Being able to save enough during our working lives to fund a comfortable retirement is a top concern for most American households, especially since about half of Americans younger than 50 expect to receive no Social Security benefits when they retire. Thus, the role of the federal government—in this case the Department of Labor (DOL)—regarding oversight of pension funds in America is key. The DOL’s Employee Benefits Security Administration enforces the requirements of the Employee Retirement Income Security Act of 1974 (ERISA), which ensures that corporations and labor unions that offer pensions aren’t mismanaging the funds under their control.
But what constitutes sound management? Some investment managers would like to invest pension funds they control in fashionable products that are associated with environmental, social, and governance (ESG) theory. They claim that they can deliver financial returns to beneficiaries while also advancing progressive causes and goals. But what happens when maximizing profits takes a back seat to things like climate activism and workforce diversity? Is it fair to deliver smaller retirement benefits to workers because investment managers have chosen to pursue loftier political goals with the cash they control?
In the last several years this question has become increasingly controversial, with the Department of Labor under the previous leadership of Secretary Eugene Scalia publishing a rule that would have stopped pension fund managers from putting money in politically motivated investments and required them to simply stick to providing the best risk-adjusted returns possible. However, the rule the Department published under the previous administration was not popular with the incoming Biden appointees, who refused to enforce it and immediately set about to writing their own rule to allow ESG-aligned investing by pension fund managers. The final version of that rule was published last November.
A major development in this controversy emerged a couple of weeks ago when 25 state attorneys general sued the federal government for putting workers’ savings at risk. They allege that the Biden Department of Labor didn’t properly follow the Administrative Procedure Act, which governs the creation of new federal regulations, when crafting the new rule. They also claim that it is in opposition to the requirements of ERISA—the law, mentioned above, that was passed specifically to protect the solvency of private pension funds.
The lawsuit, Utah v. Walsh, was filed in the U.S. District Court for the Northern District of Texas and is being heard by U.S. District Judge Matthew Kacsmaryk, a Trump appointee. We will have to wait and see how the litigation plays out, but it will no doubt be noticed by policy makers at other federal agencies who are considering ESG-related rules and policies. I suspect that a little legal pushback will go a long way toward more reasonable outcomes.
There is also an effort to repeal the rule legislatively, led by Rep. Andy Barr (R-KY) and Sen. Mike Braun (R-IN). Their joint resolution would use the powers of the Congressional Review Act (CRA) to reverse the Biden administration’s replacement rule. Overturning a specific rule under the CRA would also stop the same agency from ever proposing another similar rule in the future, unless Congress were to specifically provide otherwise in subsequent legislation. Advancing American Freedom (AAF), the advocacy group founded by former Vice President Mike Pence in 2021, is spearheading the grassroots lobbying on behalf of the repeal effort. AAF Executive Director Paul Teller is urging Congress to rollback Biden’s “politically inappropriate” and “financially irresponsible” rule.