Two Countervailing Forces: Public Pensions and Climate Change

Times are changing, and the American public is realizing its role in contributing to climate change. One of President-elect Biden’s policy issues is climate change, saying that “We’re going to invest $1.7 trillion in securing our future so that by 2050 the United States will be a 100% clean energy economy with net-zero emissions.” 

Biden’s campaign promise could be detrimental to pension plans currently dependent on fossil fuel revenues, potentially leading to shifts in investment trends. If the industry begins to decline as the U.S shifts towards green energy, beneficiaries of fossil fuel pension plans will be impacted. Retired coal miners in West Virginia fear that many of their benefits could be decreased or altogether cut by those in power. 

Climate change also puts investment returns at risk because extreme weather events will hurt a company’s profits. Anne Simpson, a CalPERS manager, says that “We need to think about – how do we manage that risk? How do we mitigate that risk? Don’t just lie there on the railway tracks waiting to be run over,” describing the relationship between her pension plan and climate change. 

There needs to be a resolution between fossil fuels and pension plans, if not, each force will exacerbate the problems of the other. The fossil fuel industry strengthens climate change, eventually leading to greater investment losses. Fiona Stewart, a financial specialist at the World Bank, writes that “if institutional investors do not act, they face a potential portfolio value loss of $10.7 trillion triggered by the effects of rising temperatures.”  

Pension plans are unnecessarily hurting themselves by relying on fossil fuel returns. A Notre Dame report on climate change argues that fossil fuel pension plans ought to invest in environmental, social, and corporate governance (ESG) for greater financial returns. The U.S. has diametrically shifted its opinion on climate change, therefore, pension plans must modernize their investments. 

To ameliorate the effects of climate change on beneficiaries, managers should allow for more investment diversification, clearly outline how  ESG investments fit into their fiduciary duties, build ESG literacy and awareness, and share and adopt best practices from other pension plans. Bodies like the International Organization of Pension Supervisors (IOPS) provide frameworks and support for pension managers seeking to “modernize” their investments. Failing to realize the ailings of the fossil fuel industry will detrimentally impact beneficiaries.

Commentary: What Does BlackRock’s Prominence in the Biden Administration Mean for Investors?

This article originally appeared in TownHall on Dec. 17, 2020.

Last week, President-Elect Biden tapped two prominent individuals at the world’s largest money-management firm for key positions within the new administration’s economic team. Brian Deese, a BlackRock managing director who is responsible for overseeing the sustainable investment strategy of the firm, has been named as the new head of the National Economic Council. Wally Adeyemo, who served as a senior advisor at BlackRock and was Chief of Staff to CEO Larry Fink, has been nominated for U.S. Deputy Secretary of the Treasury.

Staffing is Policy as the DC saying goes, and such corporate picks might be a disappointment to some elements of the Democratic Party. However, what is most troublesome is the involvement of these two nominees in BlackRock’s recent efforts to push sustainability and environmentally-focused investment priorities over solid returns and a fiduciary obligation to their customers.

Earlier this year Larry Fink announced that the firm would begin to reshape their entire investment approach, accounting for climate risk when making decisions regarding capital allocation and investment priorities, and taking such steps as divesting entirely from the coal sector.

It is disappointing that BlackRock would choose to divest from entire industries within the U.S. market based not on underlying company performance but due to political pressure. Such a trend is nothing new – from defense manufacturers, to tobacco companies, to the energy companies of today, some industries will always be a target for activism. However, such a move flies in the face of the free-market values that our country and our economy were based on.

If a certain sector is deemed problematic, the impetus is on lawmakers to put restrictions into place – not the private sector. I was heartened to see this week, the Office of the Comptroller of the Currency (OCC) put forward a new regulation re-emphasizing this principle, codifying the standard that banks and investors must lend based only on creditworthiness without regard to political or other forms of pressure. Unfortunately, with BlackRock, the train appears to have already left the station.

Given the swell in public pressure for green initiatives in the private sector, BlackRock’s transition shouldn’t come as a surprise. However, it is necessary to consider the full story behind their motives. In a report earlier this year from the Institute for Pension Fund Integrity, for which I sit on the advisory board, a closer look was given to the consequences that BlackRock’s move in this direction will have on investments.

