Until the Biden administration, you had every reason to believe that the people managing your pension or other retirement plan were trying to maximize your benefits. They were required to do so by law.
Not anymore. Now, unless the Biden administration loses in court, that will no longer be the case. Under a new Biden administration Department of Labor rule, plan managers will be able to invest your money without your consent to achieve the plan managers’ political, social or ideological goals.
In 1974, Congress enacted the Employee Retirement Income Security Act (ERISA) to ensure that retirement plan managers, called fiduciaries, operate a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits or defraying reasonable plan expenses. Over the past 50 years, ERISA has worked well.
The Biden-Harris administration’s new rule interprets ERISA differently, allowing fiduciaries to “break ties” among potential investment alternatives or when voting proxies by using progressive social objectives relating to climate change, labor law or corporate governance.
In this case, a “tie” would be two investment alternatives that have precisely the same projected return and risk. Any normal financial methodology is going to result in a list of choices with those investments with the highest risk-adjusted projected returns at the top. In practice, there are very, very few actual investment possibilities that have precisely the same projected return and precisely the same risk.
If, however, a fiduciary wants to purposefully create ties, it is easy to do so. For example, simply divide the roughly 5,000 public operating companies into five groups, numbered one through five, and you will have 1,000 investment possibilities in the top group. The new Labor Department rule would allow fiduciaries to choose among those in the top group using political considerations rather than the best interest of plan participants.
The Biden-Harris rule is an invitation to ERISA fiduciaries to pursue their political or social goals at the expense of plan beneficiaries. It is effectively a statement by the Department of Labor that enforcement actions will not be forthcoming if fiduciaries pursue progressive political aims at the expense of plan participants. To the extent that it is successful in achieving its objectives, the rule will result in lower returns and less retirement income for plan beneficiaries. Not to mention the channeling of millions of dollars toward progressive causes.
Both the Republican-controlled House and the Democratic-controlled Senate have passed resolutions of disapproval in an attempt to reverse the politicization of these retirement savings plans. Unfortunately, President Biden vetoed these resolutions in March of 2023. Now, the Biden Labor Department rule is being challenged in the courts in a case called State of Utah v. Su.
In July, the 5th U.S. Circuit Court of Appeals sent the case back to the trial court in the Northern District of Texas to reconsider the case in light of the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. In that case, the Supreme Court put an end to the so-called Chevron deference where courts were instructed to provide deference to government agencies’ interpretation of statutes rather than exercise independent judgment.
Because under the Loper decision the Labor Department's interpretation of ERISA is no longer to be accorded deference by the courts, its attempt to allow politics to harm plan returns and retiree benefits is much more likely to overturned in court.
Since the ERISA statute is about as clear as it gets that plans are to be managed solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants, the Biden Labor Department's attempt to allow plans to be managed for other purposes is highly suspect. The Labor Department's attempt to warp the meaning of the statute will no longer be accorded deference by the courts.
Congress made its intent clear when it enacted ERISA and when it approved resolutions disapproving the Labor Department rule to ensure that ERISA retirement plans are managed by fiduciaries solely for the benefit of retirees. We can all hope that the courts will enforce Congress’s intent.
David Burton is the Senior Fellow in Economic Policy at the Heritage Foundation’s Thomas A. Roe Institute for Economic Policy Studies.
