Compliance February 24, 2023

Embattled DOL ESG Rule Receives Democratic Congressional Support

A DOL rule permitting ESG considerations in retirement plan investing has been challenged by two separate lawsuits. House Democrats are now trying to legislate it.

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New legislation, the Freedom to Invest in a Sustainable Future Act, was introduced Thursday by Representative Suzan DelBene, D-Washington, would codify the key elements of the controversial Department of Labor rule permitting environmental, social and governance considerations in retirement plan investing, which went into effect on January 30. The legislation is co-sponsored the co-founders of the Sustainable Investment Caucus, Representatives Sean Casten, D-Illinois, and Juan Vargas, D-California.

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The bill would amend the Employee Retirement Income Security Act of 1974 to permit the consideration of ESG factors in retirement plan investing. It would also amend ERISA to include the updated “tiebreaker” rule: If a sponsor is deciding between multiple investment options, they could use “collateral” ESG factors if competing options would otherwise serve equally “the plan’s economic interests.”

This tiebreaker phraseology of “serve equally” is understood as a lower legal barrier than the phrasing of Trump-era the DOL rule from 2020, under the administration of President Donald Trump, which said that in order to consider collateral factors as a tiebreaker, competing investments must be otherwise indistinguishable.

Again in keeping with the new rule, and in contrast to the Trump-era rule, the bill explicitly does not require additional documentation. The bill reads: “A fiduciary shall not be required to maintain any greater documentation, substantiation, or other justification of the fiduciary’s actions relating to such fiduciary act than is otherwise required.”

This point on documenting requirements was a key element of a lawsuit brought in Wisconsin on Tuesday which challenges the legality of the DOL’s ESG rule. That lawsuit alleges that by not requiring documentation of collateral considerations, fiduciaries can avoid leaving a paper trail which could then be used against them later in litigation.

Since the two open complaints—including one brought in North Texas by 25 states—against the DOL rule challenge its consistency with ERISA, the proposed bill would obviate that objection by amending ERISA to effectively incorporate the DOL rule.

The representatives who back the bill have put forward two reasons to support it: ESG is a sound financial methodology, and ESG principles can make investing more environmentally and socially responsible.

DelBene emphasized both components in a statement, saying that, “Americans deserve a secure retirement and ESG investments can be a key component in accomplishing that goal. This bill would help provide workers and retirees a pathway to reach that secure retirement and invest in a sustainable world for future generations.”

In the same statement, Casten emphasized the intersection of financial returns and ESG and said, “Climate risk is financial risk. Retirement plan fiduciaries should be free to consider climate change and other ESG factors without regulatory barriers or the threat of litigation. I’m proud to support this legislation that gives workers the option to invest in the best plans for their future.”

Democrat supporters of ESG in Congress often take what might be called the “happy coincidence” thesis, which says that considering ESG factors is good for investing and risk management, as required by ERISA, and that it also makes the investment sector more environmentally and socially conscious.

The bill would have to pass the Republican-controlled House of Representatives before being taken up by the Democrat-majority Senate. The bill has not been assigned to a Congressional committee yet, but it is likely to be referred to the House Financial Services Committee.

 

 

Data & Research February 24, 2023

Top Economist: Recession Coming, But Boomer Retirees to Mitigate Job Cuts

The US is expected to enter a “short and shallow” recession in 2023, according to the Conference Board’s top economist.

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The US is likely to enter a “shallow” recession in 2023, but the expected wave of Baby Boomer retirement should mitigate job cuts, The Conference Board’s top economist Dana Peterson said on Thursday.

Leading economic indicators point to a recession in 2023, the nonprofit think tank’s chief economist and center leader of economy, strategy, and finance said on a webinar with journalists. Peterson also predicts, however, only a modest increase in the unemployment rate due to a parallel wave of baby boomer retirees leaving the job market.

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Peterson noted that the US has “never had millions of people exiting the labor market at the same time,” and that the result would the continuation of a relatively tight labor market as compared to prior recessions.

Effects from the pandemic are also suppressing labor force participation, with many parents keeping their childcare duties, leaving both them and childcare workers out of the labor force, Peterson told reporters. Furthermore, tight US immigration policies have made it difficult for employers to draw labor from outside the country, she said. Those factors should lead to only a modest increase in the unemployment rate to 4.5%, resulting in about 900,000 layoffs.

“I would not want to be one of those 900,000 people,” Peterson says. “But 900,000 is mild to prior recessions.”

Short and Shallow

If the New York-based Conference Board’s predictions materialize, the recession would most likely be short, shallow, and characterized by negative domestic demand. Data released by Fidelity Investments Thursday shows that retirement savers in their sample group held workplace 401(k) contributions steady in 2022 despite a sharp drop in average balances. Those savings patterns, according to the nation’s largest recordkeeper, have been tested by high costs related to inflation, but for the most part savers have held the course.

In response to that inflation, the Federal Reserve has been steadily hiking interest rates, a monetary tightening tool that will likely continue in 2023, according to Peterson. Two or three more 25 basis-point rate hikes are probable, she said, with inflation peaking and gradually falling back to the Federal Reserve’s 2% target in 2024, which is when an interest rate cut would begin to be considered.

Peterson referred to various drivers of inflation, including housing costs, and the steady demand for services post-pandemic.

“The consumer is really the driving force behind this,” she said. They continue to spend, and it remains uncertain whether consumers’ excess savings, wage income, or credit will last, she added.

The war in Ukraine also continues to drive inflation. In the three main sectors of food, energy, mineral supplies, “Putin keeps his finger on the switch,” said Lori Murray, Conference Board president of the committee for economic development.

Energy Price Risk

An additional risk of faster inflation is the resurgence of elevated energy prices, Murray said. China reopening is expected to increase consumption of services and energy, which would raise prices and compound global inflation.

The panelists, however, see inflation eventually moving downwards. Valuations of home prices have peaked and are slowing, while new rents are lower than during the pandemic. However, “the debt ceiling is the most front and center issue that can disrupt that entire apple cart,” Murray said. She stated that the US must get to sustainable debt to GDP ratio.

“In order to do it without suffering dramatic effects on the economy, it would take 20 to 30 years to achieve that goal, so we really need to start now,” she said.

The Conference Board is judging the likelihood of recession in part by the 6-month rate of its leading economist indicator, which has stayed at less than -4% since March 2022.

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