It is worth noting upfront the financial incentives that BlackRock has with such actions. In recent years, index investing has become more and more competitive, which has cut down on returns. Most Environmental, Social, and Governance (ESG) funds, the benchmark for “sustainability” in modern investment (despite the ambiguity in the term itself), contain much higher fees than passive funds.

For example, BlackRock’s iShares Global Clean Energy ETF, one of the largest ESG funds in the world, carries an expense ratio over ten times larger than the expense ratio for BlackRock’s S&P 500 ETF. With these types of financial incentives, in addition to the large number of new customers that will likely be enticed by these political changes, the motive for such a move becomes more and more clear.

Worse yet, definitions of what is or is not ESG often make little sense. Take for example nuclear energy. Under BlackRock’s definition of ESG, the greatest source of carbon-free electricity generation in the U.S. is deemed unworthy. If the purported goal is to achieve “net zero” emissions in the U.S. by 2050, as the incoming administration has stated, discouraging investment and innovation in the largest source of carbon-free energy would be a strange way to get there.

BlackRock’s new direction is all well and good for BlackRock’s bottom line, but the benefit for investors is a completely different story. Last year a Pacific Research Institute study found that a ten-year investment in several major ESG portfolios would end up over 40% smaller compared to the same investment in a broader S&P 500 Index fund. Such a divergence flies in the face of investors seeking the highest risk-adjusted rate of return and is especially egregious for public pension fund managers struggling to maintain the strict standards of fiduciary responsibility they owe their beneficiaries.

BlackRock’s sheer size – with a current $7 trillion in assets – has understandably resulted in outsized influence over the policy, management, and investment decisions of the corporate sector at large. It now seems that this influence will be spilling over into the federal government.

Given the precarious state of the U.S. economy, as we begin to finally crawl back from the COVID-19 pandemic, it will be necessary to keep up the pressure on the Biden administration to pursue an agenda that looks out for the best interests of investors rather than caving to political pressure. With BlackRock at the helm, this may be a tricky path.

Ken Blackwell, a former Treasurer of Ohio, is on the advisory board of the Institute for Pension Fund Integrity.

Issue Brief – Multiemployer Pensions: Assessing the Financial Challenges

The Institute for Pension Fund Integrity released their latest issue brief today — an examination of the state of multiemployer pension plans and the various policy challenges and solutions facing these funds. More than 10 million Americans depend on these plans for their retirement, which could be hurt by funding challenges.

Several key considerations are evaluated in this issue brief:

  • A number of underlying problems face multiemployer pension plans and the historical trends that have exacerbated their current standing. These include declining manufacturing, demographic trends, and changes to American trade and regulatory policy. Several prominent multiemployer pension plans in the United States stand out for their endangered status.
  • Faced with the challenges of the current economic crisis, many pensions are taking steps to avoid insolvency, with varying degrees of risk. These have included cutting benefits, forcing employers to pay more into plans, or making more risky investments to close the financial gap.
  • The federal government has historically taken actions through legislation and regulatory efforts to reform multiemployer pension plans. While well-intentioned, these reforms have generally failed to produce meaningful reform to save the largest and most in-need pensions in the country. Reforms spearheaded by the federal government are necessary to save these pension plans from failing and ensuring the financial security of their members.

“The time to ensure that pension fund managers are bound by their fiduciary obligation to their beneficiaries and not by any other political motives is now,” said IPFI President Christopher Burnham. “Prioritizing issues other than pure financial returns may be an acceptable strategy for individuals managing their own money or for corporate board rooms contemplating the future of their company, but for fiduciaries, prioritizing any kind of self-interest or ulterior motive over maximizing returns is a dereliction of duty.”

Read the latest issue brief on multiemployer pensions HERE.

 

Background:

Multiemployer pension plans are joint pension plans created between employers and unions, which allow for employees working in industries that require them to move between different employers the retirement security of a pension. These plans have recently faced pressure due to declines in manufacturing industries, demographic shifts, and a host of other factors, including bankruptcies. Many of these pensions today are on the brink of collapse, which would be disastrous for the U.S. economy and for workers.

