Legislation Codifying Restrictions on ESG Passes House

January 21, 2026

The House of Representatives voted January 15, 2026, to amend the Employee Retirement Income Security Act (ERISA) to replace the regulations adopted by the Department of Labor (DOL) during the Presidency of Joe Biden with new statutory language on ERISA plan fiduciaries’ use of environmental, social and governance (ESG) factors when making investment decisions for retirement plans – mandating by law that plan fiduciaries prioritize financial returns using “pecuniary-only” standards. The bill would also require a plan fiduciary to act solely in the economic interest of plan participants when exercising a shareholder right (e.g., voting of proxies), and would prohibit ERISA fiduciaries from considering diversity when selecting asset managers and other service providers. Is this ERISA legislation likely to become law, and if so, why should public plans care?

The “Protecting Prudent Investment of Retirement Savings Act (H.R. 2988) passed the House on January 15^th by a largely party-line vote of 213-205, with three Democrats voting in favor of the legislation. The House Education and Workforce Committee reported the legislation, which was sponsored by Congressman Rick Allen (R-GA), who is chairman of its Subcommittee on Health, Employment, Labor, and Pensions.

In a nutshell, as the American Society of Pension Professionals & Actuaries (ASPPA) explains, the legislation would repeal the Biden-era DOL regulatory guidance issued in December 2022 that allowed plan fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights, such as proxy voting. “As a replacement, the bill would codify the ‘pecuniary-only’ standard that was the basis for the rule issued in the final days of Trump’s first term, but later rescinded under the Biden administration,” ASPPA points out. Of equal importance, H.R. 2988 would also address proxy voting and the hiring of plan service providers.

[NB: A “rule” is issued by an executive agency, such as the DOL. It is created under authority delegated by a statute, not by the Congress itself, and can usually be amended or repealed by the agency through its rulemaking process. On the other hand, a statutory provision codifying a regulation – a “law” – is enacted directly by the Congress and converts the substance of an existing regulation and writes it into the statute authorizing the rule. Once codified, the rule becomes binding at the statutory level and, importantly, cannot be changed by the agency on its own, but requires legislative action. Thus, codification is often seen as “locking in” and strengthening a regulatory requirement.]

Limitation on Consideration of Non-Pecuniary Factors by Fiduciaries

As passed by the House, H.R. 2988 would provide that an ERISA plan fiduciary “shall be considered to act solely in the interest of the participants and beneficiaries of the plan” only if the fiduciary’s action related to investments “is based solely on pecuniary factors.” Furthermore, the 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.” [The term “pecuniary factor” is defined by the bill to mean “a factor that a fiduciary prudently determines is expected to have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.”]

In explaining the bill, Education and Workforce Committee Chairman Tim Walberg (R-MI) insisted that, “[a]t its core, this legislation is about one simple principle: retirement savings should be managed to protect workers’ futures—not to advance political agendas.”

Walberg stressed during House debate that ESG investing has become “a tool for advancing a broader political agenda.” Specifically, he said that “[i]nstead of asking, ‘Is this the best investment for the worker?’, the ESG framework often asks, ‘Does this investment align with certain social or environmental goals?’” He also underscored that “ESG funds are often higher cost, less transparent, and in many cases, they underperform compared to traditional options.”

The bill’s sponsor, Congressman Allen, also insisted that “[t]he Biden-Harris administration’s misguided ESG policies allowed fiduciaries to play politics and steer retirees’ savings into left-wing investments for political and social purposes.” Furthermore, he emphasized that, “[i]n their haste to satisfy the radical progressive wing of their party, the Biden Administration encouraged fiduciaries to sacrifice the retirement security of millions of Americans instead of maximizing financial returns.”

However, in a letter to the full House prior to the vote on H.R. 2988, Jody Calemine, Director of Government Affairs for the AFL-CIO, argues that the bill is creating “a vague ‘pecuniary factors’ standard for the investment of retirement plan assets” which — originally proposed as a regulation by the Trump Administration in 2020 –- is “intended to discourage retirement plan fiduciaries from considering environmental, social, and governance issues when making investment decisions.”

For example, the AFL-CIO letter stresses that “[u]nder longstanding DOL regulations, private sector retirement plan fiduciaries are permitted to consider collateral benefits as a tiebreaker when competing investments equally serve the financial interests of the plan over the appropriate time horizon.”

