Friday, December 24, 2021
ICYMI: 23 states file comment opposing DOL's proposed rule that "promotes a social activist agenda over the interests of employees, retirees, and other retirement fund beneficiaries."
You can read the full comment letter here. For additional background on the proposed rule, go here. An excerpt from the letter:
It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one....
Under the Proposed Rule, plan fiduciaries will more often choose ESG investments, employers can serve their political agendas, and investment managers are protected from adverse consequences of their social investment decisions. Indeed, the government may also exert pressure on plan sponsors who do not offer ESG defaults as a way of driving capital to achieve desired social outcomes. But it is the employees and beneficiaries—whose retirement savings are affected—who will suffer. The Proposed Rule encourages fiduciaries to favor social causes to the potential detriment of employees’ retirement savings. Moreover, retirement plans that consider ESG factors will incur higher investment costs. As a result, less of each employee’s retirement savings is available for investment and the return may be much less. A fiduciary cannot sacrifice investment returns or assume greater investment risks as a means of promoting collateral social justice policy goals....
The consensus background on sub-regulatory guidance in this area across the political spectrum highlights one critical point of agreement: the longstanding view that the fiduciary duty under ERISA requires an objective assessment of an investment’s economic risk and return when evaluating whether it is appropriate for a plan. Fiduciaries remain bound by statute to manage investments with an ‘‘eye single’’ to maximizing the funds available to pay retirement benefits. Yet, the Proposed Rule promotes ERISA fiduciaries to subordinate those interests in favor of other objectives. The Proposed Rule does not protect employee retirement savings but increases the risk of loss and costs by encouraging investments that are often misleading, administratively costly, and historically untested. While it is never appropriate to encourage plan sponsors to take such risks, it is particularly indefensible in a time when Americans struggle with inflation and financial uncertainties. The Proposed Rule risks the economic security of retirees to further a political agenda. The Department should not adopt the Proposed Rule.
Even though I sympathize with their argument, I do not find the comment letter very compelling. It does not appear to have been crafted by someone who has a thorough understanding of the relevant sections of ERISA. I consider it a missed opportunity.
Posted by: Bernard S. Sharfman | Dec 30, 2021 6:35:30 PM