President-elect Joe Biden.
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The Department of Labor, which oversees America’s retirement and health plans, will take a different cast come Jan. 20, with moves including a potential return of the so-called fiduciary rule and a reversal of a regulation that restricts the use of sustainable funds in retirement plans, analysts said in interviews with Barron’s.
The DOL’s initial focus under the Biden administration is likely to be health care and health policy, “because the situation with the pandemic is deemed more urgent,” said Erin Cho, a principal at Groom Law Group and an expert on pension-investment issues.
Also on the front burner will be an effort to keep Democrats’ campaign promise of raising the federal minimum wage to $15. Analysts say progress is possible via executive actions that would require federal contractors to pay higher wages, even if Republicans keep control of the Senate.
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Still, a range of changes that will affect investors are likely to be on the way. In the first place, a new person will be in charge, succeeding Labor Secretary Eugene Scalia, who has been criticized as antagonistic toward labor. The people reported as in the running for the job include such labor-friendly personages as Sen. Bernie Sanders; Boston Mayor Marty Walsh; Rep. Andy Levin, a Democrat from Michigan; California Labor Secretary Julie Su; Harvard Law School lecturer Sharon Block, a former Obama administration Labor official; and Seth Harris, a former deputy labor secretary.
The DOL is key to America’s retirement plans because it administers and enforces the Employee Retirement Income Security Act of 1974, which protects the interests of employee benefit plan participants and their beneficiaries. Aron Szapiro, head of policy research at Morningstar, predicts a renewed emphasis on investor protection under former Vice President Joe Biden. “The investor protection issue will keep going,” he said.
— Investors can expect a new version of the Obama-era Fiduciary rule, also known as the “Conflict of Interest” rule, which the Fifth Circuit Court of Appeals overturned in 2018. The rule required advisors to give conflict-free advice on retirement accounts, putting their clients’ needs ahead of their own potential compensation. That meant shifting away from commissions on various investment products and becoming completely transparent on advice they provided.
“Many people believe there’s a need for an enhanced fiduciary standard,” particularly in the case of rollovers from existing retirement plans, said Michael Hadley, a partner at Davis & Harman specializing in Erisa and retirement issues. “You will see the department trying to elevate standards of conduct,” Szapiro said.
As part of that effort, the new DOL could take a close look at the so-called investment-advice exemption, a proposal that the department is trying to finalize before the Trump term ends. It would allow fiduciaries to receive commissions and other payments, including for advice about rolling over 401(k) accounts on retirement.
The new standard could coexist with the Securities and Exchange Commission’s Regulation Best Interest. That rule raises the legal and ethical standards brokers must meet when recommending or selling investment products. It requires them to put the interests of their customers before their own, and to disclose to clients how they are paid, if they have any disciplinary history and whether there are any conflicts of interest that create incentives for them to sell certain products.
— A second priority “would be for the DOL to see what they can do about the newly finalized rule” that effectively limits the ability of 401(k) retirement plans to offer sustainable investments, said Bryan McGannon, director of policy and programs for US SIF, the sustainable-investment trade group. That rule requires fiduciaries to choose investments solely based on so-called pecuniary, or financial, factors that “are expected to have a material effect on risk.” Those offering investments that pursue nonpecuniary goals will have to submit analysis and documentation explaining the move.
While many people already regard environmental, social, and governance investing as a pecuniary decision—meaning that they see it as significantly affecting returns—the rule may still make it more difficult for them to pursue that choice. Fewer retirement plans are likely to offer impact funds that look for social and environmental outcomes, for example.
US SIF has said it aims to reverse the rule in the next Congress, but the effort may go nowhere if the next Senate is Republican-led. Still, a Biden administration DOL would have options. “Subregulatory guidance in the form of a bulletin that is more pro-ESG” is one choice. says Cho of Groom.
Importantly, the administration has an ambitious set of goals around addressing climate change, including rejoining the Paris agreement, decarbonizing the electricity sector, and bolstering renewable energy. It will need the financial pressure the sustainable-investment sector can exert in order to succeed. “They’ll never get the Erisa dollars unless they have guidance that is more stable than it is right now,” said Ethan Powell, president of Impact Shares.
Other experts, though, have played down the impact of the latest ESG rule. “We have been in business for 20-plus years and have seen these efforts come and go and not stop the growth of the impact and ESG industry,” said David Sand, chief impact strategist at Fort Lauderdale, Florida-based Community Capital Management, which oversees the CRA Qualified Investment Fund (CRANX).
The DOL could also look at an existing proposal about proxy voting that may also make it harder to practice ESG investing. According to the proposed rule, fiduciaries must thoroughly research and analyze each proxy vote to ensure it doesn’t pursue “nonpecuniary objectives.”
The documentation is less onerous in cases such as voting in accordance with management’s recommendations. “You either vote with management or not vote at all—that really flies in the face of any common-sense approach to CEO and shareholder accountability,” said Dieter Waizenegger, executive director of CTW Investment Group.
— Pooled retirement plans, which take effect on Jan. 1 and were created under the Secure Act to give small, unrelated employers a way to offer a retirement savings option, are another potential area of focus. “Most small business [retirement plans] could end up in PEPs in the next five years,” said Szapiro, the Morningstar policy chief. Phyllis Borzi, who headed the DOL’s Employee Benefits Security Administration from 2009 to 2017, has raised concerns that pooled plans could create potential for conflicts of interest.
— Finally, the DOL may weigh in on cybersecurity and its importance to people’s retirement accounts. “ Not all 401(k) plans are held with major financial institutions and there’s no national standard for cybersecurity and 401ks” said Hadley of Davis & Harman. A cybersecurity initiative “wouldn’t surprise me.”
Write to Leslie P. Norton at [email protected]