While the bill continues to provide that if a fiduciary is unable to distinguish between or among investment alternatives or investment courses of action “on the basis of pecuniary factors alone,” then the fiduciary “may use non-pecuniary factors as the deciding factor.” However, this can be done only if a fiduciary can prove through documentation that a tie exists by showing:

why pecuniary factors were not sufficient to select a plan investment or investment course of action;
how the selected investment compares to the alternative investments– as to the composition of the portfolio — with regard to diversification, the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan, and the projected return of the portfolio relative to the funding objectives of the plan; and
how the selected non-pecuniary factor or factors are consistent with the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan.

Calemine insists that not only will the bill’s “pecuniary factors” standard – and the need to extensively document when considering collateral benefits as a tiebreaker — impose additional burdensome requirements on retirement plan fiduciaries who wish to consider collateral benefits. In addition, “these additional requirements for the consideration of collateral benefits will not apply to any other investment decisions,” he underscores.

Exercise of Shareholder Rights

The legislation as passed would also make the exercise of shareholder rights, including proxy voting, explicitly subject to ERISA’s duties of prudence and loyalty. Proxies held by retirement plans would have to be voted in the economic interest of plan participants and beneficiaries — if they were voted at all.

That is, the new bill would also make it clear that, by law, the fiduciary duty to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right. The bill explicitly provides: “The fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right.”

In commenting on this section of the House-passed bill, Education and Workforce Committee Chairman Tim Walberg (R-MI) said that, currently, “some fiduciaries use the shares held in retirement plans to push political policies through proxy votes—whether or not those policies benefit the workers whose money is at stake.” He said that H.R. 2988 would stop that by making it clear that “exercising shareholder rights—including proxy votes—must be done in the economic interest of plan participants. Not to advance radical political initiatives. Not to appease advocacy groups. And not to satisfy trends in corporate boardrooms.”

This section of the bill provides that if an ERISA plan’s fiduciaries do determine to vote their proxies, they have a duty to “maintain a record of any proxy vote, proxy voting activity, or other exercise of a shareholder right, including any attempt to influence management.” Also, the duty to “exercise prudence and diligence in the selection and monitoring of a person, if any, selected to advise or otherwise assist with the exercise of shareholder rights” – and to document this — is also codified.

Finally, where the authority to vote proxies or exercise other shareholder rights has been delegated to an investment manager or a proxy voting advisory firm, there is imposed a duty on a responsible plan fiduciary to prudently monitor the proxy voting activities of such investment manager or advisory firm and determine whether such activities are in compliance.

If, on the other hand, the plan decides not to vote a proxy, a fiduciary will be deemed to nevertheless have satisfied their fiduciary responsibilities if a “safe harbor proxy voting policy” is adopted that:

either limits voting resources to particular types of proposals that the fiduciary has determined are substantially related to the business activities of the issuer or are expected to have a material effect on the value of the plan investment; or
establishes that the fiduciary will refrain from voting on proposals or particular types of proposals “when the assets of a plan invested in the issuer relative to the total assets of such plan are below five percent (or, in the event such assets are under management, when the assets under management invested in the issuer are below five percent of the total assets under management).

In all cases, compliance with a safe harbor voting policy shall be presumed to satisfy fiduciary responsibilities with respect to decisions not to vote. (Furthermore, even when there is such a policy in place, it will nonetheless not preclude the voting of a proxy when the fiduciary determines that the matter being voted on is expected to have a material economic effect on the investment performance of a plan’s portfolio.)

Nevertheless, the AFL-CIO raises concerns H.R. 2988 will discourage retirement plan fiduciaries from voting proxies at public company shareholder meetings because of the new documentation requirements for casting proxy votes that are imposed. Furthermore, the creation of a new safe harbor to refrain from voting at any company that is less than five percent of the plan’s assets is of concern, because — given the duty to diversify plan assets – the AFL-CIO believes this safe harbor will apply to almost all proxy votes. “These proxy voting provisions will effectively disenfranchise retirement plans from having their voices heard at company shareholder meetings,” the AFL-CIO underscores.

Service Provider Selection

H.R. 2988 would make it an ERISA fiduciary breach for a plan fiduciary to select or reject fiduciaries, counsel, employees or service providers because of race, color, religion, sex, or national origin. Why? Chairman Walberg, in his floor remarks during debate on the legislation, said that “[r]etirement plan service providers should be chosen on performance and price—not on ideology or race-based preferences.”

