The Labor Department is on a tear.
In recent actions, it has opened the door for sponsors of defined contribution retirement plans to consider adding alternative investments such as private equity to their lineups. And it also sent a stern warning for both defined benefit and DC plan sponsors over including investments with an explicit ESG focus. More recently, it has proposed blocking an ERISA plan sponsor's ability to vote a proxy unless the issue has an economic impact on the retirement plan. Even more galling: Issues unlikely to have an economic impact can be supported by plan sponsors if they are voting in accordance with management's recommendation.
The flurry of activity isn't surprising as administrations often try to get out guidance before a possible change after an election.
But consistency is important, too. The Labor Department has put forth seemingly contradictory stances on ESG and private equity. ESG investing is well-established in Europe and is gaining traction in the U.S., using companies' records on issues such as climate change, gender diversity and weapons distribution to evaluate them as investments. But the DOL's proposed rule limits considering these investments, saying that ERISA plan fiduciaries cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk to promote non-pecuniary goals. The proposal acknowledges that ESG factors can be pecuniary factors, but only if the economic risks or opportunities associated with them are material.
The Labor Department's insistence on ERISA fiduciaries putting investment outcomes first for individuals makes sense. But then it is hard to argue that adding certain private equity investments to a DC plan is always aligned with that goal, given the transparency issues and high fees often associated with such strategies. In giving the green light for DC plan sponsors to incorporate certain private equity strategies so long as a prudent fiduciary process is undertaken, the department argues that its intention is to help John and Jane Main Street better save for a secure retirement. And that may be the case. But why the Department of Labor seems to favor the opacity and higher fees of private equity while denouncing ESG investments for the same reasons is puzzling at best.
By restricting plan sponsors' ability to cast proxy votes, dulling the teeth of its own fiduciary rule, making it much more difficult to invest with an ESG lens and opening the doors to non-transparent alternatives funds, it begs the question: Who exactly is the Labor Department serving with these proposals?