A Note on Politicized Investment Policy

Two weeks ago, the U.S. Department of Labor (DOL) announced a change in its pension rules. DOL announced that it intends to incorporate political concerns and directives into the rules that govern investments in our retirement accounts.

During the Trump administration, the Department had clarified that the Employee Retirement Income Security Act, known as ERISA, requires retirement plan fiduciaries—those who manage the money in retirement plans—to act “solely in the interest” of plan beneficiaries. However, the Biden administration’s proposed new rule encourages fiduciaries to take other factors into account. Fiduciaries would be encouraged to consider “climate change and other environmental, social, or governance (“ESG”) considerations”—considerations which, in my view, risk encouraging retirement plans to lose focus on their fiduciary duties to plan participants.

It was my privilege to work under Secretary Eugene Scalia at the Department of Labor in the previous administration. One of his final acts there was to ask me to produce a comprehensive report on the looming financial crisis faced by public pensions managed by state and local governments.

When I saw the news about DOL’s new rule, it reminded me that Secretary Scalia was particularly interested in the problem of politicized pension investments. Because of that interest, I included a special section in the report describing the dangers of blending political goals into pension investment strategies (see the “Ideological Pressures” section that begins on page 39 of the report).

CEI will have more to say later about the problems posed by DOL’s proposed rule (a public portal for comments on the proposal will remain open for another six weeks or so), but I think the paper linked above provides a solid overview of the many problems that the ESG-style politicization of pension investments creates.

Readers of the “Doonesbury” comic strip may recall that Raoul Duke once served as general manager of the Washington Redskins. At one point, Duke—in a move that almost certainly violated his fiduciary duties to the plan’s beneficiaries—decided to dip into the players’ pension fund and use the money to hire a football player away from another team. When caught, Duke explained, “But the pension fund was just sitting there!”

That nicely captures a danger we need to control—the fundamental human urge to use other people’s property for private benefit. The fundamental problem is that the more we allow personal and political preferences to be incorporated into fiduciary duties, the more likely it is that we’re opening the door to political values that really shouldn’t be there.