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.