While Democrats in negotiations over trillions of dollars in new spending, the Biden administration is quietly advancing its agenda through regulation. Last week, witness a little-noticed proposed rule by the Labor Department that will add new political directives to your retirement savings.
The administration says the rule will make it easier for retirement plans to offer 401k funds focused on ESG environmental, social and governance objectives. In fact, the rule will coerce workers and businesses into supporting progressive policies.
An important Trump Labor rule last fall reinforced that the Employee Retirement Income Security Act Erisa requires retirement plan fiduciaries to act solely in the interest of participants. The rule prevented pension plans and asset managers from considering ESG factors like climate, workforce diversity and political donations unless they had a material effect on the return and risk of an investment. The rule effectively barred plans from placing workers who don t select a 401k fund option into a default ESG fund.
The Biden DOL plans to repeal the Trump rule while putting retirement sponsors and asset managers on notice that they have a fiduciary duty to include ESG in investment decisions. The proposed rule makes clear that climate change and other ESG factors are often material and should therefore be considered in many instances in the assessment of investment risks and returns. A fiduciary duty may often require an evaluation of the effect of climate change and or government policy changes such as electric vehicle mandates on an investment, the rule-making says. Retirement plan sponsors won t merely be allowed to prioritize climate and social factors in how they invest. They could be sued if they don t. Workers won t get much say because plans won t be required to solicit preferences on ESG.
The Biden DOL claims that ESG factors yield higher returns. Many compelling studies show the theoretical benefits of diverse and inclusive workplaces, DOL But it also acknowledges that findings vary, and material ESG benefits don t necessarily translate into better financial performance.
Many positive ESG studies confuse correlation with causation. Some ESG funds have recently performed better than broader stock indexes because they are weighted heavily toward Big Tech companies whose stock values have soared. But these funds may also carry more financial risk.
Asset managers are pushing to create ESG 401k funds in part because they can charge higher fees. According to the asset-weighted average expense ratio of U.S. passive funds was 0.61% in 2020 compared to 0.41% for all open-ended mutual and exchange-traded funds and 0.12% for open-ended funds. This difference can reduce retirement savings by tens of thousands of dollars over a few decades.
The Biden rule would let plan sponsors enroll workers in ESG 401k funds as the default, so workers could unknowingly end up paying higher fees. It also threatens retirement plan sponsors with political liability if they don t support progressive shareholder resolutions, such as those requiring companies to reduce CO2 emissions or disclose legal donations.
Many small pension plans abstain from proxy votes because performing the required due diligence would be inordinately expensive. Some also want to avoid political controversy. But DOL comes close to demanding pension funds pick a political side, and you know which side that is.
Voting proxies are a crucial lever in ensuring that shareholders interests, as the company s owners, are protected, DOL says. Abstaining from a vote is not a specific act since it could determine whether a particular matter or proposal is approved. DOL says small plans can reduce their costs by relying on the recommendations of proxy advisers that happen to be the left-leaning proxy duopolists Glass Lewis and Institutional Shareholder Services. Both provide ESG research services, so the DOL rule will boost their business.
All of this amounts to a backdoor rewrite of Erisa, one of the best laws of the last 50 years. Progressives are moving across the Biden administration to steer private capital to implement an agenda they can t pass through Congress. Your savings will be conscripted to advance the progressive agenda, whether you like it or not.