A final rule promulgated by the Department of Labor (DOL) allows retirement plan managers (e.g., employers or registered investment advisers) of Employee Retirement Income Security Act (ERISA) plans to consider non-pecuniary factors for investment decision-making and proxy voting.
ERISA: Sections 403(c) and 404(a) require fiduciaries to act solely in the interest of the plan’s participants and beneficiaries, and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.
Fifth Third Bancorp v. Dudenhoeffer – 573 U.S. 409, 134 S. Ct. 2459 (2014) explicitly says that the plan benefits must be “financial.”
A fiduciary has control or discretionary authority over the retirement plan. The fiduciary can be the employer or registered investment adviser (e.g., asset manager).
There should be no consideration of “collateral benefits” because that would imply a “mixed motive” that is in violation of ERISA.
The Biden Administration’s rule will allow qualified default investment alternatives (e.g., target date funds) to invest in environmental, social, and governance (ESG) funds that have a non-pecuniary investment objective.
ERISA covers pension plans run by private-sector employers and nonprofits. This includes defined contribution (DC) and defined benefit (DB) plans.
There are more than 132 million private employees in the U.S.
152 million workers, retirees, and dependents hold an estimated $12 trillion (about $37,000 per person in the US) in assets.
According to the Bureau of Labor Statistics, “As of March 2022, 69 percent of private industry workers had access to [DC or DB] benefits.” Of the 69 percent, 52 percent of private industry workers participated in their retirement plan.
Over 47.3 million private-sector workers (actively working) participate in a DC or DB plan and are affected by DOL’s rule.
In 2019, 79 percent of private industry workers participated in savings and thrift plans, 15 percent in deferred profit-sharing plans, 16 percent in money purchase pension plans, and 4 percent in employee stock ownership plans (ESOPs).
Based on a Congressional Research Service analysis of the 2019 Survey of Consumer Finances, about 19 percent of households with a net worth less than $6,370 have DC savings, 29 percent of households with a net worth between $6,370 and $67,650 have DC savings, and 41 percent of households with a net worth between $67,650 and $200,950 have DC savings.
Vanguard’s administrative data for 2021 indicated that approximately 13 percent of DC plans offered one or more “socially responsible” funds. Moreover, about 30 percent of participants were offered at least one “socially responsible” fund, and of those participants, 6 percent were using these funds.
The DOL rule lays the groundwork to allow institutional investors/plan managers to divert retirement savings to ESG offerings that may have higher fees and lower returns than conventional funds.