Fiduciaries – New DOL Guidance a Reminder to “Do the Right Thing” Those ESG investments you’ve been hearing so much about? Turns out, they’re not such a great strategy to help employees save for retirement.
In recent years, plan sponsors and providers have been incorporating so-called “do-good” strategies focused on “environmental, social and governance” (ESG) into the investment menus of workplace retirement plans. Here’s the rub: ESG funds can be overly focused on furthering social policy goals, at the expense of delivering returns. Here’s rub No. 2: Fiduciaries may be tempted to select these funds based on their personal ideologies, rather than their ability to help employees invest and grow their savings for retirement.
New guidance from the government helps preempt the ESG folly. The Department of Labor’s Employee Benefits Security Administration just put out a(FAB), which says that fiduciaries under the Employee Retirement Income Security Act (ERISA) “must always put first the economic interests of the plan in providing retirement benefits.” Writing on the Competitive Enterprise Institute (CEI) , author Trey Kovacs aptly observes, “This may seem superfluous for the Department of Labor to put out such guidance. One would assume that fiduciaries of retirement plans only seek the best possible investment returns for plan participants.”
Further, the FAB states that “plan fiduciaries may not increase expenses, sacrifice investment returns, or reduce the security of plan benefits in order to promote collateral goals.” Kovacs praises the DOL’s guidance. He writes: “This department action should be lauded as a win for workers seeking a secure retirement. Those managing retirement funds should not place ideological agendas ahead of investment returns. This can cost plan participants dearly, and for no good reason.”
Sure, sometimes altruism trumps practicality, and as a fiduciary — as a human being — it can be difficult to resist the temptation to act in a way that furthers one’s own ideological agenda. However, your first responsibility as a fiduciary is to act in participants’ best interests. ESG funds in and of themselves aren’t “bad” — far from it — but if they aren’t able to deliver solid returns, they have no place in your retirement plan investment menu.
So before you jump on the ESG bandwagon, or if you offer these strategies in your plan, consider how their performance — or lack thereof — may impact your employees’ retirement readiness. If ESG funds’ mission undermines individuals’ ability to grow their savings to create sufficient, sustainable, retirement income, are they truly worth it? No matter how idealistic your sensibilities, when it comes to your primary mission — improving retirement outcomes — the answer is no.
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