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Lost Track of Fiduciary, ESG Rules? Here’s Where They Stand

March 29, 2021, 9:30 AM

Retirement advisers across the U.S. are pausing to catch their breath as the U.S. Labor Department’s benefits agency prepares for another round of rulemaking on the definition of a fiduciary and possibly reversing attempts to restrict sustainability investing.

DOL’s Employee Benefits Security Administration under former President Donald Trump issued a rules tsunami in its final months, rolling out proposals to permit advice by conflicted fiduciaries and curb environmental, social, and corporate governance investing and proxy voting.

“It’s been a lot for EBSA,” said Dan Doonan, executive director of the National Institute on Retirement Security. The Labor Department subagency of just under 1,000 employees regulates private-sector worker benefits.

President Joe Biden reacted swiftly upon taking office in January, freezing and reviewing all but two of those rules required under the Setting Every Community Up for Retirement Enhancement Act Congress passed in 2019. Since then, a lot has been riding on incoming leadership at the DOL, said Fred Reish, a partner at Faegre Drinker Biddle & Reath in Los Angeles.

“Now that we have a confirmed secretary of labor, part of that puzzle is in place,” Reish said, noting that EBSA still lacks an assistant secretary. “That is the person who will likely have the primary responsibility for setting the tenor of these guidance projects.”

Here’s where several in-limbo rules stand.

Fiduciary Rule: EBSA officials have been meeting with employee benefits attorneys who represent big-name investment firms to discuss redefining the role of a retirement plan fiduciary once again, sources told Bloomberg Law.

Precisely who in the U.S. retirement plan industry is considered a fiduciary under the law has been a hot topic since before EBSA or even the Employee Retirement Income Security Act of 1974. Fierce investor criticism crippled a uniform rule in 2011, and the U.S. Court of Appeals for the Fifth Circuit vacated an Obama-era rewrite in 2018.

Trump’s fiduciary rule 3.0, which took effect Feb. 16, subjects individual retirement account rollover advice to the 1975 five-part test defining fiduciaries and grants regulated investment firms an exemption to profit from conflicted advice. Biden let that rule take effect last month, but few expect it will be the department’s final word.

“The next step will likely be a new regulation further expanding the definition of fiduciary advice and possibly an update to prohibited transaction exemption,” Reish said. “The DOL will need to walk a fine line between the desire to cover more advisers under the fiduciary definition and the limits imposed on the DOL by the Fifth Circuit’s vacatur of the Obama-era fiduciary rule.”

Investment Duties Rule: The Biden DOL said last week that it won’t enforce the Trump-era investment duties rule that took effect Jan. 12, nor pursue enforcement actions against plan fiduciaries who fail to comply with it.

The rule required those overseeing pension and 401(k) plans to put the economic interests of plan participants and beneficiaries ahead of what it called “non-pecuniary” goals. When it proposed the rule in June 2020, the agency said it wanted to set clear regulatory guideposts for plan fiduciaries “in light of recent trends” in environmental, social, and corporate governance investing.

The department’s final iteration of the rule, issued during the waning days of Trump’s administration, stripped the rule of explicit references to ESG factors, but created a tougher standard for fiduciaries to include them when choosing default investments, essentially codifying an earlier Trump field assistance bulletin that had outright banned them.

The DOL is likely to reverse the rule by 2022, not only permitting socially conscious investing but specifically defining socially conscious investment factors as material if they could affect future returns or investment risk.

Proxy Voting Rule: Reish said EBSA’s proxy voting rule is “connected at the hip” to the investment duties rule, as it follows the Securities and Exchange Commission’s best-interest standard and regulates based on pecuniary factors.

With that in mind, the Jan. 15 rule prohibiting the exercise of shareholder voting rights that aren’t connected to a plan’s financial interest could be the subject of another EBSA rule rewrite.

Some advisers are still scratching their heads as to why administrations have ping-ponged back and forth on the issue in the first place. It remains a contentious subject even among those who have applauded other Biden administration retirement policy initiatives.

“I really have no respect for ESG investing,” said Alicia Munnell, executive director of the Center for Retirement Research at Boston College. “I think it’s a ploy by the financial service firms, because active management was becoming less popular and so they kind of repackaged under this umbrella product.”

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editors responsible for this story: Martha Mueller Neff at; Andrew Harris at