The Institute for Pension Fund Integrity remains focused on evaluating the fiscal factors facing pensions across the country and provide meaningful solutions to ensure the retirement security of pension beneficiaries.

DOL Final Rule Limits Proxy Voting by Retirement Plan Fiduciaries

This article originally appeared in SHRM on December 15, 2020.

Retirement plan fiduciaries will be barred from casting corporate-shareholder proxy votes in favor of social or political positions that don’t advance the financial interests of retirement plan participants, under a Department of Labor (DOL) final rule released on Dec. 11.

These matters are often referred to as social, economic and governance (ESG) issues.

“Reforms to the current proxy advisory system were needed because decision making has increasingly become subject to political pressure and personal influence,” said Chris Burnham, president of the Institute for Pension Fund Integrity, which advocates for transparency and accountability in the management of public pension plans.

The DOL also posted a fact sheet summarizing the rule’s key provisions, which take effect 30 days after the rule’s upcoming publication in the Federal Register. Fiduciaries, however, have until Jan. 31, 2022, to comply with a requirement to review service provider proxy voting guidelines prior to following their recommendations.

The rule is considered a companion to a November DOL final rule restricting retirement plan fiduciaries for either defined benefit pension or 401(k)-type defined contribution plans from selecting plan investments based on nonfinancial factors.

Fiduciary Responsibilities

The Employee Retirement Income Security Act (ERISA) defines fiduciaries as plan decision-makers with discretionary authority and control over the management of the plan and its assets. Fiduciaries are required to act in plan participants’ best interests. The final rule addresses fiduciaries’ “prudence and exclusive purpose duties” under ERISA with respect to proxy voting and exercises of other shareholder rights. It affects employee benefits plans that own equities (i.e., stock shares) that require voting—primarily defined benefit pension plans.

In some circumstances, the rule could apply to welfare plans that hold stock assets or to defined contribution plans, such as those with collective investment trusts where the underlying assets are actually plan assets subject to the fiduciary voting process, DOL officials said when the proposed rule was issued for comment in September. However, the final rule clarifies that its provisions do not apply to voting and similar rights on shares in defined contribution plans, including employee stock option plans, that participants hold in their individual accounts.

“ERISA plan fiduciaries must put the growth and security of workers’ retirement savings first,” said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the DOL’s Employee Benefits Security Administration. “This rule will help ERISA plan fiduciaries follow the law and navigate their prudence and loyalty duties when exercising shareholder rights and obligations.”

Restrictions on Proxy Voting

The final rule is intended to protect the interests of participants and beneficiaries by:

  • Confirming that proxy voting decisions and other exercises of shareholder rights must be solely in the interest of, and for the exclusive purpose of, providing plan benefits to participants and beneficiaries.
  • Ensuring that plan fiduciaries do not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any objective that does not have a material effect on plan assets’ risk and returns.
  • Improving fiduciary practices relating to the selection and monitoring of proxy advisory firms. “A fiduciary may not accept the practice of following the recommendation of a proxy advisory firm or other service provider without determining that such firms’ or such service providers’ proxy voting guidelines are consistent with the fiduciary’s obligation described in the rule,” Wilson said during a Dec. 11 conference call briefing.

According to Burnham, the recommendations of some of the largest proxy advisory firms “have moved from a strict duty of loyalty and care to one of making political-based decisions, increasingly under the guise of ‘ESG’ considerations that certainly have an essential role in the board room, but used as a political tool in their recommendations, clearly violate fiduciary duty.”

Safe Harbor Practices

Plans may adopt safe harbors for satisfying the rule’s fiduciary responsibilities with respect to whether to vote on a proxy ballot matter, Wilson said. Safe harbors under the rule include a policy to limit voting to matters that the fiduciary has prudently determined are expected to have a material effect on the value of the plan investment. Another safe harbor practice is adopting a policy to refrain from voting when a fiduciary determines that the plan’s holding in the proxy issuer, relative to the plan’s total investment assets, is sufficiently small that the matter being voted on would not have a material effect on the investment performance of the plan’s portfolio.

