WORKER RETIREMENT SAVINGS, ESG, AND PENSION REFORMS

Remove ESG considerations from ERISA. Environmental, Social, Governance (ESG) investing is a relatively recent strategy promoted by large asset managers that focuses not only on a company’s bottom line, but also on the company’s compliance with liberal political views on climate change, racial quotas, abortion, and other issues. The ESG movement has focused especially on reducing greenhouse gas emissions. For example, ESG proponents advocate for divestment from oil and gas companies or the exercise of investor influence to reduce oil and gas production. ESG considerations unrelated to investor risks and returns necessarily sacrifice trust law’s traditional sole focus on investment returns for collateral interests. And while individual investors may prefer to invest in “green” companies, “woke” companies, or companies with greater board diversity, and may even be willing to sacrifice some financial gains to do so, the question relevant to DOL is whether, and under what conditions, fiduciaries should be permitted to follow this path as well. While Americans are free to invest their own savings however they wish, in ERISA, Congress imposed strict duties on employer-sponsored worker retirement plans as a prophylactic protection of workers’ retirement security in general. Recognizing the unique status of employer-managed retirement savings, in ERISA, Congress required that fiduciaries exclusively seek the best interests of plan beneficiaries. Because ESG investing necessarily puts other considerations before the interests of the beneficiary, ESG investing by plan managers is an inappropriate strategy under ERISA.

DOL should return to the Trump Administration’s approach of permitting only the consideration of pecuniary factors in ERISA. However, this approach should not preclude the consideration of legitimate non-ESG factors, such as corporate governance, supply chain investment in America, or family-supporting jobs.

DOL should consider taking enforcement and/or regulatory action to subject investment in China to greater scrutiny under ERISA. Many large retirement and pension plans remain invested in China despite its lack of compliance with U.S. accounting standards and state control over all aspects of private capital.

Alternative View. Some conservatives believe that ERISA plan investments should be made solely on a pecuniary basis and the consideration of any non-pe- cuniary factor, ESG or otherwise, should be prohibited. Additionally, other conservatives believe that even though ESG investing is often not a sound finan- cial strategy, it is not wrong for retirement plans to offer ESG investment options so long as individuals explicitly acknowledge and choose to pursue investment options that do not exclusively maximize pecuniary gains.

Thrift Savings Plan. The Thrift Savings Plan (TSP) is the retirement savings benefit plan for most federal employees and many former employees. The TSP is managed by the Federal Retirement Thrift Investment Board (FRTIB). At over $800 billion in assets under management, the TSP is one of the largest retirement plans in the world.

DOL should prohibit investing in ERISA plans on the basis of any factors that are unrelated to investor risks and returns.

DOL should reverse efforts to politicize the TSP by removing “mutual fund” windows that encourage ESG, and should clarify the fiduciary duties of the TSP. Recent efforts by congressional Democrats and the Biden Administration to politicize the TSP by offering selective “mutual fund” windows that encourage ESG should be reversed by DOL, and the fiduciary duties of the TSP should be clarified by the department to preclude ESG investments absent individual stock selection by the participant. The TSP is managed under contract by private-sector fund managers. Its current managers are BlackRock and State Street Global Advisers. Both of these managers have demonstrated a public commitment to use the funds they manage to advance ESG.

The federal government should follow the lead of multiple state governments in removing their pension funds from fund managers such as BlackRock and State Street Global Advisers, and contract with a competitive, private-sector manager that will comply with its fiduciary duties.

DOL should also consider bringing enforcement actions against BlackRock and State Street Global Advisers for their violations of fiduciary duty while managing the TSP.

Congress should enact legislation authorizing the FRTIB to exercise its independent business judgment in exercising the proxy votes for its holdings of the TSP and provide clear proxy voting guidelines for the FRTIB to follow. The current proxy adviser market is dominated by two firms, Institutional Shareholder Services and Glass Lewis, which use heavily weighted ESG criteria in directing the proxy votes of pension plans. If feasible, the new legislation should also offer a streamlined process for other proxy advisers to compete for the TSP’s business.

As the principal retirement savings plan of America’s servicemen and women, part of the FRTIB’s fiduciary duties in managing the TSP is a duty not to invest in governments that are enemies of the United States. Yet the FRTIB has repeatedly approved the investment of TSP funds in Chinese military companies and state-owned enterprises. Under the Trump Administration, DOL ordered the FRTIB to cease investments in China. However, under the Biden Administration, the TSP has made available a wide range of investments in China.