Read in conjunction with Attorney General Pam Bondi’s July 2025 memo warning that diversity, equity and inclusion (DEI) programs may violate federal civil rights laws, the provision would appear to effectively prohibit race or sex-based preferences, goals, or criteria in vendor selection. For example, DEI-based vendor selection may present possible fiduciary breaches if a plan’s fiduciaries establish preferences for a manager because it is “minority owned;” require diversity statistics as a condition of engagement; score bidders based on workforce demographics; or use DEI goals as a tie breaker, according to Microsoft Copilot.

In summary, when asked for a governance note, here is what Microsoft Copilot produced:

H.R. 2988’s nondiscrimination provision establishes that an ERISA fiduciary breaches their duty of loyalty if they select, retain, or evaluate service providers using race, color, religion, sex, or national origin as a factor, regardless of intent or programmatic framing. Unlike the July 2025 Bondi memo—which applies to entities receiving federal funds—this rule applies solely because the fiduciary is governed by ERISA, making the prohibition a matter of fiduciary compliance rather than grant‑recipient civil‑rights law. In practice, the provision bars the use of demographic preferences, DEI‑based scoring, ownership‑based preferences, or diversity‑related conditions in vendor selection, requiring fiduciaries to rely exclusively on pecuniary and operational criteria when engaging investment managers, consultants, custodians, or other service providers.

Whether your counsel of legal advisers agree, it is worth thinking about should H.R. 2988 become law. On that point, observers seem to think it will not be an easy path to enactment.

For now, the bill has been referred to the U.S. Senate Banking Committee, but “the likelihood of passage remains unclear,” according the to the ASPPA. As the association notes, last Congress, the House of Representatives passed similar legislation sponsored by Congressman Allen, but it was not considered in the Senate; Pensions and Investments makes the same observation. ASPPA predicts that this time around, the bill “could experience a similar fate given the tight party ratios, where it takes 60 votes to end debate” – a reference to the ability of Democrats to filibuster the legislation.

In this regard, it is also well to note that Financial Advisor (FA) stresses that support for the bill has largely come from House Republicans, advancing through the Education and Workforce Committee on a party-line vote before passing the full House. In addition to the AFL-CIO, opposition comes from labor unions, investor advocates and public-interest groups who warn the bill could restrict fiduciaries from considering financially material risks tied to climate change, workforce practices or corporate governance.

In the meantime, DOL is also currently working on a new rule concerning “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” a reference to ESG investing strategies in plan menus and proxy voting and expected to be concluded by May 2026. And in December of last year, President Trump issued an executive order directing DOL to “strengthen ERISA fiduciary rules and increase fiduciaries’ transparency regarding their use of proxy advisors, ensuring proxy advisors and plan managers act solely in the financial interest of American workers and retirees.” While such a DOL rulemaking will not carry the same weight as a codification of a fiduciary rule, it does suggest heightened attention and ongoing activity in this area. In short, ESG is still a “hot topic” on the Hill.

But in the end, does it matter to public pensions? After all, governmental plans are not subject to ERISA. True, but ERISA still matters to NCTR system members for several important reasons. First, ERISA is effectively the national “benchmark” for fiduciary conduct, with state courts, state legislators, and public trustees viewing ERISA as the “gold standard” for duties of loyalty and prudence, among others – and many state fiduciary laws explicitly incorporate these duties as well as other standards in a manner similar/identical to those in ERISA. In summary, ERISA often shapes state law and influences litigation – with judges often citing ERISA cases. Finally, ERISA case law often shapes expectations and public pension fiduciaries are frequently judged against ERISA standards.

Thus, while ERISA does not directly apply to public plans or their fiduciaries, it does indirectly affect how the latter are evaluated, trained, and expected to behave. If H.R. 2988 becomes law, it can therefore be expected to have a major impact on public pension plans.

One last note: the bill also includes provisions affecting defined contribution (DC) plan operations and disclosures. Specifically, DC plans that offer brokerage windows would be required to provide participants with clearer notice explaining the difference between investments selected by ERISA fiduciaries and investments chosen through a brokerage window, where fiduciary protections may be more limited. This change “could require advisors and plan sponsors to revisit participant communications and educational materials to ensure compliance,” FA emphasizes