The Department of Labor, under the leadership of Secretary Eugene Scalia, implemented an important (though widely misunderstood) rule this year, regarding how federally regulated pension plans make their investments on behalf of beneficiaries. The rule, “Financial Factors in Selecting Plan Investments,” which was published a few weeks ago, requires pension plan investment managers to focus on investment returns, rather than other “non-pecuniary” considerations, including compliance with increasingly trendy frameworks like “environmental, social, and governance” (ESG) theory. Unfortunately for America’s retirees, the incoming Biden administration is widely expected to try to repeal it, or simply sabotage its enforcement.
As the department’s notice of proposed rulemaking and final rule make clear, private pensions that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) are required to be managed to produce the maximum financial returns for beneficiaries. The statute and relevant legal precedent is clear—there is a singular duty of plan fiduciaries to deliver the highest “risk-adjusted” returns they can. They aren’t allowed to siphon the profits off for themselves, they aren’t allowed to deposit funds with their cousin’s Ponzi scheme, and they aren’t allowed to invest them for political, social, or ideological reasons of their own.
That has always been the law, and before that was the customary expectation of the Anglo-American law of trusts going back centuries. However, the popularity of ESG investing has given the Department of Labor concern that some pension fiduciaries were flouting that traditional expectation and investing in firms and funds that were politically popular but not necessarily delivering the highest returns. Thus, the rule was written and put through the Administrative Procedure Act’s usual notice-and-comment process (read my comment here). Now, however, multiple industry observers and pundits are predicting that the appointees of the incoming Biden administration will go out of their way to “clarify” the rule—which is to say gut it or nullify its effect.
Anyone who is, or expects to be, a beneficiary of a pension plan should be concerned about that. Putting millions of dollars into the Gumdops and Moonbeams Alternative Energy ESG Fund might get your plan’s investment manager invited to an industry conference panel on inclusive capitalism, but it probably won’t do much to keep you current on your property taxes and insurance premiums if the market gets tight.
If it turns out that moonbeams really can power the 21st century, after all, fund managers are free to invest in them. They just can’t put your pension dollars into investment vehicles that deliver good green vibes without also delivering a competitive return. ESG advocates claim that this is an unfair infringement on their ability to advance important non-financial issues, but that’s just a confession of the very motives that ERISA forbids and the rule was meant to protect beneficiaries from in the first place. If the most strident of them are correct and ESG goals are, if fact, more important than retirement security for millions of Americans, then they’re free to lobby Congress to amend ERISA to allow for such investing explicitly. But they can’t refuse to follow the law just because their friends in Davos tell them they should.