ERISA Fiduciaries Under a Biden Labor Department: What Is on the Horizon?

February 22, 2021

President Joe Biden has been in office for 34 days and his nominee for Secretary of Labor, Marty Walsh, has not yet been confirmed. So far, Mr. Walsh has not publicly stated much regarding his views or intended priorities with respect to ERISA, although it is known that he has a background in labor organizing and the pension issues related to labor unions.

Nonetheless, a number of issues in the ERISA fiduciary space have already garnered the new administration’s attention and there are certain clues about how this Department of Labor (DOL) may impact the regulation and enforcement of ERISA’s fiduciary standards.

This LawFlash highlights some of these issues and identifies possible ERISA fiduciary priorities for the Biden DOL.

  • A Reexamination of ESG

One area of expected DOL focus will be the role of “environmental, social and governance,” or “ESG,” factors in ERISA investment decisionmaking. This topic has been subject to regulatory back and forth over the last two decades, with successive Republican and Democratic DOLs each putting their own policy stamp on the issue. All signs point to the Biden DOL doing the same.

The most recent volley is the Trump DOL’s final rule titled “Financial Factors in Selecting Plan Investments.” The rule became effective January 12, 2021 (with a later effective date of April 30, 2022 for a provision applicable to qualified default investment alternatives (QDIAs)). (Read our prior LawFlash.) The Financial Factors Rule includes an interpretation of the duty of loyalty standard that prohibits the consideration of “non-pecuniary” factors for ERISA fiduciaries considering plan investments, subject only to narrow exceptions. “Pecuniary factors” are equated in the regulation with economic factors (and formally defined as factors that an ERISA fiduciary prudently determines are 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).

This most recent iteration of the regulation of ESG considerations has resulted in much controversy because of its perceived potential, despite the removal of references to ESG in the regulation itself, to chill the use of ESG factors and its potential broader impact on ERISA fiduciary decisionmaking standards generally. At the same time, the DOL has been engaged in investigations of ERISA plan fiduciaries on their consideration of ESG factors in investment decisionmaking. (Read our prior blog post.)

The Biden administration has already indicated its intent to reexamine the Financial Factors Rule. In a January 20, 2021 executive order titled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis” (the Executive Order), President Biden directed all executive departments and agencies “to immediately review and take possible action to address federal regulations and other actions from the Trump administration” that conflict with these “important national objectives.” The Executive Order specifically enumerates such “national objectives” as including the improvement of public health and protecting the environment, holding polluters accountable, and the creation of the well-paying union jobs. This Executive Order specifically identified the Financial Factors Rule as part of the DOL’s review.

On the same day, President Biden issued the “Modernizing Regulatory Review” memorandum (Memorandum) that seeks to modernize the regulatory review process by requesting feedback from Office of Management and Budget (OMB) and other agencies as to “how the regulatory review process can promote public health and safety, economic growth, social welfare, racial justice, environmental stewardship, human dignity, equity, and the interests of future generations.”

Taken together, the Executive Order and Memorandum signal that the DOL may determine to modify or replace the Financial Factors Rule, or seek other approaches such as a nonenforcement policy or a pause in the current ESG-focused investigations. Others expect the DOL to make more limited changes to the Financial Factors Rule such as by changing its provision restricting investment options with non-pecuniary goals as QDIAs. However, until the DOL issues these changes (which would require undertaking a notice-and-comment rulemaking process that could take several months at a minimum), the Financial Factors Rule is currently in effect (subject to the later effective date for the QDIA provisions).

  • A Possible Review of New Proxy Voting Rules

On the other hand, it is less clear how a Biden DOL will seek to regulate fiduciary standards around proxy voting—which presents overlap with ESG considerations—or seek to change a Trump era rule on proxy voting (which some viewed as a corollary rule to the Financial Factors Rule).

The proxy voting rule (officially titled “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights”) became effective on January 15, 2021—just days before the end of the Trump administration (the Proxy Voting Rule). The rule clarifies the fiduciary standards around proxy voting for investment portfolios subject to the ERISA fiduciary responsibility rules. The rule makes clear that a fiduciary is not required to vote on each and every proxy or exercise each and every shareholder right. Rather, the Proxy Voting Rule requires that the fiduciary make the decision of whether to vote proxies or exercise shareholder rights taking into account the costs of voting; thus providing the fiduciary discretion to decide that not voting or exercising a particular right is in the plan’s economic interest. (Read our prior report.)

Particularly for plan sponsor fiduciaries, the Proxy Voting Rule presents some challenges because, among other things, it precludes a fiduciary from simply following the recommendations of a proxy voting service without ensuring that the service’s policies and recommendations are consistent with the rule’s standards. Also, when read with the Financial Factors Rule described above, there is some concern that it could have a chilling effect on considering ESG and related factors in proxy voting decisions and shareholder activism.

This Proxy Voting Rule was not specifically included in the Executive Order requiring examination of the Financial Factors Rule. Nevertheless, many expect that the DOL will reevaluate it in conjunction with its reevaluation of the Financial Factors Rule, as both are part of the same ERISA regulation.

  • Continuing Focus on the Fiduciary Rule and Nondiscretionary Recommendations

Many expect a continued focus on the investment advice fiduciary standards, with a particular focus on advice to plan participants and retail investors, also known as the “fiduciary rule.”

