Compliance March 1, 2023

Senate Follows House in Rejecting DOL ESG Rule

A resolution to nullify the rule to allow for ESG factors in retirement plan investments will now go to Biden’s desk, where he has promised a veto.

Reported by

The U.S. Senate followed the House of Representatives in approving a resolution that overturns the Department of Labor rule paving the way for the consideration, but not the requirement, of environmental, social and governance investing in retirement plans.

The Senate vote on House Joint Resolution 30, overturning the rule, passed with a 50-46 vote, with all Senate Republicans voting yes, as well as Senator Joe Manchin, D-West Virginia, and Senator Jon Tester, D-Montana. Three Democrats where absent. The act will now move to President Joe Biden’s desk, where he said Monday he will veto it in order to keep the DOL rule intact.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

The vote follows a House vote yesterday in which the resolution passed along party lines with a tally of 216 to 204. The DOL rule was finalized in November 2022 after more than a year of public comment and review. The rule removed what was essentially a chilling effect on recommending ESG-focused investment in retirement plans governed by the Employee Retirement Income Security Act that was enacted under the administration of President Donald Trump. That rule said that plan fiduciaries should only consider “pecuniary” factors in investment decisions. 

The Congressional move comes amid a national Republican-led movement against ESG-focused investing that has included lawsuits, both state and federal, seeking the removal of the DOL retirement investing rule. It also comes on the same day that Biden officially nominated Julie Su to be the new Secretary of Labor, with a Senate confirmation hearing to come. In his remarks about the nomination, Biden urged a swift vote, saying: “I asked the United States Senate to move this nomination quickly, so we … can continue the progress to build this economy that works for everyone.”

The debate over ESG investing may extend that confirmation hearing, according to some experts. The Biden Administration argued in its statement on Monday that incorporation of ESG investing does serve a fiduciary purpose, as “there is an extensive body of evidence that environmental, social and governance factors can have material impacts on certain markets, industries and companies.”

Dissenters, such as Tester, have said the potential to use ESG factors in plan investing will jeopardize the investments of everyday retirement savers.

“At a time when working families are dealing with higher costs, from health care to housing, we need to be focused on ensuring Montanans’ retirement savings are on the strongest footing possible,” Tester said in a statement on Wednesday. “I’m opposing this Biden administration rule because I believe it undermines retirement accounts for working Montanans and is wrong for my state.”

Senator Patty Murray, D-Washington, spoke in favor of the rule on the Senate floor, arguing that her colleagues misunderstand the DOL’s position regarding ESG investing in plans.

“This is a really important point I think folks are missing: the Biden rule is fundamentally neutral on how ESG factors are taken into consideration so long as the investment fund is meeting its fiduciary obligations to its beneficiaries,” she wrote in a statement. “The rule we are talking about is neutral on whether a fiduciary is considering these factors from a particular perspective.”

A February post by two legal scholars on the Harvard Law School Forum on Corporate Governance agreed with that assessment, noting that “the 2022 Biden Rule largely reaffirms the Department of Labor’s longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.
Data and Research March 1, 2023

Defined Benefit Plans Posted Worst Performance Since 2008 Crisis Last Year

But performance for defined benefit plans did rebound in Q4, according to a new report.

Reported by

Defined benefit plans in 2022 endured the worst performing year since the global financial crisis of 2008, new data shows. Overall performance suffered, the Q4 2022 Investment Metrics Plan Universe found.

Data across 1,500 defined benefit plans showed the median gross return for all defined benefit plans was negative 14.1%, in 2022, compared to 2021’s positive performance of 14.6%. The most comparable period, according to Investment Metrics, was Q4 2008, which had a gross median return of negative 24.1%.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

“In 2022, there was nowhere to hide,” says Brendan Cooper, head of client consulting and research at parent company Confluence, via email. “A surprise [was] that corporate plans posted the worst calendar year performance by plan type … given their overweight to fixed income versus other plan types, which you could expect to be more conservative [and/or] less risky.”

Driving the negative performance for corporate defined benefit plans were lower returns and protection from fixed-income allocations, the report stated.

For corporate DB plans, the median asset allocation was more than 50%; for public plans, Taft-Hartley plans and foundations and endowments, it was below 30%; and for high-net-worth pensions, it was less than 20%, the data showed.  

“Corporate defined benefit plans maintain the heaviest weighting to the fixed-income asset class by a substantial margin,” the report’s Q4 plan allocation analysis stated. “This clearly did not help them in 2022. When comparing the asset allocation of Q3 2022 to Q4 2022 we saw public plans, endowments & foundations, and high net worth individuals shift their asset allocation from fixed income into public equities.”

Median defined benefit plan performance for corporate pensions was worse than public, Taft-Hartley and endowment and foundation plans for the 2022 calendar year, the data showed: The one-year median performance for corporate plans in 2022 reached nearly negative 20%, compared to every other plan type, which posted negative returns less than 15%.   

High-net-worth-eligible individuals, who have contributed up to the annual IRS limit in a DC plan and want to invest additional amounts for retirement, can save above the threshold for a 401(k) in a personal pension or in a cash-balance plan at work.

The best news in the report was that pension plan performance actually went up in Q4, as the median quarterly return for the same plans was a positive 5.2%.

The data showed:

  • Defined benefit plans posted a median net return of 5.39% for Q4 2022, as performance rebounded after three consecutive quarters with negative returns to begin the year; 
  • Endowments and foundations saw the best performance compared to other plans, with a median net return of 6.37%; and
  • Health and welfare plans delivered the worst performance for the quarter, with a median net return of 3.18%.

Investment Metrics’ Q4 2022 report was sourced from more than 4,000 institutional retirement plans. Additional historical data came from the proprietary Investment Metrics Defined Benefit Plan Universe, comprising 1,502 corporate, public, Taft-Hartley, foundation and endowment and high-net-worth defined benefit plans, with total assets of $1.2 trillion.  

The Plan Universe report is updated quarterly. The report is available to download.

«