Compliance March 10, 2021

DOL Says It Won’t Enforce Final Rules on ESG and Proxy Voting

The department says it will not pursue enforcement actions against any plan fiduciary for failure to comply, and it plans to release further guidance on the issues.

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The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) announced Wednesday that it will not enforce recently published rules on the use of environmental, social and governance (ESG) investments within tax-qualified retirement plans and proxy voting and shareholder rights.

The DOL said that until it publishes further guidance, it will not enforce either final rule or pursue enforcement actions against any plan fiduciary for failing to comply with them. The DOL said it will update the EBSA website as more information becomes available.

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“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments and that they may need to have special justifications for even ordinary exercises of shareholder rights,” says Ali Khawar, principal deputy assistant secretary for EBSA. “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”

The DOL published its final rule on retirement plan investing, “Financial Factors in Selecting Plan Investments,” on November 13. The final rule said plan fiduciaries should select investments and investment courses of action based solely on consideration of “pecuniary,” or financial, factors.

The final rule, which no longer explicitly referred to ESG, included some significant changes compared with the DOL’s initial proposal, which would have placed stricter limits on ESG investments within retirement plans.

The DOL published its final rule “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights” on December 16. It addressed obligations of plan fiduciaries under the Employee Retirement Income Security Act (ERISA) when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.

A wide range of stakeholders, including asset managers, plan sponsors and consumer groups, questioned whether the two rules properly reflected the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries. The stakeholders also questioned whether or not the DOL rushed the rulemakings through under the previous administration and failed to adequately consider public comments on the value of ESG in improving long-term investment returns for retirement investors.

The stakeholders told the DOL that the ESG rule was deterring plan sponsors from using ESG in their investment decisions.

The Insured Retirement Institute (IRI) said Wednesday that it supports the DOL’s decision not to enforce the two recently published regulations.

“We strongly support today’s decision by the DOL to temporarily forgo enforcement of the ESG and proxy voting rules,” Jason Berkowitz, IRI chief legal and regulatory affairs officer, said in a statement. “This will provide an opportunity for the department to re-evaluate and possibly review or withdraw them.”

The IRI told the DOL in its comment letters that the new ESG rule was unnecessary and that it would actually impair plan sponsors from considering these factors when building their investment lineups by making it more complicated for sponsors to consider the impact of ESG issues.

Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, also praised the DOL’s decision, saying the two final rules were “hastily finalized.”

The rules “ignored the large body of evidence that environmental, social and governance considerations and proxy voting are suitable for ERISA-governed retirement plans,” she said. “We thank DOL staff for quickly reaching out to stakeholders to understand the impacts of the rules and look forward to continuing to engage with the DOL to ensure that further guidance and rulemaking clearly articulate the suitability of ESG considerations and proxy voting in retirement plans.”

Likewise, Senator Patty Murray, D-Washington, chair of the Senate Health, Education, Labor and Pensions (HELP) Committee, praised the delay in enforcing the two final rules.

“This step is a win for workers, retirees, investors, businesses, communities, the environment—everyone,” the senator said in a statement. “Stopping these rules ensures people investing in their futures are able to make sound decisions to build their financial security while also helping to build a world that is more just, diverse and sustainable.”

The Markets March 10, 2021

Recent Strong Returns Make the Future More Challenging, J.P. Morgan Says

The asset management firm points to the importance of increasing savings and diversification as two ways to counteract potential lower returns.

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When J.P. Morgan Asset Management launched its 2021 “Guide to Retirement,” aimed at helping retirement plan advisers give better advice to participants to improve their retirement savings, it emphasized that possibly the biggest takeaway is that “returns have been good recently, which makes it challenging going forward,” says David Kelly, chief global strategist at J.P. Morgan.

Following that, it remains critical for retirement plan savers to diversify their portfolios. Kelly adds that “inflation and taxes are very much important to think about,” especially in light of all of the monetary and fiscal stimulus that has been implemented to counter the negative impacts of the COVID-19 pandemic on the economy.

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Going forward, it is inevitable that returns are going to decline, he says, which means advisers need to recommend “a more sophisticated approach to asset allocation,” namely more diversified portfolios.

Pointing to the dislocations in the market following the 9/11 terrorist attack, the 2008 Great Recession and the 2020 pandemic, Kelly says there was no way anyone could have predicted these events beforehand. “If you knew of the upcoming risks, you could hedge against them,” he says. “Since you can’t know, you need to diversify.”

