DOL Proposal Will Chill ESG Corporate Pension Investing, Advocates Say

Advocates of environmental, social, and governance (ESG) investing have decried the US Department of Labor (DOL)’s newest proposal as poison for sustainable investments in pension plans.

On Tuesday, the DOL proposed a rule that said company defined benefit (DB) retirement plans have a fiduciary duty to beneficiaries, not to social causes advanced through ESG investing that could reduce returns or increase risk.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Labor Secretary Eugene Scalia said in a statement.

Scalia added: “Rather, ERISA [Employee Retirement Income Security Act] plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

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The proposal would only affect private employer plans, which have not been as active or outspoken about ESG investing as have some of their peers in endowments and foundations or in public pension funds.

But ESG supporters say the proposal targets a growing trend in sustainable objectives, such as climate change and diversity, that they say do not run contrary to fiduciary considerations.

“The DOL proposal is out of step with professional investment managers, who increasingly analyze ESG factors precisely because of risk, return, and fiduciary considerations,” the Forum for Sustainable and Responsible Investment (US SIF), an advocacy group, said Wednesday in a response.

“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options—many of which have outperformed their indices over time and especially during the market shock related to COVID-19,” the response continued.

“You’re obliged as a fiduciary to take these issues into account, and the DOL is questioning whether you should do that,” said Tim Smith, director of ESG Shareholder Engagement at Boston Trust Walden.

Experts say that the DOL may want to tamp a trend many have touted as the future of investing. At the start of this year, BlackRock CEO Larry Fink said in his influential annual letter to chief executives that his firm would make sustainability a core goal for investments.

But that may have spooked the Department of Labor, which has urged caution to investors in the past against relying on ESG ratings or including ESG considerations in investment policies. If passed, the proposal could have far-reaching consequences on the broader industry, including ratings agencies and ESG products.

“The Department of Labor is clearly worried that ESG is politicized and they’re worried that participants’ assets are jeopardized if plan fiduciaries are pursuing ESG investments for reasons other than investment performance,” said George Michael Gerstein, co-chair of fiduciary governance at Stradley Ronon Stevens and Young.

Experts also say that public pension plan leaders should take note of the rule. The regulation and the preamble commentary could inform analysis on potential fiduciary breaches under state law. The proposal is currently open for a 30-day comment period.

“This is a fairly aggressive regulation proposal that could have a real, significant impact on the ESG industry,” Gerstein said.

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Tags: Employee Retirement Income Security Act, environmental social and governance investing, ESG, Eugene Scalia, Fiduciary, Investment, Pension, proposal, United States Department of Labor (DOL)

Internal audit alleges that International Association of Fire Fighters President Harold Schaitberger misreported millions of dollars in union funds.

The head of the International Association of Fire Fighters (IAFF) has been accused by the union’s treasurer of corruption and gross financial malpractice, and illegally raking in millions of dollars from the union pension fund over the past two decades.

Edward Kelly, the IAFF’s general secretary-treasurer and second-highest ranking member of the union, wrote in a 105-page audit obtained by the conservative journalism website the Washington Free Beacon that IAFF President Harold Schaitberger misreported millions of dollars in union funds while diverting millions of dollars for a purpose unrelated to their intended designation. As a result, approximately $6 million in union funds remains missing.

“The recordkeeping performed prior to my assuming office in September 2016 was so poor, one could argue it was designed that way,” Kelly wrote in a March 20 internal memorandum detailing the findings of the audit, according to the Free Beacon.

Schaitberger has ties to presumptive Democratic presidential nominee Joe Biden, whom the IAFF endorsed in April 2019, making it the first national union to endorse Biden. The IAFF donated $5,000 to Biden’s campaign in 2019 and spent nearly $75,000 in outside spending to support his candidacy, according to the Free Beacon, which cited US Department of Labor (DOL) records.

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Kelly’s audit uncovered that on top of Schaitberger’s $388,000 annual salary from the union, he was also collecting monthly pension payments of more than $5,000 since becoming president nearly 20 years ago, despite not being retired.

Kelly contracted auditing agency BDO USA to examine IAFF records as part of his investigation and requested evaluations from three law firms as to whether the union pension system is compliant with IRS requirements. The law firms said the pension payouts violated IRS regulations that require employees to leave their employer’s service before collecting pensions, according to documents included in the memorandum.

Although IRS regulations allow pension systems to include bylaws authorizing “in-service pensions” to current employees, the law firms said that no such clauses existed in the union pension plan until January 2016. One of the law firms also added that the pension payouts may violate the Employee Retirement Income Security Act (ERISA).

“This memorandum concludes that there were payments made from the plan that should not have been made,” wrote Kathryn Solley, a partner at Nelson Mullins Riley & Scarborough LLP, in a March report. “Therefore, at this time, the fiduciaries must suspend benefit payments to both individuals pending investigation and correction.”

Kelly also accused Schaitberger of accumulating millions of dollars of benefits through the retirement program without notifying the IRS and said it is separately auditing the union’s retirement program because of “excess deferrals” by Schaitberger and others. He also said a 2006 amendment that could have added millions in the funding obligation of the pension plan was adopted without the approval of the executive board.

In addition to the audit’s findings, the Free Beacon reported that the memorandum claims Schaitberger attempted to thwart Kelly’s internal investigation by accusing the treasurer of not having the authority to hire an outside counsel to audit the books and demanded that he turn over several documents from the probe.

“You are asserting that, as general secretary-treasurer, I do not have the ‘authority to execute contracts and agreements on behalf of the IAFF,’ nor ‘the authority to retain outside counsel,’” Kelly wrote to Schaitberger in the memorandum. “I respectfully disagree.”

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Tags: Corruption, Edward Kelly, financial malpractice, Harold Schaitberger, IAFF, International Association of Fire Fighters, Milliman 100 Pension Funding Index