DOL should exercise its oversight of the FRTIB to prohibit investments in China. Congress should enact legislation prohibiting investment of the TSP in China.

PENSION REFORMS.

Public Pension Plan Disclosure. Residents of states that responsibly manage their public pension plans (pension plans for State and local government employ- ees) should not be responsible for bailing out states that do not do so. Money is ultimately fungible, so federal aid to States can effectively be used to free up other State funds for pension contributions. Although the federal government does not impose funding rules on public pension plans, these plans should be required to disclose the fair market value of plan assets and liabilities (using the Treasury yield curve as the discount rate) on an annual basis. In the aggregate, these plans were underfunded on a market basis by $6.501 trillion as of Fiscal Year (FY) 2021, even though the plans reported underfunding of only $1.076 trillion using overly optimistic assumptions.

l Multiemployer Plans. At the request of multiemployer union pension plans, the government has given such plans much more lenient rules and discretion over funding than it has given to single-employer plans. Multiemployer plans have been severely mismanaged, and the plans have abused the discretion and deference given them by federal law and enforcement agencies to make promises that they cannot keep. As a result, these plans are generally severely underfunded, with $757 billion in aggregate underfunding, and a funding level of just 42 percent. The Biden Admin- istration has provided a massive taxpayer bailout to some of these plans, but without any needed reforms. Even worse, it gave out funds in excess of what the law allows. l Congress should reform multiemployer pensions to give participants in these plans the same protections as those in single-employer plans. Liabilities should be measured similarly to single-employer plans. Workers should be able to earn benefits at any employer in the plan, but liabilities should be divided amongst employers, instead of the current illusory joint and several liability under which no one is ultimately responsible for making up underfunding. Troubled plans should be prohibited from

Disclose the fair market value of plan assets and liabilities. Congress should require public pension funds to disclose the fair market value of plan assets and liabilities (using the Treasury yield curve as the discount rate) on an annual basis. making new pension promises. More timely and detailed reporting should be imposed. Pension Benefit Guaranty Corporation. The Pension Benefit Guaranty Cor- poration (PBGC) insures benefits for private sector pension plans, with separate single-employer and multiemployer insurance programs. l The PBGC’s annual report must be submitted on time, and with timely data that uses fair-market value principles to calculate the PBGC’s finances. The PBGC has been submitting portions of statutorily required annual reports many months late and using out-of-date data. And PBGC’s data on plans is almost five years old. These problematic practices make it difficult for Congress to become aware of serious problems in the insurance programs, which received a bailout of over $85 billion in the 2021 American Rescue Plan Act.  The PBGC should use existing statutory authority to protect workers, retirees, employers, and taxpayers by closely monitoring and taking appropriate remedial action with regard to badly run and underfunded multiemployer union pension plans, including termination where appropriate. The PBGC’s refusal to use such authority helped cause its multiemployer program deficit to go from less than $500 million in 2008 to over $65 billion in 2017. l Congress should increase the variable rate premium on underfunding and eliminate the per-participant cap in order to appropriately take into account risk and limit the degree to which well-funded pension plans must subsidize underfunded plans. Reforms should proportionately reduce the fixed per-participant premium to ease the burden on well-funded plans and also increase premiums on multiemployer plans to match single-employer plans. Improving Access to Employee Stock Ownership Plans. Employee Stock Ownership Plans (ESOPs) are ERISA-covered employee retirement savings plans that allow employees to receive compensation in the form of equity in their employer business. These arrangements enable employees to formally partici- pate as investors in how their employers’ businesses are run. And they also align employer–employee incentives by giving employees a greater financial stake in the success of their employers. With over half of small businesses owned by business owners over the age of 55, ESOPs also create advantageous succession oppor- tunities that support the continuity of local businesses and regional economic — 610 —Department of Labor and Related Agencies development. Finally, ESOPs can enable greater investment returns for employees. However, ESOPs have to date lacked clear rules under ERISA that recognize their unique structure and benefits, and this opacity can serve as a barrier to employers considering adopting ESOPs. l Provide clear regulations for ESOP valuation and fiduciary conduct. DOL should make it easier for employers to offer ESOPs by providing clear regulations for ESOP valuation and fiduciary conduct that encourages the participation of employee beneficiaries in corporate governance, while recognizing the importance of financial diversification for retirement security. Alternative View. Conservatives believe that it is important for American fami- lies to have control over their savings and to be able to hold diversified assets. While ESOPs can be a beneficial part of a worker’s and family’s savings, some conserva- tives believe that the government should not favor one form of investment over another or make it harder for families to have a diversified investment portfolio.