Plan fiduciaries often mistakenly believe they must vote on all shareholder measures, DOL officials said. The new rule would thus “reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.”

Opposition Voiced

When the rule was proposed in September, social justice and labor advocates took issue with it. Some, for instance, argued it would restrict the ability of labor union pension funds to use their proxy votes to advance pro-union positions.

The rule “would create an overly burdensome and unjustified process for the consideration of voting proxies that would, in many cases, effectively prohibit ERISA plans from exercising their shareholder rights,” the United Food and Commercial Workers International Union wrote in a comment letter.

According to the Service Employees International Union, “The increase in proxy voting cited by the DOL reflects appropriate monitoring and engagement efforts by institutional investors … and the growing recognition that the environment, diversity, and other societal issues present economic risks and opportunities.”

Democrats generally were critical of the new rule when it was proposed, and of the DOL’s earlier final rule restricting fiduciaries from selecting plan investments based on nonfinancial factors. Rep. Andy Levin, D-Mich., is drafting two bills—the Sustainable Investment Policies Act and the Retirees Sustainable Investment Policies Act—that would require fiduciaries to take socially responsible factors into account when making investment decisions for retirement plans, such as worker wages and rights, environmental risks, political spending and human rights policies, “taking the opposite approach” from the current DOL, InvestmentNews reported.

The new proxy voting rule is slated to go into effect 30 days after its publication in the Federal Register, with compliance delayed until Jan. 31, 2022, for certain recordkeeping and proxy voting policy requirements. While it’s uncertain whether the incoming Biden administration will seek to replace the rule—a process that could take several months, should it happen—plan fiduciaries are advised to understand the rule and implement its provisions, as failure to do so could increase their liability to enforcement actions or participant lawsuits.

The Department of Labor ‘s New Rule is a Much-Needed Step Toward Ensuring Fiduciary Obligations

Today the Department of Labor took a much-needed step toward ensuring positive, long-overdue reforms to the role that proxy advisory firms play in ERISA-backed pension fund management through their finalized rule titled, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”
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Following the rule’s release, Chris Burnham of the Institute for Pension Fund Integrity said, “this rule rightly reaffirms the fiduciary obligations that ERISA-backed pension fund managers owe to their beneficiaries and puts forward much needed reforms in an industry that for too long has neglected to serve the best interest of pensioners. Reforms to the current proxy advisory system were needed because decision making has increasingly become subject to political pressure and personal influence.”
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At the Institute for Pension Fund Integrity, we have held grave concerns over the outsized role played by proxy advisory firms in the investment decisions of pension fund managers, as well as the degree to which these decisions have veered away from the principal of fiduciary duty and a strict duty of loyalty and care to the beneficiaries from whom their hard-earned retirement savings have been entrusted.
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The two largest proxy advisory companies, Institutional Shareholder Services (ISS) and Glass Lewis, comprise a duopoly in the market. It appears to us their recommendations have moved from a strict duty of loyalty and care to one of making political-based decisions, increasingly under the guise of “ESG” considerations that certainly have an essential role in the board room, but used as a political tool in their recommendations, clearly violate fiduciary duty. Furthermore, the rise of “robo-voting,” under which asset managers, pension fund managers, and other investors automatically vote the proxy advisors’ recommendations without scrutiny, has undercut transparency and accountability in the system.
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“The rule curbs the practice of automatic voting and specifies that plan fiduciaries are no longer required to vote on all proxy matters. Perhaps most prominently, the scope of proxy voting would be narrowed so that fund fiduciaries could cast proxy votes only when they would have an economic impact on the retirement plan” Burnham said. “These are important steps toward ensuring that fund managers must solely consider factors affecting the value of a plan’s investment.”
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Beyond the re-emphasis on fiduciary duty inherent in this rule, it puts a much-needed focus on the overall costs associated with these proxy decisions. For pension beneficiaries, especially those in smaller plans who may lack the resources to pour into evaluating every proxy firm recommendation, the added convenience and lower costs stemming from this reform cannot be underestimated.
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Workers throughout the country rely on their pensions to provide a secure retirement for them and their families. All that can be done should be done to help protect and grow these stable sources of retirement funding. We applaud the Department of Labor on this much-needed rule to provide ERISA-backed pension fund beneficiaries with the transparency, accountability, and loyalty they need and deserve.

