A March 1 House subcommittee hearing to address improving retirement security and access to mental health found itself largely debating the Biden administration’s proposed guidance on ESG factors, as well an array of retirement policy proposals.
The hearing by the House Education and Labor’s Subcommittee on Health, Employment, Labor and Pensions (HELP) featured an underlying dispute between Andrew Biggs, Ph.D., Senior Fellow at the American Enterprise Institute, who contended that the administration’s ESG proposal is an overreach, and Aron Szapiro, Head of Retirement Studies and Public Policy at Morningstar, who defended the proposal allowing plan sponsors to consider ESG information as part of a prudent process for selecting plan investments.
Biggs explained that he feared the current proposal to give ESG factors greater emphasis in retirement planning could undermine Americans’ retirement savings as a mean to pursue public policy goals. “In simple terms, if ESG criteria make sense from a purely financial standpoint, then profit-oriented investors will adopt them without being prodded to do so,” Biggs said in his opening statement. “If ESG criteria do not make sense from a purely financial standpoint, then implicitly promoting them via regulation violates the fiduciary standards set out in ERISA,” he stated.
In contrast, Szapiro contended that ESG risk analysis can be part of any prudent investment analysis—and should not be called out for special, unique scrutiny. “Indeed, many asset managers view ESG risk as a pecuniary matter that is fundamental to evaluating the likely risk-adjusted performance of an investment,” he explained.
Moreover, he noted that plan sponsors appear to have shied away from considering ESG information and analysis, in part because of regulatory uncertainty. “In doing so, sponsors have left the U.S. defined-contribution system in the aggregate tilted toward investments with more ESG risks. Unless retirement plan sponsors are convinced that ESG risks are overstated, they may wish to reexamine their investment choices using an ESG lens,” Szapiro testified.
Meanwhile, under questioning by Rep. Virginia Foxx (R-NC), the full committee’s ranking Republican inquired of Biggs whether the administration’s proposed rule on ESG investing is consistent with a 2014 U.S. Supreme Court ruling (Fifth Third Bancorp v. Dudenhoeffer) that the term “benefit” under ERISA refers to financial benefits and does not include non-financial benefits.
“Both the written word of ERISA and various court interpretations show that the obligation of the fiduciary is solely to the participant and solely to the participant’s pecuniary benefits, meaning the financial benefits they get from the investments. Other factors such as environmental, social, governance, economically targeted investments—those can only matter to the degree that they don’t detract from the financial returns to participants,” Biggs responded.
ESG Performance
While Szapiro’s testimony also addressed fee disclosures and provisions to expand access to lifetime income products in employer-based plans, he pushed back on contentions made by Biggs, who cited a study by Boston College’s Center for Retirement Research saying that ESG funds underperform other index funds.
When asked by Rep. Andy Levin (D-MI)—who has introduced legislation to help advance sustainable investing—about Biggs’ testimony citing the CRR study, Szapiro noted that Morningstar’s study of the data that looks across all sustainable funds that incorporate ESG factors finds that slightly more than half of those funds finish in the top half of their Morningstar category. “So at least looking retrospectively, there’s really no ‘there there’ to the argument that these funds systematically or generally underperformed conventional funds,” he explained, emphasizing that in previous years the research found that sustainable funds were more likely to perform better than conventional funds. Biggs, however, still maintained that he believes index funds perform better and offered to supply additional studies.
The subcommittee’s ranking Republican, Rep. Rick Allen (GA), indicated that committee Republicans are ready to work on a bipartisan basis to strengthen employer-sponsored retirement plans, but also criticized the administration’s ESG proposal. While noting that the committee should focus on enacting the RISE Act and SECURE Act 2.0, Allen further suggested that Republicans need to be vigilant against the Biden administration’s regulatory agenda.
“The administration has demonstrated that it cares more about its radical progressive agenda than the financial well-being of retirees. This was evidenced by the Department of Labor’s proposed rule that will pressure retirement plan fiduciaries to prioritize environmental, social, and governance factors when investing retirement plan assets,” Allen stated. “This is a reversal of protections the Trump administration put in place for retirement savers. So, now the President of the United States is going to tell people where to invest their money—this is ridiculous,” he stated.
Coming Legislation
In his opening statement, Subcommittee Chairman Mark DeSaulnier (D-CA) pointed to the full committee’s approval in November of the Retirement Improvement and Savings Enhancement (RISE) Act as a bipartisan step that would help improve retirement security of American workers, but suggested that more work needs to be done.
DeSaulnier cited draft legislation that Rep. Lucy McBath (D-GA) intends to introduce that appears to bring together several recently introduced bills. According to the statement, McBath’s draft legislation would:
- help 401(k) participants better understand the fees they pay on investments (based on legislation that Rep. Susan Wild (D-PA) also plans to introduce soon);
- increase lifetime income options in 401(k) plans (based on legislation Reps. Donald Norcross (D-NJ) and Tim Walberg (R-MI) recently introduced);
- give workers additional opportunities to be part of their employer’s retirement plan (based on the Auto Reenroll Act introduced recently by Rep. Kathy Manning (D-NC));
- boost employee ownership programs through the Labor Department (based on the Worker Ownership, Readiness and Knowledge Act introduced by Reps. Joe Courtney (D-CT) and Mark Pocan (D-WI);
- encourage emergency savings (based on legislation introduced by Reps. Bonnie Watson Coleman (D-NJ) and French Hill (R-AR)); and
- increase spousal protections in 401(k) plans (based on legislation offered by Rep. Lauren Underwood (D-IL)).
While members from both parties encouraged cooperation to enact bipartisan legislation, no timeline was given for additional action. Many Capitol Hill observers believe, however, that there will be action in the coming months on some variations of the SECURE Act 2.0 and the RISE Act.
Spousal Protections
In addition to the ESG debate, the hearing addressed women’s retirement security.
Amy Matsui, Director of Income Security and Senior Counsel at the National Women’s Law Center, testified about how women faced a retirement crisis well before the pandemic and may experience decreased lifetime earnings and depleted savings as a result. Among Matsui’s suggestions is for Congress to address what she described as a “longstanding and increasingly significant gap in ERISA’s protections and eliminate this risk to women’s retirement security.
“Strengthening spousal rights in defined contribution plans under ERISA would help ensure that women who rely on their spouses’ retirement savings because they have fewer of their own, do not risk economic insecurity in retirement because their spouse has depleted or given away retirement savings accrued during their marriage,” Matsui testified.
The hearing also addressed legislation to expand lifetime income options in DC plans; whether the DOL will try to resurrect the Obama-era fiduciary rule; Social Security insolvency; and whether the existing fee disclosure rules can be improved.
