Jun. 14, 2022
Do not implement the Climate Change Disclosure. It is not in the best interest of investors. The Biden administration is advancing its agenda through a backdoor rewrite of ERISA. Progressives are moving across the Biden administration to steer private capital to implement an agenda they can’t pass through Congress. The Biden administration Department of Labor has proposed an ESG rule that would make it easier for employer-sponsored retirement plans to offer fund that adhere to so-called environmental, social and governance metrics. The Trump Labor rule reinforced that the Employee Retirement Income Security Act (ERISA) requires retirement plan fiduciaries to act “solely in the interest” of participants. The rule prevented pension plans and asset managers from considering ESG factors like climate, workforce diversity and political donations unless they had a “material effect on the return and risk of an investment.” The rule effectively barred plan from placing workers who don’t select a 401(k) fund option into a default ESG fund. Do not implement this Climate Change Disclosure. It is not in the best interest of investors. The Biden ESG rule would not let plans sponsors enroll workers in ESG 401(k) funds as the default , so workers could unknowingly end up paying higher fees. It also threatens the retirement plan sponsors with legal liability if they don’t support progressive shareholder resolutions, such as those requiring companies to reduce CO2 emissions. A fiduciary’s duty may “often require an evaluation of the effect of climate change and/or government policy changes” such as electric vehicle mandates on an investment, the rule-making says. Retirement plan sponsors won’t merely be allowed to prioritize climate and social factors in how they invest. The could be sued if they don’t. Workers won’t get much say because plans won’t be required “to solicit preferences” on ESG. The Biden Department of Labor claims that ESG factors yield higher returns. But it also acknowledges that “findings vary,” and theoretical ESG benefits don’t necessarily translate into better financial performance. Many positive ESG studies confuse correlation with causation. Some ESG funds have recently performed better than broader stock indexes because they are weighted heavily toward Big Tech companies whose stock values have soared. But, these funds may also care more financial risk and the reality is that a more secure long-term portfolio requires balanced diversification instead of weighting the plan on one sector. Asset managers like BlackRock are pushing to create ESG 401(k) funds in part because they can charge higher fees. According to Morningstar, the asset-weighted average expense ratio of U. S. “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 saving by tens of thousands of dollars over a few decades. The Department of Labor says small plans can reduce their costs by relying on the recommendations of proxy advisers. They proxy advisors are not neutral or objective. The two leading firms, Glass Lewis, and Institutional Shareholder Services both provide ESG research services and the DOL rule will boost their business. Additionally, they are both left-leaning. The bottom line is that the Biden rule would let plan sponsors enroll workers in ESG 401(k) funds as the default, so workers could unknowingly end up paying higher fees for programs that they don’t personally endorse. The retirement savings of the workers will be conscripted to advance the progressive Biden agenda, whether the workers like it or not.