Commentary: The OCC Is Right – Banks Have No Right To Politicize Their Lending Practices

This article originally appeared in Forbes on December 10, 2020.

Fiduciary duty requires all money managers, trustees, and advisors to make investment decisions based solely on risk and return. It does not include decisions based on political whim or the political flavor of the day. Twenty-five years ago, it was tobacco companies; today it is a smorgasbord of activist causes, from companies that help defend our nation, to energy, to ammunition.

Fiduciary duty, a more than 1000-year-old concept of loyalty to those who have been entrusted with your property, is now under attack – not just in pension fund and mutual fund management, but also in the banking sector, as major investors threatening to sidestep entire American industries not because of risk and return but for political reasons.

Red-lining entire sectors is not only a violation of duty from a fiduciary perspective, it is also likely illegal, and flies in the face of the free-market principles under which the American banking system is supposed to operate. However, in a necessary first step, the U.S. Office of the Comptroller of the Currency (OCC) issue a Notice of Proposed Rulemaking which would codify the standard that banks must lend based only on the lender’s credit-worthiness (emphasis added) without regard to political or other forms of discrimination.

As detailed by the Wall Street Journal, large-scale banks with more than $100 billion in assets would be required to evaluate the risks of individual customers on a case-by-case basis, and would be barred from red-lining entire industries. According to the OCC, this decision comes in response to bank leadership statements regarding their intention to divest from whole sectors of the economy, usually in response to activist pressure and the ill-defined concept of “reputational risk” to the bank. This is not a right vs. left issue.  Pressure comes from both sides of the political spectrum to divest from certain industries. I have certainly seen religious and other institutions place restrictions on how their money is managed.  Note the key words there are “their money.”  Their money is not your money.  Money managers are entrusted with “their” money to invest with the highest return at a reasonable risk and within the guidelines imposed by the property owner. “Their” guidelines become your guidelines—not the other way around.

The impetus for this new proposed rule stems from guidelines set forth in the Dodd-Frank Act, which charges the Comptroller to ensure “fair access to financial services, and fair treatment of customers” by nationally chartered banks. This law aims to ensure that entire classes of customers are not cut off from services due to the perception of higher risk. The new OCC regulation represents an implementation of this provision of the law by ensuring that entire categories of customers and American industries cannot be terminated writ-large but must be judged on a case-by case basis.

At the end of the day there is no such thing as a risk-free loan, or, in the classic expression of all bond traders, “There is no interest rate too high for too high a risk.” It is the obligation of all banks to manage, not avoid, risk based on both substitutive and quantitative analysis founded on impartial risk management standards. That is the only criteria they can have. The recent proposed rulemaking by the U.S. Comptroller of the Currency is an essential first step in keeping personal political viewpoints out of polluting fiduciary duty.

 

Illinois Pension Funding Crisis Looming, Tax Measure Failure Hurts Prospects

Illinois’ pension crisis has hit a breaking point. The state’s pension liability was $230 billion in 2019 and is expected to rise to $261 billion in 2020 after a year of poor economic performance due to the COVID-19 pandemic and the ensuing economic downturn. The state’s pension liabilities are currently estimated to be $137 billion and the funds are currently only 40% funded. Relative to its size, Illinois’ pension debt is the worst in the nation and the funds face impending collapse unless a solution can be found.

The Teachers Retirement System of Illinois is the largest of the state’s pension funds. The fund managed to outperform most others throughout the COVID-19 crisis, but still only maintained a 0.52% return rate on investment. The state of Illinois assumes a 7% return annually, making these low levels of returns unsustainable for the long term health of the already declining pension plan. Still, the pension’s operators maintain a positive attitude. “Everyone took a hit during the pandemic,” TRS Interim Executive Director Stan Rupnik said. “But the investment strategies we have in place limited losses and have allowed us to prudently rebuild the portfolio’s value.”

