New Financial Factors Regulation Blocks Participant Requested Investments

MARLBOROUGH, Mass., Nov. 23, 2020 /PRNewswire/ -- The Financial Factor Regulation from the Department of Labor requires that any investments designated for participants are based only on pecuniary factors of risk and return. Investments requested by participants can no longer be accommodated since such requests are non-pecuniary by the standards defined in the regulation.

Originally proposed to affect only Environmental Social Governance ("ESG") investments, the final regulation covered every possible non-pecuniary factor that is used to select designated investments. The expansion in scope beyond ESG means that any basis for selection and monitoring needs to be examined as a possible violation.

The preamble to the regulation is explicit in noting that "A fiduciary's evaluation of an investment must be based only on pecuniary factors, unless non-pecuniary factors are used to distinguish between otherwise indistinguishable alternatives"  and "A fiduciary may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives, and may not sacrifice investment return or take on additional investment risk to promote non-pecuniary benefits or goals".

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Take the case where a participant, even the chief executive, would like to have access to his/her favorite mutual fund and requests to make it available in the 401(k) plan. The answer has to be "No" according to the new regulations, unless that fund can be shown to be superior to all other reasonably available investments.

Such requests that were granted in the past must now be reversed unless changes are made. One change is to remove the fund from the plan line-up and suggest that it be acquired through a brokerage window, in which case the regulation will not apply. Another change is to authorize an asset class for the plan, in which the fund is the best available.

Unfortunately, the path of least resistance is to remove the offending fund.

DALBAR, Inc. is inviting firms with retirement business to examine the possible impact of Financial Factors regulation and discuss strategies for compliance. For more information about participating in this online forum, please contact Cory Clark at (617) 624-7156 or [email protected].

DALBAR, Inc. is the financial community's leading independent expert for evaluating, auditing and rating business practices, customer performance, and service.


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