Federal tax laws allow some income invested for retirement to avoid taxation until the money is withdrawn after retirement. To qualify for that preferred tax treatment, the fund must be responsibly managed under rules set by the US Labor Department.

Many companies offer their employees a choice of retirement investment vehicles.  The Trump Administration’s Labor Department insisted that such pension funds be managed with an eye “only on pecuniary factors.”  This rule, adopted after public notice and comment, was designed to prevent pension fund managers from being stampeded by interest groups with goals other than the best dollar rate of return for the retirees. Among the most prominent of those interests is “corporate governance,” demanding that activists be given a seat on a company’s board, the better to insist, for instance, that an apparel company not purchase supplies from countries without labor laws comparable to America’s. Other goals extend to demanding salary increases that a labor union was unable to win at the bargaining table, or that a company take a position against a controversial state law, as Disney did in Florida. President Biden proposes repealing the “pecuniary factors only” rule. Senate’s Majority Leader, Chuck Schumer, recently defined permissible non-pecuniary goals as including “investing in workers, or hedging against the dangers of a changing climate, or guarding against risks of corporate malfeasance.”

Left unconstrained, companies could, under Sen. Schumer’s view, consciously allow the market value of their stock or the dividends the company paid out to decline, in service of non-pecuniary goals. Biden’s new rule says, “Risk and return factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”

The new rule assures that “A fiduciary may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits  . . .  to other objectives, and may not sacrifice investment return or take on additional investment risk to promote benefits or goals unrelated to interests of the . . .  beneficiaries in their retirement income or financial benefits under the plan.” However, reading the two sentences together, the import is clear that a pension manager can consider the social and environmental characteristics of the world in which a retiree would be living as part of the “interests of the participants.” The Trump rule allowed non-pecuniary factors only when alternative investments were tied in an evaluation of their pecuniary effects. Rejecting that requirement, the proposed Biden rule allows the non-pecuniary factors to be the deciding factor among options that would equally serve the interests of the retirees—using the broader definition of “risk and return” that includes the economic effects of “environmental, social, or [corporate] governance” factors.  It is logical to predict that Biden Labor Department officials will find many socially “correct” investments as serving equally well, if not better, the broader welfare of retirees, even if a lower pecuniary pay-out resulted. If that result were not intended, there would be no reason for the change in the rule.

The House and Senate voted to block the Biden rule; but Pres. Biden has vetoed that resolution, allowing the new rule replace the old one.  Activist investors will be re-invigorated, bolstered by a myriad of third-party groups that rate companies on how they line up with the social goals each such private group advocates.  Pension managers will be pressured to choose only companies with high social citizenship scores, so defined.

 If an individual wants to invest in any particular company on social criteria, that is that person’s free choice. And if a retiree wants to spend some of her or his pension on social causes, that too is the retiree’s right.  The pension manager’s duty, however, should be to get as large a monthly check into a retiree’s bank account, consistent with prudent management, to allow the retiree that freedom.