It is well known that Americans do not adequately save for retirement. As such, it is crucial that every dollar American workers put away for retirement is invested with the goal of seeking to maximize return, not achieving a secondary goal.
Workers who participate in an employer sponsored retirement plan, 401(k), or defined benefit plan, should feel confident that the exclusive goal plan fiduciaries pursue is securing workers’ retirement.
To achieve that end, the Department of Labor’s Employee Benefits Security Administration released a Field Assistance Bulletin (FAB), which makes clear that plan fiduciaries covered by the Employee Retirement Income Security Act of 1974 (ERISA) “must always put first the economic interests of the plan in providing retirement benefits.”
This may seem superfluous for the Department of Labor to put out such guidance. One would assume that fiduciaries of retirement plans only seek the best possible investment returns for plan participants.
Not so fast. For years, institutional investors and other plan fiduciaries have become enamored with what is called “environmental, social and governance” (ESG) investment strategies, where promoting social policy goals can trump economic returns.
Public pension funds have pursued ESG strategies to the detriment of workers’ retirements for years. For example, as I wrote in the Orange County Register:
…in 2000, CalPERS and CalSTRS launched the “Double Bottom Line” initiative, which included social activist and tobacco-free investment policies. CalSTRS later revealed that its tobacco investment ban had lost the plan $1 billion in gains and in 2008 conceded that it “could no longer justify” avoiding tobacco stocks.
But more recently, institutional investors who manage employer-sponsored retirement plans have adopted these misguided tactics. As Tim Doyle, Vice President of Policy and General Counsel at the American Council for Capital Formation, noted:
BlackRock, one of the largest passive institutional investors in the country, has quite surprisingly changed their historical position as a passive fund manager and began to engage companies as if they were active fund managers.
This was openly acknowledged following a January letter from its CEO Larry Fink, calling on publicly traded companies to “serve a social purpose” and threatening to rebuke corporate board nominees at companies who do not get into line.
BlackRock CEO Fink’s letter encapsulates another example of how investment fund managers seek to advocate for their own personal political agendas. Corporations confront a litany of shareholder resolutions and proxy votes every year that intend to force the company to adopt some ESG goals. And institutional investors have started to incur significant expenses on retirement plans by initiating proxy fights on ESG issues.
Labor’s guidance curbs this practice and erects safeguards. As put forth in the FAB, “plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals.” If an investment fund wishes to engage the board of a publicly traded company, they must provide “documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.”
This department action should be lauded as a win for workers seeking a secure retirement. Those managing retirement funds should not place ideological agendas ahead of investment returns. This can cost plan participants dearly, and for no good reason.
It is welcome news that the Department of Labor is putting its foot down when it comes to investment managers playing politics with workers’ retirement funds.