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President George W. Bush explained the workings of his White House in 2006. He said, “I hear the voices …. But I’m the decider.”
In those often-quoted words, Bush made a point worth recalling this week. President Biden just issued the first veto of his presidency to support the DOL rule.
The importance of the Biden veto is not about assessing environmental, social or governmental (ESG) factors (more on that below). It was about affirming the role of the fiduciary in investment advice.
The role of retirement-plan fiduciaries must transcend the role of elected politicians. The fiduciary must be, in the words of the 43rd president, “the decider.”
The CFA Institute’s Paul Andrews explained why when he said, “Politicians make poor asset managers.”
Fiduciaries must be held accountable for retirement-plan investment decisions, politicians for political decisions.
Biden’s veto was no surprise. He supports the DOL rule. The rule affirms that retirement-fund fiduciaries are responsible for their decisions and that they may consider ESG factors in certain circumstances. The fiduciary must conclude that all investment alternatives considered serve the financial interests of the plan “equally.”
The retirement plan fiduciary is the affirmed “decider.” Opponents of the rule saw it differently, of course. They said that allowing politicians to restrict what fiduciaries can do is removing the politics.
The Wall Street Journal opposed the rule and explained why in a November 23, 2022 editorial. But it mischaracterized what the rule does and does not permit.
The WSJ suggested the DOL rule will get asset managers to embrace “debatable theories and studies” to support social and government factors and to abandon prudent processes. Returns will decline and participants will be on the hook “if ESG strategies don’t pan out.”
The WSJ claimed the new rule empowers retirement plans to invest based on (my emphasis added) ESG factors that “put your 401(k) to progressive political work.”
No, not so.
A fiduciary cannot abandon its investment policy statement (IPS). It must show its adherence to a prudent process.
The WSJ then stated the new rule “gives plan sponsors nearly unlimited discretion and legal protection to invest based on these often-political considerations.” No, not so. See above.
The WSJ was not alone. Republican state AGs sued to stop the rule. Republican governors joined together to fight ESG in their states. The governors said they will work to “force changes” in how asset managers invest state pension funds to stop the “proliferation of woke ideology.”
The WSJ’s opinion writers discussed this point in the context of diversity, equity and inclusion (DEI) on university campuses. A March 17th WSJ editorial described a debacle at Stanford Law School. Fifth Circuit Court of Appeals Judge Kyle Duncan was shouted down by “a mob of law students.”
The school’s associate dean for DEI, Tirien, Steinbach, spoke in support of certain students, claiming, among other things, that Duncan’s proposed speech would cause “harm” to those students. Judge Duncan described what happened next, when “two U. S. marshals decided it was time to escort me out.” [Ed. note: On March 23, I learned that Stanford put Steinbach on leave and, in a lengthy statement, called out the impropriety of her actions.]
The WSJ editorial said that this incident at Stanford shows DEI “has become a threat to free speech” and how DEI officers enforce “ideological conformity.”
What does this shameful experience at Stanford Law School have to do with ESG? A whole lot by association. Judge Duncan’s experience struck a nerve with those who link the “S” in ESG to DEI.
The idea that asset managers may act like Steinbach is the concern. But the idea that asset managers would read the WSJ and act as fiduciaries do not appear to have been considered by the WSJ.
The WSJ said the rule aims to protect fiduciaries that “invest based on ESG.” No, the rule protects a fiduciary’s freedom to inquire about and consider ESG factors. The rule affirms that retirement-plan advisors must always act as fiduciaries with prudence and loyalty to the client. According to the announcement in the federal register, the rule sets:
a standard that requires the fiduciary to conclude prudently that competing investment courses of action equally serve the financial interests of the plan. … In such cases the fiduciary is not prohibited from selecting the … courses of action based on collateral benefits other than investment returns.
Interestingly, the issue is not that the Trump and Biden DOL rules are so different. They are not.
Harvard Law School professor Robert Sitkoff noted the Trump and Biden rules are similar: “Subject to a few nuanced changes of limited practical import, the Biden rule is largely consistent with the 2020 Trump rule and earlier regulatory guidance.”
The DOL rule has received much attention. The reason it matters has not. The rule matters because it makes clear that the fiduciary is the “decider,” legally bound to act as a fiduciary. Politicians are not.
Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.
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