The White House recently issued a new regulation that will allow investment fiduciaries, including 401(k) plan managers, to offer investment options that consider environmental, social, and governance (ESG) issues, such as climate change and social justice initiatives. The move could radically transform retirement investing for tens of millions of Americans nationwide.
Until now, those managing many retirement accounts were required to prioritize the best return on investment possible. By opening the door to left-wing investment plans, the Biden administration is permitting employers and private pension fund managers to effectively politicize retirement investments.
Under the new regulation, a retirement account fund manager or employer must continue to pledge to prioritize the interests of retirees, a longstanding requirement, but fiduciaries will now also be allowed to include factors like climate change and other ESG considerations in their analyses and decision-making processes. This will, by design, empower left-wing employers and fund managers to use retirement accounts to push leftist causes.
The regulation is a huge win for those who support using investment dollars to promote a left-wing ideological agenda. The total value of all U.S. 401(k) accounts was a whopping $7.3 trillion in June 2021. Although not all of that wealth will likely end up in ESG funds in the wake of Biden’s regulatory change, if even just one-third of those funds do, it would mean trillions of dollars could soon flow toward companies that embrace liberal ideals.
Some workers may not notice any changes to their 401(k) and other retirement options over the next year or two, but others will soon find themselves stuck choosing between a short list of ESG-focused investment funds, effectively requiring some workers wanting to take advantage of the tax benefits offered by 401(k) plans to contribute to beliefs with which they do not agree.
The Biden administration claims that fund managers that take advantage of the new rule are not abandoning their commitment to help retirees earn a profit, because they say that good investment decisions should take climate change and other ESG factors into account. History has shown, however, that ESG funds do not perform as well as those that simply try to earn the best return on investment possible.
For example, in an article about ESG investing published in the Harvard Business Review earlier this year, professor Sanjai Bhagat noted, "To begin with, ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.
How can you protect yourself from being required to invest in ESG funds? First, tell your employer, pension fund manager, or other fiduciary responsible for your retirement accounts that you are not interested in ESG investing. The Biden rule does not require ESG investments; it only allows fiduciaries to offer them.
Second, the new Biden rule permits employers to make an ESG fund the default option for employees enrolled in 401(k) accounts. That means that employees who normally do not voluntarily elect specific 401(k) investments could soon have their hard-earned money automatically invested in an ESG fund. Many workers won’t even notice the change. If you want to avoid this from happening in the coming years, be sure to submit your own 401(k) elections.
Third, if your employer or pension manager severely limits your options so that ESG investing is hard to avoid when contributing to a 401(k), consider other investment opportunities that would put you in greater control of your money. An individual retirement account, commonly known as an IRA, could be a better option, for example.
Biden’s latest regulatory change is designed to funnel more money, potentially trillions of dollars, toward causes he and other progressives support. If you don’t want to see your money spent to advance ESG efforts, you need to start preparing now.