The U.S. Department of Labor has adopted a rule allowing retirement plan fiduciaries, such as Nevada’s PERS board, to consider environmental, social and governance issues when choosing investments for their members’ retirement funds. Under the 1974 ERISA law, the federal department of labor, or DOL, can set minimum investment standards for retirement and health plans.
For example, requiring fiduciaries to follow “prudent man” rules in managing their members’ funds. Allowing environmental, social and governance, or ESG, investments increases risks to funds while possibly serving other public policies.
But 26 Republican state attorneys general sought a federal court injunction against DOL’s enforcement of its rule as undermining retirement savers, being beyond DOL’s authority and being arbitrary and capricious. Having lost at trial, it’s now appealing to the federal Fifth Circuit Court.
Simultaneously, Oklahoma and other states have adopted laws preventing their retirement and health systems from investing members’ funds in certain kinds of securities. They are being challenged in courts by fund members, backed by large investment advisors who peddle ESG funds and by public employee unions and other special interests.
Which approach is sound policy and what should be done? To answer that, we must first specify the purposes of retirement and health plans and the basic standards to which they must adhere. Like all government entities, their primary obligations are to voters, taxpayers and the broad public interest.
Significant portions of their funds come from taxes, and the legislators and executives who promulgate laws governing them are elected by voters and owe a basic duty to maximizing the broad public interest. Some statutes governing these funds imply that fiduciaries’ basic duties are owed to members of the retirement and health funds.
While such purposes may add to the fiduciaries’ duties, they cannot override the fundamental voter, taxpayer and public interest duties. Especially when the funds have received supplementary appropriations from tax dollars to cover shortfalls, as has been the case for PERS and most state and local retirement and health funds.
Moreover, policies that satisfy voter, taxpayer and public interest duties are fair to plan members and satisfy the duties owed to them.
Those policies are reflected in the prudent man standards, which fundamentally require investment that, on an expected-risk basis, will preserve the capital of the fund and optimize the tradeoff between expected risks and expected growth of the fund in order to meet future obligations to the members.
According to modern investment theory, this requires investing in a slice of the entire market at low management costs to yield the average return of all investments. The theory counsels against trying to pick winners because that runs significant risks of severe or persistent loses.
States and localities can embrace matters in addition to prudent-man standards if there are sound public concerns supporting them. For example, Oklahoma’s legislation requires pension funds to cut ties with firms that discriminate against oil and gas firms, which are a significant portion of Oklahoma’s economy. That unusual fact supports adding an unusual provision.
But why should fiduciaries around the country choose ESG investments and no others? The DOL limits would, for example, prohibit the oil/gas provision that is manifestly in the public interest in Oklahoma.
Also, similar agriculture-related provisions in Kansas, defense industry protections in California (a large part of its economy) and high tech in Washington and California (ditto).
The only reason for the U.S. Department of Labor’s ESG standards is to help the unsound extreme ideological all-of-government aggression the Biden administration martials for its ESG hobby horse. That doesn’t help retirement and health plan members, nor voters, taxpayers and the broad public interest. It burdens all of them.
Democrats and other progressives running the federal administrative state want to prohibit some sound policies and mete out exceptions – a classic “stakeholder” recipe for corruption. The states want to be able to respond to facts unique to them and defend their actions on the facts – essential public-interest procedures. Nevada should decide on that basis.
(This article originally appeared in Nevada Business.)