1. Opinion

Pension plan managers aren’t supposed to solve the world’s problems | Column

A just-announced federal rule aims to ensure investment managers focus on retirees’ pensions, not environmental, social or corporate governance factors, writes the U.S. Labor Secretary.

Being able to retire with a secure financial future is part of the American dream. Today, the Department of Labor is adopting a rule to better ensure that money in U.S. retirement plans is used solely to fund workers' retirement.

More than $10.4 trillion is held by private pension plans covered by the Employee Retirement Income Security Act, known as ERISA. Those amounts exist for one purpose: to fund retirement benefits for the 139 million American workers covered by the plans. When President Gerald Ford signed ERISA in 1974, he declared that “the men and women of our labor force” would have “greater assurances that retirement dollars will be there when they are needed.” That’s the promise of ERISA.

U.S. Secretary of Labor Eugene Scalia
U.S. Secretary of Labor Eugene Scalia [ SHAWN T. MOORE | U.S. Department of Labor ]

Under ERISA, investment managers must invest retirement funds for the exclusive purpose of providing benefits under the retirement plan. Those managers must act with loyalty to workers and retirees. ERISA dictates that the manager base investment decisions only on the financial risks and benefits associated with an investment, not on the manager’s own goals or policy preferences.

But the enormous sums of money in retirement plans inevitably catch the attention of people who would like to use those funds to advance causes of personal interest to them. This has happened with state and local government pension funds not subject to ERISA. In the early 2000s, the California Public Employees' Retirement System began divesting from tobacco, an action that one of its own investment consultants said cost the fund billions of dollars. More recently, the California teachers' retirement plan divested from gun manufacturers, and three of New York City’s largest pension plans are on track to divest from fossil fuel companies.

Investment actions like these are part of a trend toward “ESG investing” — that is, considering environmental, social and corporate governance factors when making investment decisions. Of course, these factors can at times be highly relevant to the value of an investment. And when they are, our new rule permits plan managers to consider them.

We would, for instance, expect a retirement plan investment manager to take into account a corporate board of directors that conceals wrongdoing, or a factory that violates emission standards. To the extent asset managers use “ESG” thoughtfully to increase retirees' investment returns, they have nothing to fear from our new rule.

But when the Department proposed the rule for public comment earlier this year, some commenters made the case for plan managers pursuing a more ambitious agenda. One said that investors should act “collective(ly)” “to manage social and environmental systems.” Another suggested pension plans are “universal owners,” and argued that ESG factors should influence investment decisions even when they don’t have a “demonstrable positive effect on a company’s financial performance.”

And some members of Congress complained that our proposal would make it harder to “leverage trillions of dollars a year to drive positive social change.” These attitudes echo “Principles for Responsible Investment,” a group endorsed by the United Nations, which argues that investors' “responsibilities must extend beyond” the actual performance of their investments “to include the wider role that investments play in real economies and societies.”

ERISA doesn’t task retirement plan managers with solving the world’s problems. It doesn’t ask them to be ecologists, sociologists and public policy experts all at the same time. Nor does it ask managers to take on politicians' job of determining which societal trade-offs are acceptable.

For some investment managers, assuming these roles no doubt feels personally rewarding — even empowering. But the law requires retirement plan managers to focus on one goal: managing assets for the exclusive purposes of providing retirement benefits to American workers. Fulfilling retirement promises is, by itself, a moral good and a prime policy goal for the nation. It’s by adhering to their duty of loyalty to American workers that retirement plan managers have a positive impact on society as a whole.

The rule we adopt today simply reminds retirement plan managers of the central promise of ERISA. By doing so, our rule also furthers a priority of this administration: ensuring that the interests of ordinary Americans are not sacrificed for the au courant views of global elites.

Eugene Scalia is the U.S. Secretary of Labor. He wrote this exclusively for the Tampa Bay Times.