One of the major problems with Illinois’ system are the lack of control over benefits. Retirees who fit into the pension’s Tier 1 system average over $2 million in earnings total in their retirement. At the same time, courts have effectively made it impossible to change the law that affects retirees. The law currently can only be changed to affect new workers, leaving the state with limited tools to combat the rising funding problem.

Another avenue for reform that recently closed is the state’s tax system. In 2020, voters rejected a “fair tax” measure that would have updated the state’s constitution barring a progressive income tax structure. The state currently taxes all income at 4.95% regardless of amount of income. The “fair tax” would have raised money from the top earners by taxing them at a higher rate and would have lowered taxes on earners that made below $100,000, effectively increasing directed funding toward the pension system. The measure was soundly defeated at the ballot box with 55% of voters disapproving of the measure. 

Rather than raising taxes on the wealthiest to cover the pension deficit, the state will now have to look toward alternative measures, including broader tax increases across the board as well as cutting future pension earnings for new workers. One of the paths to reform would be a complete overhaul: a constitutional amendment to cut already-promised benefits. The state should also consider taking smaller measures, including considering more stable investments and using more realistic investment predictions. Only by using a variety of tools to achieve both large and small reforms will Illinois begin to dig itself out of its current crisis.

Commentary: Labor Dept. Right to Put Pensioners’ Interest First

This op-ed originally appeared in the Chief-Leader on Nov. 23, 2020.

 

In 1973, I joined the New York City Fire Department after serving in the U.S. Army in Vietnam. I spent 28 years with the department, rising to the rank of Captain while concurrently serving as the President of the Uniformed Fire Officers Association and the Vice Chairman of the New York City Fire Pension Fund.

Throughout these experiences, I’ve seen first-hand the dedication that these brave men and women have poured into their profession, accepting daily risks and reduced pay with the promise of a secure and stable retirement. In recent years, I have also watched as pension fund managers shirked their fiduciary obligations to beneficiaries, giving priority to outside interests and increasing their reliance on unaccountable proxy advisory firms.

The Department of Labor’s recently finalized rule regarding environmental, social, and governance (ESG) investing practices is a much-needed step toward upholding fiduciary responsibility among ERISA-backed pension-fund managers, ensuring that America’s retirees receive the stable, generous pensions that they were promised for so long.

Highest Returns the Goal

Pension funds should be singularly focused on attaining the highest financial returns, adjusted for risk, and ESG investing strategies are a diversion from this goal. Last year, the Pacific Research Group released a study that found that ESG funds were “43.9% smaller compared to an investment in a broader, S&P 500 index fund,” after 10 years. Understanding the higher cost and lower returns related to ESG investing, how anyone could see this as compliant to fiduciary duty escapes me. Pension beneficiaries have little to no control over the investment of their retirement money–as such, boards of trustees owe it to their beneficiaries to manage these funds with the greatest care and intent to generate the greatest returns, thus ensuring the pension promised.

It has been heartening to see the level of support that this principle has received since the draft rule was first announced several months ago. In a recent editorial, the Wall Street Journal reaffirmed the primacy of financial goals in ERISA pension investments. They noted that “A fiduciary…can’t invest retirement assets only in companies with low carbon emissions or racially diverse workforces when these aren’t linked to financial returns. The Labor rule clarifies that financial factors are those that have a ‘material effect on the return and risk of an investment.'”

ESG as it exists today—specifically when it underperforms—is at best a dilution of fiduciary duty which compromises the integrity of investment strategies. It is my hope that investors and management teams come to this realization before it significantly harms pensions. In the absence of such an epiphany, clarified and improved regulation reaffirming the importance of financial considerations, not political considerations, is necessary for ERISA-managed pension funds. As long as asset managers are using ESG to demand higher fees for lesser returns, pension funds are not safe from irresponsible investing.

