President Trump instituted a financial rule saying fiduciaries must make decisions based on financial outcomes (pecuniary decisions). On inauguration day, President Biden signed Executive Order 13990, ordering the agency heads to overthrow any Trump policy inconsistent with bolstering resilience to the impacts of climate change. Acting on the E.O., the Department of Labor changed President Trump’s rule. Fiduciaries can now use non-pecuniary factors to make investment decisions to support environmental and social objectives instead of financial outcomes. The new rule fundamentally changes the meaning of the word fiduciary, as people may unknowingly support political causes contrary to their beliefs. Retirement investments in ESG funds are not required but are now permissible. It is a slippery slope from permissive to required.
· The Department of Labor relaxed retirement fiduciary requirements.
· Fiduciaries can use non-financial outcomes for investment decision-making.
· The environmental/social/governance (ESG) funds to be put in 401ks underperform financially and sustainably against the non-ESG funds.
On November 22, 2022, the U.S. Department of Labor loosened environmental, social, and governance (ESG) fund rules for 401k plans under the Employee Retirement Income Security Act (ERISA). The opening paragraph of the policy reads as follows,
“Today, the U.S. Department of Labor released a final rule under the Employee Retirement Income Security Act (ERISA) to empower plan fiduciaries to safeguard the savings of America's workers by clarifying that fiduciaries may consider climate change and other environmental, social, and governance (ESG) factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.”
ESG funds go by several names. Some familiar names include sustainable, impact, or socially conscious investing. The funds tend to invest more in climate change or social justice initiatives than in financial return. The rule explicitly states that fiduciaries can make investment decisions that reflect ESG considerations. The rule change does not require ESG considerations but allows fiduciaries to interject politics into investment recommendations. Also, the rule liberally and questionably expands the ERISA duties of a fiduciary. The primary functions of a fiduciary are to act in the best financial interests of the client. There are six main categories of fiduciary duties.
1. Duty to act prudently (a prudent person would act similarly in the same situation)
2. Duty to diversify the assets of a plan (minimize the risk of significant losses)
3. Duty to comply with the provisions of the plan (act according to the strategies of the investment plan)
4. Duty of loyalty (act in the interest of participants and beneficiaries with the exclusive purpose of providing benefit)
5. Duty to pay only reasonable plan expenses (fees would be assessed reasonable by a person acting prudently)
6. Duty not to engage in prohibited transactions (avoiding conflicts of interest or ethical violations)
In 2020, the Trump administration instituted a rule stating that fiduciaries should only consider "pecuniary factors." Under the Trump rule, non-pecuniary factors could be used as a decision tie-breaker if two or more investments return projections were nearly identical. A pecuniary factor is a consideration to have a material effect on the risk of return of an investment based on appropriate investment horizons consistent with the plan's investment objectives and funding policies. In other words, decisions would be consistent with competent, honest financial professionals recommending generally accepted investment theories. Exceptions did exist under the Trump rule but required documentation of various factors to explain the deviation from protocol.
The new rule overturns the Trump policy and loosens the requirements for non-pecuniary decisions connected to ESG funds. The change results from two Executive Orders, including one signed on President Biden’s first day in office. On his inauguration day, January 20, 2021, President Biden signed Executive Order 13990, “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.” The E.O. directed federal agencies to review regulations that
1. were promulgated, issued, or adopted between January 20, 2017, and January 20, 2021, and
2. are or may be inconsistent with, or present obstacles to, the policies set forth in the order. Those policies included improving public health, protecting our environment, and bolstering resilience to the impacts of climate change.
Section 2 of E.O. 13990 stated that "for any such identified actions, the head of the relevant agency shall, as appropriate and consistent with applicable law, consider suspending, revising, or rescinding the agency action." Also, in section 4 (b) of E.O. 14030, "Climate-Related Financial Risk," signed on May 20, 2021, the President explicitly directed the Department of Labor to suspend, revise or rescind President Trump's 2020 rules.
What Does It Mean?
Harvard Business Review reported the findings from multiple studies comparing ESG and non-ESG funds. If this weren't so serious and potentially disastrous, the results would be laughable. Not only did the non-ESG funds significantly outperform the ESG funds, but they also returned higher sustainability scores than the ESG funds. Additionally, the non-ESG funds had better compliance with labor and environmental rules. Essentially, ESG funds underdeliver everything they promise and are inferior to non-ESG funds. The non-ESG funds had better ESG scores than the ESG funds. A 2020 study found that underperforming managers frequently spoke publicly about the company’s commitments to ESG.
In contrast, profitable companies with better ESG scores spoke much less about ESG. It turns out that most profitable companies also want to breathe clean air and treat people equally. However, they want to speak honestly instead of hiding behind it or using it to shield poor performance. Go figure, or in the genius of Elon Musk. Let that sink in.
Retirement accounts should exist to fund your agenda: a long, happy retirement. It is a moral crime that Politicians try to use your retirement account to fund their agendas instead. ESG funds are optional in 401ks but can easily be represented as the best investment choice.
The way companies choose retirement funds may surprise some people. There is a fiduciary who chooses funds that employees can choose. This new rule authorizes decision-makers to make ESG funds the default option in automatic enrollment plans. A recent Vanguard study found that 91% of employees are enrolled in the default retirement option.
Corrupt politicians consider retirement accounts a giant honeypot of money for their political ambitions. The recent changes are another sad action in a long history of attacking retirements. Have you read about the looming pension problems created by politicians pilfering retirement accounts? Taking control of your retirement accounts is the best way to avoid ESG funds or the next political fundraiser snuck into your portfolio.
Precious metals IRAs are a powerful way of moving your retirement accounts outside the tentacles of political corruption. The trusted retirement experts at the U.S. Gold Bureau will educate you about your options and help you legally set up your account.
It would be nice to say that this is all a bad dream, but unfortunately, this 401k rule is the new reality. The new rule will go into effect 60 days after it gets published in the national register. You may want to move quickly.
Help is only a phone call away.
Call the U.S. Gold Bureau Retirement Services.