Labor Dept. Seeks to Restrict Social Goals in Retirement Investing

Jerome Schlichter, a lawyer who has successfully pursued numerous employers on behalf of workers over excessive fees in their 401(k) plans, said he was not aware of employers who had sought to pursue E.S.G. goals at the expense of financial returns.

“That has not been something that we’ve seen,” Mr. Schlichter said. “It hasn’t been done by fiduciaries in any broad way, in part due to concerns about exposure for litigation.”

Other lawyers said that while the growth in E.S.G. investment options and their rising popularity among workers could require additional regulation and enforcement, such action would typically be better aimed at investment companies marketing such funds, rather than employers and their plan administrators.

George Sepsakos, a lawyer who advises employer plans about their legal responsibilities, said the Securities and Exchange Commission had been reviewing disclosure from E.S.G. funds to make sure their marketing accurately reflected their investing strategies. “Right now the definition can mean different things to different people,” Mr. Sepsakos said.

He said that if an investment company had misrepresented potential returns or fees from an E.S.G.-focused fund, the investment company rather than the employer would typically be liable. “The plan fiduciary can only make investment decisions based on what they know or should have known at the time,” he said.

A 2015 academic paper examining decades of research and over 2,000 other studies found that about 90 percent of the work showed no negative connection between E.S.G. principles and corporate financial performance. A large majority showed positive findings.

As a result, said Mr. Hale of Morningstar, the proposed rule could end up being counterproductive. “Not only could investments that focus on the long-term sustainability of companies lead to truly long-term outperformance because you’re picking better quality companies,” he said. “But there is also the systems argument, that you’re helping to create a financial system and economy that will be more successful.”

Article source: https://www.nytimes.com/2020/06/24/business/labor-retirement-investing.html