Eye Proxy Advisers Warily

Some of the biggest proponents of ESG are proxy advisers. This industry—98 percent of which is controlled by two firms— provides research and recommendations for investment funds, such as pensions, and sometimes even vote their proxies through a process called “automatic voting.” Adherence to fiduciary duty is not required for proxy advisers the way it is for ERISA fiduciaries; therefore their guidance can cause asset managers to violate this bedrock principle. While we should celebrate the Department of Labor’s actions on ESG investing, we should also look ahead to a second pending rule that further addresses the undue influence that these proxy advisers wield in pension investment decisions.

These actions from the Department of Labor are a positive step towards further codifying the responsibilities held by those we trust with our money. I applaud this rule as a part of a greater effort to maintain pension funds’ independence from politics, and hope that it will guide ERISA fiduciaries back to their original purpose: protecting and growing Americans’ retirement.

 

Mr. Brower is a board member of the Institute for Pension Fund Integrity

In Case You Missed It – The Department of Labor has Issued a Finalized Rule on ESG Investing in ERISA Pension Plans

Washington, DC – The Department of Labor has finalized and released a new rule on tax-qualified retirement plans governed by the Employee Retirement Income Security Act (ERISA) in order to codify the extent to which Environmental, Social, and Governance (ESG) considerations factor into investment decisions. As laid out in the rule, ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy is to subordinate return or increase risk for the purpose of non-pecuniary objectives.
Today, massive unfunded liabilities plague pension plans across the country. Given the incredible financial shortcomings facing retirees, efforts to politicize pension fund investments is not only a divergence from fiduciary responsibility, but also an incredibly irresponsible act. This sentiment was reflected in an editorial by the Wall Street Journal board, where they note that “The reason asset managers largely oppose the new Labor rule is because they want to use worker retirements to promote their own political and financial interests. They want to charge higher fees for managing ESG funds even if they don’t produce better financial returns for beneficiaries. The DOL rule forbids them from doing that. Kudos to Labor Secretary Gene Scalia for standing up to these Wall Street complaints.”
They go on to say that “Asset managers like BlackRock, Fidelity and Vanguard say ESG funds perform better over the long-term, but the evidence is spotty. A Pacific Research Institute study last year found that the S&P 500 outperformed a broad basket of ESG funds over a decade by nearly 44%. One reason is many ESG funds excluded companies like Amazon, Netflix and Mastercard.”
At the Institute for Pension Fund Integrity, we are singularly focused on the objective of getting politics out of pensions and protecting the financial security of America’s workforce. These actions by the Department of Labor further codify the most basic tenet of fiduciary duty: investment decisions should be governed by considering risk and returns, not any outside political agenda.
As Secretary of Labor Scalia noted in a recent op-ed, “More than $10.4 trillion is held by private pension plans covered by ERISA. Those amounts exist for one purpose: to fund retirement benefits for the 139 million American workers covered by the plans.”
In a recent Forbes column, IPFI President Christopher Burnham states “There is a place for making these types of [investment] determinations, but it resides solely with elected officials – not plan fiduciaries. The Department of Labor should be commended for finalizing and implementing this new rule, and it is my hope that in the future our government officials will continue to uphold fiduciary duty as a cornerstone of pension fund management.”
“In the coming months, it is likely that the incoming Biden administration will look for opportunities to use their executive authority to counteract many of the rules and regulations put in place by President Trump’s cabinet. In this instance, the Department of Labor’s work should be embraced as a nonpartisan, forward-thinking effort to secure a stable future for America’s workers and retirees. It is my hope that this rule will be not only enshrined, but built upon.”
We at IPFI applaud the Department of Labor’s efforts to clarify and correct guidance on the fiduciary obligations of pension fund managers. This modernization of ERISA will ensure that pension investment strategies remain focused on fiduciary duty and the best risk adjusted return. It is out hope that in the future our government officials will continue to uphold fiduciary duty as a cornerstone of pension fund management.

Commentary: “Pension Beneficiaries Should Celebrate The DOL’s New Investment Rule To Restore Fiduciary Responsibility”

This article originally appeared in Forbes on November 16, 2020.

