Republicans in Congress have just teed up the first major legislative rebuke to the Biden Administration’s environmental, social, and governance (ESG) policies. On Tuesday, the House voted 216-204 along party lines to approve the Congressional Review Act resolution that nullifies a Biden-era Labor Department rule. This was swiftly followed up by a 50-46 vote in the Senate on Wednesday to approve the joint resolution to strike the rule down. Republicans in the were able to rely upon the feature of the Congressional Review Act (CRA) that allows for a simple majority in both chambers to overturn recently issued rules by the executive branch, rather than needing 60 votes for a cloture motion to overcome a possible filibuster threat in the Senate. This measure empowers any member of Congress—in this case Sen. Mike Braun (R-IN) and Rep. Andy Barr (R-KY)—to introduce a joint resolution to disprove of a federally proposed final rule, allowing it to then head to the President’s desk.
Entitled, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”, the rule would allow fund managers of public and private 401(k) retirement accounts to invest these savings into ESG initiatives. It affects a total of 152 million, ranging from workers, retirees, and dependents. The rule was officially finalized by the department on November 22nd, 2022, and allows for fiduciaries of retirement funds to consider ESG factors when making investment decisions on behalf of their clients.
The Department of Labor (DOL) rule presents a clear violation to fiduciary’s “duty of loyalty” under Employee Retirement Income Security Act (ERISA), the expectation that a steward of an investment fund must always act within the best interests of their client. Under the new rule, a fiduciary is permitted to invest a retiree’s savings guide by ESG factors without express knowledge or approval by the retiree. The rule also appears to violate the ERISA “duty of prudence,” which requires that a fiduciary exercise the utmost care when managing a retiree’s fund account as any prudent trustee would. With this dangerous rule, a fiduciary is emboldened to invest precariously across a variety of ESG causes that are almost certainly unrelated to the primary financial needs of the retiree.
The rule side-steps these duties by removing two Trump-era “safe harbor” regulations that protected retirement funds from the ulterior motives of fund managers. The overhauled Trump-era regulations prevented fiduciaries from acting upon secondary nonfinancial considerations, such as ESG factors, and prevented decisions that were antithetical to a risk-returns on investment.
The Labor Department’s rule also poses a direct violation to existing Supreme Court precedent in Fifth Third Bancorp v. Dudenhoeffer (2014), which strictly recognizes that retirement fund managers are bound to the requirements of ERISA and restricts them to pursuing investment options that are financially beneficial to the retiree. This does not permit fund managers to act behind the backs of retirees to chase after “collateral benefits” such as ESG factors. The Department of Labor’s new rule would enable just that.
Under Trump’s safe harbor provisions, the financial advisors or banks tasked with overseeing the client’s retirement fund were expressly prohibited from considering ESG factors if they fostered a negative impact on the rate of return for the retiree’s savings or exposed them to additional financial risk. This was based on the Labor Department’s “Financial Factors in Selecting Plan Investments,” which required plan fiduciaries to make investment decisions that were based solely on financial considerations after factoring the risk-adjusted economic value of a given investment option. The intent was to protect a retiree’s 401(k) savings from being invested toward non-pecuniary environmental or social justice initiatives without the knowledge or consent of the retiree.
The CRA resolution was successful largely due to the united efforts of over 100 organizations signing a coalition letter calling for members of Congress on both sides of the aisle to support Sen. Braun and Rep. Barr’s joint resolution to overturn Biden’s Labor Department rule. The letter was sponsored by Advancing American Freedom (AAF) and gained widespread support from a host of concerned organizations like Americans for Tax Reform, Heritage Action, the Heartland Institute, and our own Competitive Enterprise Institute. With the intent to sway congressional support in Arizona and Montana among hesitant politicians, AAU ran a series of advertisements awareness among constituents of the harmful impacts of the Biden administration’s ESG rulemaking. This public outreach campaign amplified the congressional call to action in the week ahead of the House and Senate votes on the rule.
The above efforts served to win over the bipartisan support of moderate Senate Democrats like Joe Manchin (D-WV) and Jon Tester (D-MT), whose votes were instrumental in garnering majority support in overturning the woke 401(k) rule.
“At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible,” Sen. Tester said in a statement. “I’m opposing this Biden Administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”
The Competitive Enterprise Institute applauds the successful passing of the Braun-Barr joint resolution to overturn the Labor Department’s latest attempt to abuse the retirement plans of 152 million Americans. This ESG rule is but one of many examples within the Biden Administration’s dangerous “whole of government approach,” directing executive departments and agencies to pursue politically Progressive rulemaking outside of their proper jurisdiction. In this case, ESG factors in no way constitute a suitable basis for investing the futures of planned retirements. Such nonfinancial, partisan interests are best left outside of the boundaries of fund managers, who are strictly obligated to serve their clients with professional care and loyalty.