The rule will reportedly force workers and businesses to support progressive policies
while the democrats Congress Negotiating more than trillions of dollars in new spending, the Biden administration is quietly advancing its agenda through regulation. Check out a little-notice proposed rule by the Labor Department last week that would add new political directives to your retirement savings.
The administration says the rules will make it easier for retirement plans to offer 401(k) funds focused on ESG (environmental, social and governance) objectives. In effect, this rule would force workers and businesses to support progressive policies.
An important Trump Labor rule reinforced lastly that the Employee Retirement Income Security Act (ERISA) requires retirement planning to act “only in the best interest” of participants. The rule prevented pension plans and asset managers from considering ESG factors such as climate, workforce diversity and political donations unless they “have a material impact on investment return and risk.” The rule effectively bars employees who do not choose the 401(k) fund option in the default ESG fund.
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The Biden DOL plans to eliminate the Trump rule by putting retirement sponsors and asset managers on notice that they have a duty to include ESG in investment decisions. The proposed rule “makes it clear that climate change and other ESG factors are often material” and thus should be considered “in the assessment of investment risk and returns” in many cases.
A fiduciary’s duty may “often require an assessment of the impact of climate change and/or government policy changes” such as the electric vehicle mandate on an investment, the rulemaking says. Retirement plan sponsors simply will not be allowed to prioritize climate and social factors over how they invest. Failure to do so may result in prosecution. Workers won’t get much as there will be no need for “priority-seeking” schemes on ESG.
Biden DOL claims ESG factors deliver higher returns. “Several Compelling Studies Show Physical Financial Benefits of Diverse and Inclusive Workplaces,” DOL writing. But it also acknowledges that “conclusions vary,” and that theoretical ESG gains do not necessarily translate into improved financial performance.
Many positive ESG studies confuse correlation with causation. Some ESG funds have recently outperformed broader stock indexes because they are heavily weighted toward Big Tech companies whose stock values have risen. But these funds can also carry higher financial risks.
Asset Manager Prefer black Rock ESGs are emphasizing on building 401(k) funds because they can carry high fees. According to morning StarThe asset-weighted average expense ratio of US “sustainable” funds was 0.61% in 2020, compared to 0.41% for all open-ended mutual and exchange-traded funds and 0.12% for passive 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 the ESG 401(k) fund as default, so that workers could inadvertently pay higher fees. It also threatens retirement plan sponsors with legal liability if they do not support progressive shareholder proposals, such as requiring companies to reduce CO2 emissions or disclose political donations.
Many small pension plans abstain from proxy votes because doing the necessary due diligence would be prohibitively expensive. Some even want to avoid political controversy. But the DOL comes close to demanding that pension funds pick a political side, and you know which side that is.
“The voting proxy is an important lever in ensuring the interests of shareholders as owners of the company are protected,” DOL says. “Avoting a vote is not a neutral act” because it “can determine whether a particular case or motion is approved.”
DOL says smaller plans can reduce their costs by relying on recommendations from proxy advisors that are left-leaning proxy duopolist Glas Lewis and Institutional Shareholder Services. Both also provide ESG research services, so the DOL rule will boost their business.
All this amounts to a backdoor rewrite of ERISA, one of the better laws of the last 50 years. Progressives are moving to drive private capital into the Biden administration to implement an agenda they can’t pass through Congress. Your savings will be used, whether you like it or not, to advance a progressive agenda.