Updated: Dec 21, 2022
What the New Regulation Issued by the Biden Administration Means
Recently I read an article that discussed how investment fiduciaries – including 401 (k) planners will be given the opportunity to include options for consideration of investing into environmental, social and governance issues such as climate change along with social justice enterprises. This focus on investments in green energy will have some implications yet to be determined relative to the growth potential in employees’/investors’ retirement accounts.,
As fiduciaries, planners for 401 (k) and private pension funds have always had a long-standing requirement to prioritize investment options that were in the best interests of the retirees. While this fiduciary obligation is not changing with this new regulation, these managers will now have the choice of including factors such as climate change and other ESG considerations when performing analysis and advising in the decisions of allocation of investments. Effectively, some believe this is another way of pushing a political agenda.
As of June of 2021, the total investments of all American 401 (k) accounts were hovering around $7.3 trillion. This new regulation will instigate a flow of cash towards companies behind the energy crisis theory. As an average employee is mainly focused on securing his/her future retirement savings, the discussions need to be carefully presented to ensure understanding of the proposed investment contributions and whether they will be going to causes with which they do not agree.
We need to look at history. Any fiduciary who is applying best practices uses historical performance when guiding clients in their investment choices. Historically, ESG funds do not perform as well as most other options. Sanjai Bhagat wrote in the Harvard Business Review earlier in the year, “To begin with, ESG funds certainly perform poorly in financial terms” 1.
How can you protect yourself?
First, you need to communicate with your employer or fiduciary pension fund manager your wishes about where to invest your funds. This new Biden rule is not a requirement; it simply allows fund managers the option of offering these types of ESG investments.
Second, this rule DOES permit employers to incorporate an ESG fund as a default option for enrolled employees contributing for 401 (k) accounts. What this means:
Employees who normally do not step up and elect specific 401 (k) investments could have their money AUTOMATICALLY invested in an ESG fund.
If you are like my brother and most employees in this country, you would never notice the change. As my brother even told me as recent as a year ago: ‘I stopped looking since the market has been crazy; I don’t even know what I have in my account.’ This is normal behavior when it comes to investing for the average person. The lack of education is astonishing, and it’s my job and that of my colleagues to provide this education. Be sure to participate by submitting your own 401 (k) elections, and if you don’t know how – reach out!
Education SHOULD be a component in becoming a fiduciary.
Third, if you find that your employer or pension fund manager is limiting your options so that ESG is front and center and difficult to avoid, seek outside assistance to find other opportunities that give you more control over where you invest. An IRA is one option that could be putting you in a better position. There are literally options available that you probably have never heard about that would create growth and prevent any loss—not to mention reduce taxes. Why haven’t you heard about some of these? Unfortunately, it’s partly because we keep doing the same things; it’s all we’ve ever known. You may be familiar with the saying, and I’m paraphrasing: how can you keep doing the same things and expect different results? It’s time to take control.
Reach out for a FREE consultation to assess where you are in your retirement planning. We provide free financial literacy through our partnership with SOFA, and we are educating people one community at a time.
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