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In retirement plans, ‘social responsibility’ can’t outweigh financial performance

July 6, 2020, 7:00 PM UTC
Alexei Pavlishak—TASS via Getty Images

TikTok, the latest social media craze, has reached new levels of popularity in recent months as it keeps us entertained at home while more traditional methods of entertainment have been put on pause. Over the years, we have been entertained by and caught up in similar whims of the moment: Everyone remembers Hula-Hoops in the 1950s and Pet Rocks in the 1970s. 

These trends enjoyed enormous, albeit short-term, popularity. While we were all on board during their respective 15 minutes of fame, we recognize that today these trends would not be received with equal enthusiasm. But what if the person managing your retirement savings made investment decisions based on the whims of the cultural moment? Some retirement account managers choose the social or policy aims of the day over financial performance when making investment decisions in the accounts of many Americans. In line with President Trump’s promise to put American workers first, that is an investment approach foreclosed for funds regulated by the Department of Labor.

In 1974, a Republican President and a Democrat-led Congress came together to promise workers their retirement savings would be managed with the utmost care. Today, the Department of Labor is taking action to make good on that promise to protect retirees by working to ensure their interests in retirement income and financial benefits come first. In its new proposed rule, published in the Federal Register last week, the department aims to ensure that when controlling retirement funds, plan managers may not sacrifice investment returns, take on additional risk, or choose lower-performing alternatives as a means of promoting social goals.

Nearly 154 million American workers participate in private retirement plans that collectively hold about $10.7 trillion in assets. These workers entrust their savings to plan investment managers with the understanding that these hard-earned dollars will be invested wisely and responsibly. And they have good reason to believe this will be the case—when Congress passed the Employee Retirement Income Security Act (ERISA) in 1974, it required that trustees owe to plan participants the highest duties known to law, those of a fiduciary. 

Supreme Court Justice Benjamin Cardozo famously described this fiduciary standard of behavior as “the punctilio of an honor the most sensitive.” Under ERISA, this requires that a trustee operate a plan “solely in the interest” of participants and beneficiaries, and “for the exclusive purpose” of providing benefits and defraying costs.

Under what is lately termed “socially responsible” investing, instead of using the vast resources available to them to earn the highest possible return for investors, some investment managers are using assets for the collateral purpose of persuading companies to follow the social trends du jour. You may know of this practice by such names as activist investing, economically targeted investing, or so-called ESG investing, for “environmental, social, and governance.” 

ERISA plans that adopt these strategies at the expense of financial performance go against the Labor Department’s long-standing position that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks to promote collateral policy goals. 

Retirement account managers have the great privilege to choose where to direct trillions of dollars of retirement savers’ money. In an ERISA plan, this comes with the great responsibility of investing these dollars prudently and for the exclusive benefit of plan participants. Our department’s proposal makes clear that trustees must keep savers’ retirement income at front of mind, and not use workers’ and retirees’ savings for nonpecuniary purposes. 

Investing strategies rooted in social and policy preferences—which may change year to year and month to month—rather than on financial considerations have no place in investment planning with a long-term focus, like ERISA retirement accounts. With the weight of the saver’s future retirement income on the line, ERISA-regulated retirement accounts are not the appropriate vehicle to test nonpecuniary investment strategies nor to enlist funds to drive social and policy change at the expense of financial performance. 

Famed investor Warren Buffett has a simple set of rules to direct money management, and investment managers tasked with looking after retirement accounts would be wise to bear in mind: “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”

Patrick Pizzella is the U.S. deputy secretary of labor.