Articles | March 25, 2021

DOL Pivots Away from Recent Rules on ESG and Proxy Voting

On March 10, 2021, the DOL issued an expected statement that it will not enforce recently published rules on ESG and proxy voting. The rules in question are “Financial Factors in Selecting Plan Investments” (“ESG Rule”) and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” (“Proxy Voting Rule”).

DOL Pivots Away from Recent Rules on ESG and Proxy Voting

The DOL explained its decision was based on the perspectives of “a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers” that questioned the rules' consistency with fiduciary duty under ERISA.

The department further pointed to questions on the rushed process for the rulemaking and the substance of evidentiary support for changing the status quo. The rules will be revisited but in the meantime plan fiduciaries can take comfort that they do not need to adjust their investments or proxy voting approach in light of the rules. 

Segal Marco did not anticipate making major adjustments to its proxy voting service in response to the rules. The Proxy Voting Rule emphasizes certain fiduciary obligations that are consistent with prior sub-regulatory guidance as outlined. However, the rule cautioned against prioritizing non-pecuniary factors without providing guidance or examples about proxy items it considered to fall into that category. Further, the Proxy Voting Rule permitted fiduciaries to adopt policies that would limit the scope of voting. Segal Marco made an early decision that it would not offer proxy voting services that limited the issues or ballots on which to vote for reasons more thoroughly explained in the 2020 Corporate Governance Report.

Likewise, we expected few managers to change their strategies in light of the DOL’s ESG Rule. The ESG Rule cautioned fiduciaries on ESG but substantively walked away from the more dramatic changes floated prior. The final rule does not actually regulate on the term “ESG.” The DOL determined it is too amorphous to be used in regulation. Instead, the regulation distinguishes factors as pecuniary or non-pecuniary.

The DOL defined pecuniary as a factor that “a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policy established pursuant to section 402(b)(1) of ERISA.” The DOL defers to fiduciaries to determine the appropriate time horizon cited in the definition of pecuniary.

Segal Marco contacted over 200 managers of ERISA plans to inquire whether their ESG integrated strategies complied with the ESG Rule. In addition to providing Segal Marco with letters of compliance, managers responding answered that they believed their ESG considerations are pecuniary and provide their clients the best financial performance.

Members of the Segal Marco ESG Committee held meetings with various investment managers following the DOL’s proposed and final rules on ESG. Similar to Segal Marco’s actions, many managers produced response letters to the DOL when the ESG Rule was originally proposed that suggested changes to portions of the Rule. 

DOL ESG rule: “Financial Factors in Selecting Plan Investments”

29 CFR Parts 209 and 2550

RIN 1210-AB95

Press release:

Release date: October 30, 2020

Full rule:

Segal Marco comment on proposed rule:

DOL proxy voting rule: “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights”

29 CFR Parts 2509 and 2550RIN 1210-AB91

Release date: December 11, 2020

Press release:

Full rule:

Segal Marco comment on the proposed rule:

Key Provisions of DOL’s ESG Rule

Five key changes to investment duties

  1. Investment decisions must be made on pecuniary factors.
  2. Fiduciaries cannot subordinate the interests of participants to unrelated objectives. Fiduciaries are barred from sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals.
  3. Fiduciaries are required to consider reasonably available alternatives to meet their prudence and loyalty duties under ERISA.
  4. In the rare circumstances where non-pecuniary factors may be used in decision-making because the pecuniary factors reveal “truly indistinguishable” investments, fiduciaries must document the following items. Therefore, the final rule preserves the “all things being equal test” but adds new documentation requirements, specifically:
    • Why pecuniary factors were not sufficient to select the investment or investment courses of action
    • How the investment compares to alternative investments

    • Composition of the portfolio with regard to diversification

    • Liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan

    • Projected return of the portfolio relative to the funding objectives of the plan

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

  5. In participant-directed plans, fiduciaries are not prohibited from considering or including any investment fund, product or model portfolio as an investment option merely because the fund, product or model portfolio promotes, seeks or supports one or more non-pecuniary goals. However, participants must be offered a broad range of investment alternatives to choose from and the fiduciary must otherwise satisfy the prudence and loyalty provisions in ERISA and the final rule, including the requirement to evaluate solely on pecuniary factors, any investment fund, product or model portfolio in the selection process. Further, the final rule prohibits consideration of non-pecuniary factors for qualified default investment alternative (QDIA) selection. Thus, a fiduciary cannot add an investment fund, product or model portfolio if the investment objectives or goals or its principal investment strategies include, consider or indicate the use of one or more non-pecuniary factors for the QDIA.


Key Provisions of DOL’s Proxy Voting Rule

Six key requirements for fiduciaries exercising proxy voting rights:

  1. Act solely in accordance with the economic interest of the plan and its participants and beneficiaries
  2. Consider any costs involved
  3. Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan’s participants and beneficiaries or the purposes of the plan
  4. Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights
  5. Maintain records on proxy voting activities and other exercises of shareholder rights
  6. Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies and recordkeeping and reporting services

Segal Marco received compliance confirmation letters on the ESG Rule from 130 managers. A small number of managers choose not to sign a compliance letter given the Biden Administration had made clear early in its first term that it expects to take a different approach, which has now been confirmed with the recent announcement.

Segal Marco was pleased with the response received from the managers we contacted and the level of engagement shown by those managers. The ESG Committee and Alpha Research will continue to engage with managers on ESG topics and look forward to the continuation of the evolvement of ESG investing.

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The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

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