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By Cory Clark
Special to the Financial Independence Hub
As a parent, it can be hard to let your children make their own decisions. Particularly when you question the wisdom of the decisions they may make. At some point however, you have to let children make their own decisions. As they mature, that’s what they deserve, and it’s entirely possible they’ll make the right decision for them, even if it’s not the decision you would have made. One of the unintended consequences of overprotectiveness is that as soon as that child gets the chance, they fly the coop and stay as far away from their overbearing parents as they can. “Local college? No thanks.”
Last month, the U.S. Department of Labor [DoL henceforth] became a helicopter parent and pushed its proverbial children out the door when it issued new proposed rulemaking related to ESG [Environmental, social and corporate governance] investments within retirement plans. “Financial Factors in Selecting Plan Investments” seeks to codify harsh guidance on ESG investments within retirement plans, which will very likely have a chilling effect on the availability of such investment options to retirement plan participants.
The proposed rule is paternalistic to both plan fiduciaries and plan participants. With respect to plan fiduciaries, the DOL takes the unusual step of supplanting industry experts’ professional judgment in favor of their own. But perhaps the more damaging effect of the proposed rule is that it tosses aside the participant’s personal choice related to the values underlying their retirement investments. The Department has in essence said to America’s retirement plan participants, “we know better than you, and as long as you live under our roof…” This positioning can bring about a very predictable response, stop living under that roof and unlock your personal choice. Ironically, the Department issued a second proposed rule the very same month which shows participants the door.
The second proposed rule issued by the DoL, “Improving Investment Advice for Workers & Retirees,” officially reinstated ERISA’s 1975 definition of fiduciary, but made some critical adjustments to its interpretation such that rollover recommendations will be considered a fiduciary act and subject to an annual retrospective review. The proposed exemption would allow otherwise prohibited rollover recommendations, provided that the recommendation is given under an impartial standard of conduct.
DALBAR finds EST investments attractive in DC pensions
A recent DALBAR study shows that ESG investments are an attractant to defined contribution plan participation. It’s only natural that the inverse would also be true; the absence of ESG investments within a plan can be an incentive to invest elsewhere or not invest at all. This incentive is only going to get stronger as the younger generations, who have a greater preference for ESG, begin to make up a greater proportion of the retirement plan market.
For many, the strongest selling point of an IRA versus their plan is that the IRA will have more robust investment options. As ESG continues to grow in popularity, the availability of ESG investments within an IRA can make a strong case for an impartial rollover recommendation. If I’m overseeing IRA sales for my firm, I’m thanking the DoL for putting their thumb on the scale in favor of a rollover by restricting the availability of ESG investments within ERISA plans.
This is the unintended consequence of the DOL’s paternalistic approach to ESG investing. Investing responsibly is important to the American people, and if they are unable to do so through the account that holds the majority of their retirement savings, they will seek an alternative in which they can carry out their personal choice. If the DOL’s goal is to ensure retirement income security through employer-sponsored retirement plans, this proposed ESG rule would appear to be in contravention to that goal.
Cory Clark is Chief Marketing Officer at DALBAR, Inc. Over the years, Cory has worked with retirement plan specialists, investment managers, advisors, broker/dealers and insurance companies to optimize their communications, compliance and business practices. Cory is also a licensed attorney in Massachusetts, where he resides with his wife and 3 children.
