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Activist Investment Puts Millions of Retirees at Risk

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The United States faces a looming retirement crisis. With inflation soaring and investment returns falling, millions of retirees could end up with a smaller-than-expected retirement nest egg because their hard-earned savings will have been sacrificed for political causes.

Last November, the Department of Labor announced a rule change that would encourage retirement fund managers to consider climate change and so-called environmental, social, governance (ESG) factors when weighing investment decisions. The final rule, which is set to take effect this month, will undermine the decision-making principle that guides asset managers, who have a fiduciary responsibility to maximize returns for workers and retirees enrolled in employee benefit plans.

Congress took a bipartisan stand last week to block the rule and reassert the principle that fiduciaries are supposed to serve the interests of their investors—not the other way around. President Joe Biden, however, has pledged to veto the resolution that passed the GOP House and Democrat-controlled Senate. But before Biden makes good on that promise, the White House should consider what is at stake in this legislative fight.

Politicizing retirement plans is a handout to politicized activist investors and fund managers who charge high fees for ESG and similar asset products. These ESG funds—which typically spurn hydrocarbon energy assets, investments that do not promote a “net zero” emission future, and other assorted causes such as firearms, alcohol, and non-unionized labor—could surely benefit from the influx of new investor money. It is one thing if pension beneficiaries deliberately choose these strategies knowing the risks, but quite another if, like most, they cannot.

The demand for—and prices of—ESG-related investments have fallen in the wake of the COVID-19 pandemic and the Ukraine war as investors returned to allowing market fundamentals rather than idealism to guide asset allocation. In December, it was reported that ESG funds suffered their first major outflows in a decade, suffering a 29 percent decline last year—more than 30 percent worse than non-ESG funds. Nearly 80 percent of ESG products failed to keep pace with market index funds in 2022. The Labor Department announcement may be good news for struggling ESG funds, but it could prove disastrous for the beneficiaries of retirement plans. “Doing well by doing good” seems a hollow promise.

Wall Street stock exchange NEW YORK, NEW YORK – FEBRUARY 27: Traders work on the floor of the New York Stock Exchange (NYSE) on February 27, 2023 in New York City. Following one of the worst weeks of the year for stocks, the Dow Jones Industrial Average was up over 200 points in morning trading. Spencer Platt/Getty Images

The timing of this Labor Department rule change could not be more damning. Dozens of corporate and union retirement plans have already faltered and have been forced to turn to the federal government for relief. To take one example, the Teamsters Central States Fund, which covers workers ranging from Montana to Arizona, lost $2 billion in assets between 2019 and 2020. The plan faced a shortfall of about $20 billion before successfully applying for $36 billion in federal guarantees.

Retirees and disabled workers have seen their benefits slashed to a fraction of what they were promised. But the pain is only going to get worse. Federal programs meant to provide a national backstop may not be able to withstand the rate of failing pension funds as more Baby Boomers retire. One such program, the Pension Benefit Guaranty Corporation, faced insolvency by 2026 before receiving an up to $91 billion bailout through the American Rescue Plan of 2021. But it is only a matter of time before it faces another crisis.

Federal bailouts and taxpayer-funded guarantees cannot go on forever, which makes investment returns all the more vital to the long-term health of retirement funds. The Biden administration has ample evidence that politicized investment strategies are not in the financial best interests of retirees. States have amassed more than $1.25 trillion in unfunded pension debt thanks partly to politicized investment strategies that have hamstrung fund managers attempting to make up for the shortfall.

The embrace of activism through investment has proven disastrous for these entities. California’s decision two decades ago to divest from tobacco, for example, cost CalPERS nearly $3.6 billion in potential gains; it now faces a shortfall in excess of $100 billion. The Chicago Teachers Pension Fund has pledged to divest from or offset its current fossil fuel investments by the end of 2027, but it may have to revisit this decision as it comes to terms with $10 billion in unfunded liabilities.

The Labor Department cannot control how state or local lawmakers invest funds from the public treasury, but federal lawmakers can see what happens when fund managers compromise their fiduciary duty in service of a political agenda. President Biden should heed these warnings and accept the bipartisan resolution when it arrives on his desk. If he opts for the veto pen instead, the crisis afflicting hundreds of thousands of state and local employees may soon spread to millions of Americans.

Paul Atkins is former chairman of the Securities Exchange Commission and founder and Chief Executive of Patomak Global Partners

The views expressed in this article are the writer’s own.


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