The Department of Labor’s new rule permitting retirement plan fiduciaries to weigh and prioritize Environmental, Social, and Governance (ESG) factors for investment decisions and shareholder rights is being lauded by the Biden administration. But millions of Americans won’t be celebrating this move after risky investment strategies drain their 401(K) savings accounts.
The DOL rule stems from a May 2021 executive order mandating a whole-of-government approach to assess physical risks posed by climate change on critical financial decisions. This consequential rule change will amend the Employee Retirement Income Security Act (ERISA) to “protect life savings and pensions of America’s workers and families from the threats of climate-related financial risk” by reversing the “chilling effects” that were wrought by a 2020 Trump administration rule.
152 million Americans, or two-thirds of the U.S. population, will see their retirement funds—estimated to be valued at $10 trillion—jeopardized by ESG considerations. The primary goal of retirement plans, much like general investment strategies, is to maximize return on investments—not stray away from this intended goal. Adding stressors like ESG will threaten existing accounts with depreciating funds and create more unnecessary financial risk.
The new Labor Department rule may even be in violation of the Employee Retirement Income Security Act (ERISA) of 1974, a law that protects and insulates individuals’ retirement accounts from risk like that brought by ESG. Twenty-five attorneys general—led by Utah Attorney General Sean Reyes—allege the Labor Department is inviting more risk by allowing 401(K) managers, in essence, to promote non-monetary benefits in personal investment decisions.
By injecting controversial considerations into investment funds that have no bearing on maximizing returns on investment, money managers who lean on this new guidance for investment strategies will further imperil vulnerable 401(K) plans to more economic shocks.
The biggest threat to retirement savings accounts is policymaking that threatens holdings—not climate change. These plans took a major dive last year in large part due to runaway inflation wrought by trillions in spending by Biden administration policies. Overall, account holders who traded in stocks have seen diminished returns since President Joe Biden entered office. That’s no coincidence. When also accounting for astronomical rates of inflation, the value of savings bonds—which comprise 20 to 40% of total investments—also diminished due to higher interest rates wrought by runaway inflation.
The average account balance depreciated from $126,100 in quarter three of 2021 to $97,200 the same time last year—or a 22.9% decrease. On average, Americans have lost $34,000 in savings.
Given how 401(K) plans have reacted to stressors in the market, one cannot put too much faith in ESG funds because they perform exceptionally poorly compared to non-ESG index funds. A joint study conducted by Columbia University and the London School of Economics also determined ESG funds’ portfolio firms don’t outperform non-ESG funds portfolio firms—with the former having “significantly more violations of labor and environmental laws and pay more in fines for these violations, relative to non-ESG funds issued by the same financial institutions…”
In late 2022, many oft-touted ESG funds experienced outflows as investors recognized it’s more prudent to preserve capital over seeking out funds that prioritized controversial political or social aims. As a result, investors recognize ESG funds will continue to languish against actions by the Federal Reserve, for example, hiking interest rates to stave off inflation.
Why would managers direct their clients’ money to retirement funds that weigh climate or social risks since ESG funds deliver a terrible rate of return? It’s too risky to hedge your savings on index funds with diminishing bad returns.
Much to the chagrin of the Biden administration, money managers are increasingly souring on ESG as an investment philosophy. States have similarly divested billions in assets from powerful financial asset managers like BlackRock for discriminating against energy companies and firearms manufacturers.
A bipartisan group of lawmakers in Congress, including Senator Joe Manchin (D-WV), have similarly vowed to challenge and block the Department of Labor’s ESG rule for posing a threat to American workers’ hard-earned savings.
Instead of tarnishing 401(K) accounts with a flawed and nefarious investment strategy, the Biden administration should immediately reconsider the rule change and allow managers to prioritize risk-adjusted funds for millions of savings account holders.