Kelly also notes that the $4 trillion the government has spent to counteract the pandemic will inevitably lead to higher taxes down the road. All of these factors have implications for long-term investors. “This environment will be challenging,” he warns.

J.P. Morgan now predicts that a pre-retirement investor with a 60/40 portfolio, comprised of 60% equities and 40% bonds, will earn 5.75% a year, down from the firm’s earlier projection of 6% annually, says J.P. Morgan Chief Retirement Strategist Katherine Roy. This will have the greatest impact on older investors, she says, adding that they can best counter this by increasing their savings and retiring later. “They should also consider lifetime income options and diversification, including emerging market exposure,” Roy says.

Given that so many people have cut back on their spending during the pandemic, advisers have a great opportunity to continue to make the case to their retirement plan participants to be thrifty, Roy says. “Retirees pulled back 2% to 9% on their spending, and steady earners, 1% to 2%,” she says. “This is an important time to talk to retirees and pre-retirees about spending that is non-negotiable—and where they can pull back.”

Along these lines, J.P. Morgan’s guide says investors have total control over their spending and asset allocation. They have some control over employment earnings and employment duration, as well as their health, which affects their longevity.

People need to prepare to live 30 or more years in retirement, J.P. Morgan advises. A 65-year-old woman today has an 86% change of living to age 75 and a 73% change of living to age 80. After that, it drops considerably to only a 55% chance of living to age 85 and a 34% chance of living to age 90. For a 65-year-old man, there is a 79% chance of living to age 75, a 63% probability of living to age 80, a 44% probability of living until age 85 and a 23% chance of living until age 90.

However, there are more older Americans in the workforce today, which is one way of offsetting the risk of outliving retirement savings. In 2009, J.P. Morgan says, 26% of the workforce was between the ages of 65 and 74. That rose slightly to 28% in 2019 and is projected to rise to 33% by 2029. Interestingly, only 15% of older Americans say they work in retirement is to make ends meet. The overwhelming reason they work, cited by 62%, is to stay active and involved.

J.P. Morgan also notes that it is important for people to delay taking their Social Security benefits. For those born in 1954 or earlier, they would only get 75% of their benefits if they start taking them at age 62, but 100% at age 66 and 132% at age 70. For those born in 1960 or later, the figures are 70%, 100% and 124%, respectively. The asset management firm notes that “delaying benefits means increased Social Security income later in life, but your portfolio may need to bridge the gap and provide income until delayed benefits are received.”

The firm says that, on average, Americans are saving 7.9% of their salaries, well below the 10% to 15% recommended to successfully fund retirement.

J.P. Morgan also says people should make income tax diversification a priority for their retirement savings and invest in a health savings account (HSA).

The firm warns that “withdrawing assets in down markets early in retirement can ravage a portfolio. Consider investment solutions that incorporate downside protection such as: greater diversification among non-correlated asset classes; investments that use options strategies for defensive purposes; [and] annuities with guarantees and/or protection features.”

Due to inflation, J.P. Morgan also recommends that retirees consider adjusting their spending, based on market conditions, in order to make the money in their portfolios last.

J.P. Morgan also notes that the amount saved early in one’s year is more important than returns, while the opposite is true as one ages: “When saving for retirement, the return experienced in the early years has little effect compared to growth achieved through regularly saving,” the report says. “However, the rates of return just before and after retirement—when wealth is greatest—can have a significant impact on retirement outcomes.”

J.P. Morgan also says people should resist leaving the markets when there is high volatility or declines. “Taking ‘control’ by selling out of the market after the worst days is likely to result in missing the best days that follow,” J.P. Morgan says.

Finally, J.P. Morgan also points to the importance of escalating one’s deferrals over time. If a 25-year-old making $50,000 a year, getting a 2% raise every year, receiving a 5% match and an average return of 5.75% each year is automatically enrolled at 3% into their plan but never increases their deferrals, they will end up with $610,000 in savings by age 65. However, if they start at 3% but increase that amount each year up to 10% and continue at that rate through age 65, they will end up with $1.4 million. There isn’t that much difference between the latter option and starting at a 10% deferral and remaining there; that scenario would yield $1.5 million in savings by age 65.

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