The last regulatory action by the DOL regarding the fiduciary rule was the issuance of the “Improving Investment Advice for Worker & Retirees” class exemption, which covers investment advice fiduciaries and was issued in the last days of the Trump administration. That exemption is now in effect, as of Feb. 16, 2021.

But there has already been Biden action regarding the fiduciary rule. Specifically, in February the DOL also announced its intention to publish related guidance for retirement investors, employee benefit plans, and investment advice providers. The announcement also affirmed that the Biden DOL will allow the Trump era exemption to go effective (which was in doubt until recently). In making the announcement, the new Principal Deputy Assistant Secretary of Labor for the Employee Benefits Security Administration, Ali Khawar, said “[W]e will continue our stakeholder outreach to determine how we might improve this exemption, the rule defining who is an investment advice fiduciary, and related exemptions to build on this approach.”

This suggests that the DOL may be interested in further rulemaking and guidance, building on and reinforcing the interpretations of the reinstated five-part test for fiduciary investment advice described in the new exemption’s adopting release (including with regard to rollover advice).

Of primary interest here will be whether and how the DOL’s approach aligns with the SEC’s Regulation Best Interest and other federal, state, and local rules impacting retail investment advice. (See our comparison of the DOL’s Investment Advice Exemption to the SEC’s rules.)

  • Increased Support for State and Local Retirement Savings Efforts

Another issue being watched is that a Biden DOL, like other Democratic administrations, could seek to provide more support for state and local retirement savings efforts. This issue often plays out in the legal issue of preemption, given that aggressively-applied ERISA preemption rules could become a hindrance to state and local retirement programs.

The DOL’s recent withdrawal of its amicus brief (filed by the Trump DOL) supporting a challenge in the US Court of Appeals for the Ninth Circuit to the legality of California's auto-IRA program, may signal that the Biden DOL will return to a less strict interpretation of preemption (present in the Obama DOL) allowing more state and local retirement efforts.

This will likely be viewed as a signal that the DOL will support, rather than hinder, programs like the one in California, that are state or local efforts to facilitate retirement savings. (For example, the CalSavers program is a state-run program directing a portion of California workers' salaries to individual retirement accounts unless they opt out.)

Notably, the nominee for Deputy Secretary of Labor, Julie Su, is currently serving as the secretary of California’s Labor and Workforce Development Agency and is reported to have experience working on the CalSavers program.

  • Continued Support for Pooled Employer Plans

Pooled Employer Plans, or PEPs, are a new form of multiple employer plans made available by the 2019 SECURE Act (with broad bipartisan support), facilitating the operation of 401(k) plan arrangements for groups of unrelated employers. The effective date for the PEP rules was January 1, 2021. During 2020, the DOL adopted a regulation on the registration of Pooled Plan Providers, the entities that sponsor and administer PEPs, and also requested comments on prohibited transaction issues for PEP arrangements. (Read our prior LawFlash.) We expect that during 2021, the DOL will continue to issue guidance on the many operational questions arising with PEPs. 

  • Disclosures – Form 5500 and Service Provider Fee Disclosures

A Biden DOL could continue efforts to enhance and reform ERISA-related disclosure documents, particularly related to service provider compensation. The Obama DOL introduced new investment fee disclosures (the participant level and plan level fee disclosures) and a Biden DOL may similarly focus on creating new or enhanced disclosure documents.

For example, left undone by the Obama DOL were updates to the Form 5500 annual report required by plan administrators (including service provider disclosures required under Schedule C) and a guide to the service provider fee disclosures required under ERISA Section 408(b)(2). Streamlining Form 5500 is on the DOL’s regulatory agenda (created by the Trump DOL). Additionally, Congress recently amended ERISA Section 408(b)(2) to require brokers and consultants for welfare plans to disclose information about their fees and compensation similar to what is required of certain service providers to retirement plans. Given the increased focus on disclosures in the investment space generally, it is possible that the DOL will reengage in revamping and refining the disclosures currently required of service providers to ERISA plans.

  • Robust Enforcement Efforts

In addition to the above regulatory focuses, we expect that the DOL will continue the robust enforcement efforts seen during the Trump era. (Read our prior blog post.) For example, there are no indications that the DOL will pull back on the “missing participant” investigations. In fact, with the new sub-regulatory guidance on the issue, the DOL may ramp up these investigations or expand their focus into defined contribution plans. There are also indications that the DOL may open new enforcement initiatives, including a possible focus on ERISA’s fiduciary standards around data security. We will also be looking to see whether the DOL and SEC coordinate enforcement efforts on the new investment advice exemption and Regulation Best Interest as there was some effort to align these regulatory standards.

As the personnel and policies of the DOL continue to take shape and establish priorities and focus, we appreciate the opportunity to partner with you in assessing and navigating these compliance challenges. Please do not hesitate to reach out if we can provide perspective or assistance on these types of issues.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Lisa Barton 

Marla Kreindler
Dan Salemi
Julie Stapel

New York
Craig Bitman

Bob Abramowitz
Amy Kelly

John Ferreira
Matt Hawes
Elizabeth Goldberg
Randall C. McGeorge
R. Randall Tracht

Washington, DC
Rosina Barker
Althea Day
Michael Gorman
Lindsay Jackson
Daniel Kleinman
Greg Needles
Michael Richman
Jonathan Zimmerman