Paragraph (c)(3) does not, however, supersede paragraph (c)(1). Rather, paragraph (c)(3) includes provisions that are intended to apply those principles in the context of the selection of designated investment alternatives for participant-directed individual account plans. Thus, paragraph (c)(3) provides in general that, in such a case, a prudently selected, well managed, and properly diversified fund with ESG investment mandates could be added to the available investment options on a 401(k) plan platform without requiring the plan to forgo adding other non-ESG-themed investment options to the platform, consistent with the standards in ERISA sections 403 and 404. Adding such a fund is permissible only if: (i) The fiduciary uses only objective risk-return criteria, such as benchmarks, expense ratios, fund size, long-term investment returns, volatility measures, investment manager tenure, and mix of asset types (e.g., equity, fixed income, money market funds, diversification of investment alternatives, which might include target date funds, value and growth styles, indexed and actively managed funds, balanced and equity segment funds, non-US equity and fixed income funds) in selecting and monitoring all investment alternatives for the plan, including any ESG investment alternatives; (ii) the fiduciary documents compliance with (i) above; and (iii) the environmental, social, corporate governance, or similarly oriented alternative is not added as, or as a component of, a qualified default investment alternative (QDIA as described in 29 CFR 2550.404c-5) that participants are automatically defaulted into as opposed to a fund added to the menu from which they are free to choose. Under paragraph (c)(3), a fiduciary could, for example, adopt an investment policy statement with prudent criteria for selection and retention of designated investment alternatives for an individual account plan that were based solely on pecuniary factors, and apply the criteria to all investment options in similar asset classes or funds in the same category, including potential ESG-themed funds.23 While the proposal would allow a plan fiduciary to include a prudently selected ESG-themed investment alternative on a 401(k) plan investment platform if the fiduciary uses objective risk-return criteria in selecting and monitoring all investment alternatives for the plan, including any ESG investment alternatives, the Department has consistently expressed the view that fiduciaries who are willing to accept expected reduced returns or greater risks to secure non-pecuniary benefits are in violation of ERISA. Thus, fiduciaries considering investment alternatives for individual account plans should carefully review the prospectus or other investment disclosures for statements regarding ESG investment policies and investment approaches.24
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