Biden Puts Your 401(k) to ESG Work

A new rule offers legal protection for progressive investments.

WSJ Editorial.

"The Biden regulatory machine doesn’t rest, even in Thanksgiving week. On Tuesday the Labor Department finalized a rule that empowers retirement plan sponsors to invest based on environmental, social and governance (ESG) factors and put your 401(k) to progressive political work.

The Labor Department casts its rule as a mere clarification of the 1974 Employee Retirement Income Security Act (Erisa), which requires that retirement plan sponsors act “solely in the interest” of participants and beneficiaries. A Trump Labor rule barred retirement managers from considering factors that weren’t material to financial performance and risk. 

Asset managers and union pension plans claimed the Trump rule limited their discretion to consider such ESG factors as climate, workforce diversity and labor relations. The Biden DOL says it created a “chilling effect” on ESG investing. Its replacement rule gives plan sponsors nearly unlimited discretion and legal protection to invest based on these often political considerations.

“A fiduciary may reasonably conclude that climate-related factors” including “government regulations and policies to mitigate climate change, can be relevant to a risk/return analysis of an investment,” the rule says. Ditto workforce diversity, inclusion and labor relations since they may affect employee hiring, retention and productivity.

Government climate policies can no doubt affect financial performance, but not necessarily in the way that ESG investors say. Fossil-fuel producers are reaping enormous profits as Western governments seek to restrict supply. A pension plan that divests from fossil fuels would be less diversified and probably produce lower returns over the long term.

Many ESG investing strategies take into account future policies that would be needed to meet the Paris CO2 emissions targets but which may never be implemented because the economic costs are higher than society is willing to bear. Is it prudent for retirement plan managers to shun companies that don’t plan for a “net-zero” world that may never arrive?

DOL offers a long list of debatable theories and studies to support its claim that social and governance factors might be important investment considerations. “Labor-relations factors, such as reduced turnover and increased productivity associated with collective bargaining, also may be relevant to a risk and return analysis,” the rule says.

The main point of the Biden rule is to give legal protection to retirement plan fiduciaries that invest based on ESG. A secondary goal is to steer more retirement savings into ESG funds that often charge higher fees by allowing retirement sponsors to offer them as default options in 401(k) plans. Workers automatically enrolled in default funds can opt out, but they usually don’t.

Workers will have to cover 401(k) shortfalls if ESG strategies don’t pan out. That means they may have to increase their contributions or retire later. In the case of union pension plans, taxpayers might bear the cost. Democrats authorized some $86 billion in their Covid relief bill last March to shore up distressed multi-employer pension plans.

Since these pension plans enjoy a taxpayer backstop, unions will be more inclined to leverage worker retirement savings to promote progressive causes even if they result in lower returns. In sum, the Administration is politicizing retirement savings and putting taxpayers and workers on the hook for the costs. No wonder it released the rule right before Thanksgiving."