DOL Final ERISA Regulations for Private Equity Investments: New Prudence Rules, Pecuniary Factors, Exceptions, and More

Description

The DOL has recently issued guidance and final regulations that would significantly impact retirement plan investments. The guidance addresses the selection of investment options with private equity components, the consideration of environmental, social, and corporate governance (ESG) factors and other non-pecuniary factors when investing plan assets and the exercise of proxy voting and other shareholder rights associated with stock held by pension plans. ERISA fiduciaries and their counsel will need to develop an in-depth understanding of the new guidance and regulations in order to take appropriate steps to avoid unintended liability and potential claims.

In an Information Letter dated June 3, 2020, the DOL concluded that a fiduciary of an individual account plan may, consistent with ERISA requirements, offer as an investment option under the plan a professionally managed asset allocation fund with a private equity component. However, due to the greater complexity and limited transparency and liquidity of private equity investments, including a private equity component in an investment option can increase the potential liability for fiduciaries, who have a legal duty to select prudent investment options. ERISA also requires fiduciaries to monitor designated investment alternatives under the plan. Fiduciaries are liable for any losses resulting from the failure to prudently monitor these investments.

On October 30, 2020, the DOL announced the issuance of final regulations, subsequently published in the Federal Register on November 13, 2020, addressing the application of certain ERISA fiduciary duties to the selection of pension plan investments based on non-pecuniary factors. The regulations clarify that a fiduciary, when selecting plan investments, may not subordinate the interests of plan participants and beneficiaries in their retirement income to non-pecuniary goals. In addition, the regulations would require a fiduciary to document their investment process when using non-pecuniary factors to choose among investments that the fiduciary cannot distinguish based on pecuniary factors alone. The regulations also prohibit the selection or retention of a fund or managed portfolio as a qualified default investment alternative, or as a component within a QDIA, if the fund or portfolio’s objectives, goals, or primary investment strategies contemplate the use of non-pecuniary factors.

On December 11, 2020, the DOL announced the issuance of final regulations, to be published in the Federal Register, addressing the application of certain ERISA fiduciary duties to the exercise of proxy voting and other shareholder rights associated with stock held as a pension plan investment. The regulations clarify that fiduciaries are not obligated to vote every proxy or exercise every shareholder right, and, in deciding whether to vote proxies or exercise other shareholder rights, must act solely in accordance with the economic interests of the plan, taking into consideration the costs to the plan. The regulations also require the maintenance of records on proxy voting activities and other exercises of shareholder rights.

Listen as our panel discusses recent DOL guidance for private equity in retirement plans, amendments to the definition of "investment duties" and final regulations for "financial factors", and fiduciary liability, as well as offer strategies and best practices for ERISA counsel and plan sponsors.