The Big Picture
If you have a 401(k) plan (or a pension plan) sponsored by your employer, you want the investment manager to choose investments that will bring you the highest returns, right? Federal law requires that–and the Trump Administration’s Labor Department wrote a rule to make it very clear that the one and only goal that investment managers can have is to increase the money your pension or 401(k) makes. Now the Biden Administration wants to undo that requirement–and permit investment managers to put your money in so-called Environmental, Social, and corporate Governance (“ESG”) investments–even though these funds generally provide lower returns AND charge higher fees.
- The Employee Retirement Income Security Act (ERISA) is the federal law that covers most private-sector, employer-sponsored retirement plans: 401(k)s, pensions, profit-sharing plans, and individual retirement accounts (IRAs) offered by employers.
- The central requirement of ERISA is that plan fiduciaries–those who invest the funds that employees and employers contribute to pensions and retirement plans–must make investment decisions solely on the basis of financial considerations: to increase retirement savings.
- A growing trend among fiduciaries, however, is so-called “ESG investing”; that is, investing to address “environmental, social, and corporate governance” issues rather than to maximize returns. These ESG funds are comprised of stocks of companies that (1) are not engaged in politically-disfavored industries such as fossil fuels and tobacco and (2) promote a far-left agenda such and race and sex quotas for hiring, employee training based on Critical Race Theory, and environmental extremism.
- Over the last few years, flows into these ESG funds have quadrupled. The problem is that often, these funds provide lower rates of return and charge higher fees.
- To prevent Americans’ retirement savings from being shortchanged by investment managers’ social and political preferences, the Trump Administration’s Department of Labor adopted a rule in 2020 that fund investments had to be based solely on monetary considerations. Only if two funds offered the same returns could the fiduciary select the ESG fund as a “tiebreaker.” (The rule also allowed ESG funds to be offered as one option from which 401(k) participants could select.)
- The Biden Administration has proposed a rule to undo the Trump rule–and allow consideration of ESG factors in evaluating the “risk and return” of various investments. This swings the door wide open for fiduciaries to insert their own “woke” preferences in selecting investments, rather than being required to focus only on monetary returns.
Why It Matters
“Woke” investing may make investment managers feel like they are doing something “good” for society–but their idea of what’s “good” is often to promote environmental extremism, social upheaval, and race and sex quotas for corporations. So not only does “woke investing” rob you of retirement savings–it also supports beliefs that you do not agree with. So you’ll have to delay retirement or get by on less money–all to advance the left’s agenda.
If individuals want to invest their own money in ESG funds, that is their choice. It is quite another matter, however, for fiduciaries entrusted with growing employees’ retirement savings to accept lower returns in exchange for promoting their own ideas of “doing good.”
We need to let President Biden and the Department of Labor know that we will not stand for having our retirement funds shortchanged. Public comments on the proposal are being accepted until December 13. You may file your comment here.