Pension funds, whether public or private, are under assault. Politicians, and investment managers kowtowing to politicians, want to inject all kinds of personal political decisions on the management of our retirement money. Twenty-five years ago, the flavor of the day was tobacco. Today it is big oil or gun manufacturers, companies such as Berkshire Hathaway that do not meet “minimum” environmental, social, and governance (ESG) requirements and a myriad of other political criteria.

Keeping politics out of the management of other people’s pension plans is an essential part of our duty of loyalty and our fiduciary obligations. That is why the recent announcement by the Department of Labor of a final rule laying out stringent guidelines for fiduciaries of retirement plans under the Employee Retirement Income Security Act (ERISA) is a welcome and much-needed step in the right direction.

Under the new guidelines, a clear regulatory structure is established which sets out standards for the consideration of investments in ERISA-backed pension plans. Plan fiduciaries are now required to make investment choices based solely on pecuniary factors consistent with the plan’s objectives. The overall goal is to create higher returns for plan beneficiaries, with investments driven by the market. Given the egregious levels of unfunded liabilities facing many pensions throughout the country, it is heartening to see such action take place.

Adherence to fiduciary duty is a cornerstone of pension fund management. To inject political-based decision making into how these retirement funds are invested is a clear violation of the fiduciary obligation that these retirees deserve from fund managers. Unfortunately, in recent years we have seen a divergence from this principle with the injection of social and political factors in investment decisions in the form of ESG factors and the so-called “Principles of Responsible Investment,” as well as numerous pushes for divestment from certain industries.

Although the final version of the Department’s rule makes no direct mention of ESG investment funds, it is clear that even without the use of the specific term, politically focused investing was at the forefront of their minds. In fact, as described in a recent issue brief by the Institute for Pension Fund Integrity, the term ESG itself remains ambiguous, even as it has grown in popularity. Based on the rule’s final language, it would seem that Department’s leadership agrees. If investors cannot even decide on a uniform definition of ESG criteria, how can they be expected to detail its pecuniary benefits to a fund? Under the new guidelines, much more stringent documentation and justification will be needed to include ESG strategies in pension fund investment.

I wholeheartedly embrace ESG as a reasonable tool of management by responsible companies, and of course individuals are free to invest their personal portfolios in companies that elevate whatever values they like. However, fiduciaries have a different obligation. They cannot allow nonpecuniary preferences of any kind to influence investment decisions. In these cases, investments should only be made when they are likely to add value to a fund. When such investments will not improve the financial performance of the fund, or the decision to invest in them is based on political motives, they should be forgone.

This principle of fiduciary duty lies at the heart of ERISA, and since its initial passage in 1979 the Department of Labor has taken steps to update and clarify the law as needed. This latest regulatory effort is therefore a welcome and, in my opinion, long overdue update.

As Secretary of Labor Scalia noted in his recent op-ed in the Tampa Bay Times, “ERISA doesn’t task retirement plan managers with solving the world’s problems…Nor does it ask managers to take on politicians’ job of determining which societal trade-offs are acceptable.”

I couldn’t agree more. There is a place for making these types of determinations, but it resides solely with elected officials – not plan fiduciaries. The Department of Labor should be commended for the finalizing and implementing this new rule, and it is my hope that in the future our government officials will continue to uphold fiduciary duty as a cornerstone of pension fund management.

This sentiment was also reflected in an opinion column by the Wall Street Journal editorial board, where they note that “The reason asset managers largely oppose the new Labor rule is because they want to use worker retirements to promote their own political and financial interests. They want to charge higher fees for managing ESG funds even if they don’t produce better financial returns for beneficiaries. The DOL rule forbids them from doing that. Kudos to Labor Secretary Gene Scalia for standing up to these Wall Street complaints.”

In the coming months, it is likely that the incoming Biden administration will look for opportunities to use their executive authority to counteract many of the rules and regulations put in place by President Trump’s cabinet. In this instance, the Department of Labor’s work should be embraced as a nonpartisan, forward-thinking effort to secure a stable future for America’s workers and retirees. It is my hope that this rule will be not only enshrined, but built upon.