecuniary ESG factors.

Action steps

If an investment fund integrates ESG factors into the investment process for non-financial reasons or discloses that investment performance may be adversely impacted because of ESG factor considerations, a fiduciary will have expanded duties when selecting or retaining that fund. The fiduciary must:

  • Review how ESG factors are integrated into the investment process and whether such factors are pecuniary factors.

  • Review all fund disclosures and any considerations of non-pecuniary factors.

  • Document only pecuniary analysis and any tiebreaking analysis.

  • Eliminate any non-pecuniary considerations related to the QDIA.

  • Prepare your fiduciary process for the enhanced scrutiny ESG funds will receive.

Lockton’s take

Despite changes from the proposed rule that don’t specifically target ESG, based on statements in the preamble to the final rule, the DOL clearly remains skeptical about whether ESG factors can ever be true “ties” based on the consideration of pecuniary factors alone. This is all unwelcome news for plan sponsors who are increasingly aware of the societal impact of their plans’ investments and who are undergoing comprehensive diversity, equity and inclusion initiatives. We expect a Biden administration to strongly pursue a delay of the effective date, by issuing clarifying regulations, not enforcing this, or possibly looking to Congress. Plan fiduciaries wishing to consider ESG factors when evaluating an investment can still proceed, but should be cautious and careful to document their process. 


Investment advisory services offered through Lockton Investment Advisors, LLC, a SEC registered investment advisor.

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New DOL regulations require fiduciaries to reevaluate ESG investmentsDownload alert (opens a new window)