Compliance March 25, 2024

DOL Defends ESG Rule Against 5th Circuit Appeal

The challenge to the DOL’s ESG rule continues at the appellate level.

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The Department of Labor filed to the U.S. 5th Circuit Court of Appeals a defense of its rule governing “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” sometimes called the environmental, social and governance rule, as complying with the Employee Retirement Income Security Act.

The final rule permits fiduciaries under ERISA to consider ESG factors in their risk-return analysis when selecting retirement plan investments. It also permits fiduciaries to use collateral factors as a tiebreaker between two or more investments when both investments equally serve the interests of the plan and for fiduciaries to use qualified default investment alternatives that use consider nonfinancial factors, if it is a prudent investment. The department finalized the rule in September 2022.

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In January 2023, the final rule was challenged in a Texas federal district court, which upheld the rule in September 2023. The plaintiffs in the initial litigation—26 Republican-led states, two corporations and a trade association in the fossil fuels industry, and two individuals—appealed in October in the case now known as Utah et al. v. Julie Su et al. The 5th Circuit hears appeals from federal cases in Louisiana, Mississippi and Texas.

The DOL argued its response to the appeal in much the same way that it did in district court: Fiduciaries are not permitted to subordinate the interest of the plan when considering ESG factors, and they may only consider nonfinancial factors to the extent that they are part of a prudent risk return analysis.

The DOL rejected the plaintiffs’ argument that the “rule improperly licenses fiduciaries to defy their statutory obligations by taking actions that are not in the financial interests of plan beneficiaries.” The DOL answered that “the rule does no such thing. To the contrary, a fiduciary engaging in such conduct would defy the clear text of the rule.”

Further, the DOL argued that the tiebreaker rule was the “best construction of ERISA.” Previously, fiduciaries could only use collateral benefits as a tiebreaker if the two choices were otherwise “indistinguishable,” a standard relaxed to “equally serve the interests of the plan.” The DOL’s filing notes investments need not be identical in order to equally serve the plan, and it is not always possible to choose both. Picking one or the other randomly, such as by a coin flip, is itself a collateral benefit, because it is nonfinancial and produces no marginal benefit to considering other nonfinancial factors.

The DOL added that, “if plaintiffs are correct that such ties are infrequent, that does not mean the tiebreaker standard is invalid; it just means the standard applies infrequently.”

The plaintiffs have not yet filed an answer, and oral arguments have yet to be scheduled.
Data & Research March 25, 2024

Millennials, Gen Z Triple Financial Wealth Since 2019

Financial assets of the two generations have grown to almost $6 trillion in 2022 from $2 trillion in 2019.

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Out of all generations, Millennials (born from 1981 through 1996) and Generation Z (born from 1997 through 2013) experienced the most substantial growth in financial assets over the past three years, according to the latest edition of the Cerulli Edge—U.S. Retail Investor Edition. Gen Z, the youngest demographic group, saw its financial wealth nearly triple from $2 trillion in 2019 to almost $6 trillion three years later.

“At 44 million households strong—and counting—this younger cohort increasingly is becoming impossible to ignore,” said John McKenna, a research analyst for retail investment at Cerulli, in a statement. “With their financial wealth growing at a massive rate alongside the complexity of their assets, they are prime candidates for formal advice relationships beyond just a brokerage account and a local bank teller. As the retiree and near-retiree markets become more saturated, younger investors represent a chance for advisers to build relationships that could last through five decades, growing in wealth each step of the way.”

Although wealth growth was observed across all age groups, Millennials and Gen Zers experienced notable increases in ownership of stocks and retirement accounts. By the end of 2022, more than half (55%) of Millennials and Gen Zers possessed a retirement account, either through employment or independently—a rise of 6% since 2019. Moreover, the surge in retail trading during the early 2020s predominantly impacted Millennial and Gen Zers, with 22% now holding individual stocks and 9% owning pooled assets such as mutual funds and ETFs, marking an increase from 13% and 6% respectively.

Advisers should start including younger generations in the wealth planning conversation, said Mike Conrath, J.P. Morgan Asset Management’s chief retirement strategist, at the “2024 Guide to Retirement” launch event.

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“Considering the role of the adviser, their advice resonates the most when they’re not just talking to that parental generation, but they’re including the younger generations into part of that planning conversation,” Conrath said.

He stated that once wealth transfers to younger generations, the children take that money, invest it themselves or take it to their own adviser. They could spend it carelessly if they do not have financial discipline or general knowledge.

“For families that do have wealth transfers, it’s important to include the full family into the conversation so the advisers can plan according to what all the clients are comfortable with,” he said. “It not only helps the adviser retain the assets, but more importantly, [those in] the generation receiving the assets have someone giving them the professional guidance around that.”

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