The Trump administration welcomes private equity for retirement plans but builds new barriers against sustainable investing.
The labor secretary, Eugene Scalia, fought to weaken an Obama-era fiduciary rule when he was a corporate lawyer.Credit…Pool photo by Caroline Brehman
Aug. 21, 2020
Private equity funds are safe for your retirement portfolio. Mutual funds that invest in sustainable energy are not.
That’s not my view at all.
To the contrary, I consider private equity funds, with their high fees and opaque performance, to be largely inappropriate for the vast majority of people, including me, when it comes to nailing down a secure retirement. And I accept the validity of numerous studies that have found that mutual funds that emphasize sustainability can be just as safe — and generate returns just as strong — as those that hold the overall stock market.
But two recent moves by the Labor Department imply that private equity funds ought to be more welcome in 401(k) accounts all over America, while so-called E.S.G. mutual funds — those that focus on environmental, sustainability and governance factors — should be treated more cautiously than they are now.
These Labor Department regulations are curious in their own right. They allow private equity investments in workplace retirement plans and restrict E.S.G. investing in the same plans.
Taken together — along with federal rulings that weaken certain investor protections and make waging proxy fights harder — it is clear that millions of working people have endured setbacks in their retirement plans recently, even if they don’t yet realize it.
The Labor Department is headed these days by Eugene Scalia, a son of Supreme Court Justice Antonin Scalia, who died in 2016. Like his father was, the younger Mr. Scalia is a skilled lawyer with a broadly conservative, pro-business and anti-regulatory agenda.
Mr. Scalia has moved seamlessly in and out of government for decades. Despite opposition from organized labor and Senate Democrats, President George W. Bush designated him the Labor Department’s solicitor general in 2002. The next year, he returned to private practice with the law firm Gibson Dunn & Crutcher, and by 2012, The Wall Street Journal called him one of Wall Street’s “go-to guys for challenging financial regulations.” The same year, Bloomberg described him this way: “Suing the Government? Call Scalia!”
President Trump nominated him as Labor Secretary in 2019 to succeed Alexander Acosta, who had resigned his cabinet post amid a furor over his handling of a secret plea agreement a decade earlier with Jeffrey Epstein, the financier and convicted sex criminal.
While in private practice, Mr. Scalia had represented a host of asset management businesses and trade associations in a successful legal effort to overturn the Labor Department’s fiduciary rule, a landmark investor protection established by the Obama administration that strictly banned conflicts of interest in the advice given to people investing for retirement. He argued in court that the rule amounted to what he called “regulatory overreach.” The Trump administration decided not to appeal the court decision.
Despite Mr. Scalia’s high government position, the Labor Department’s decisions under his leadership suggest that his allegiances are unchanged.
By opening the door to private equity funds in retirement accounts, for example, the Labor Department has made it a bit easier for these vague and costly investment vehicles to be sold to millions of trusting people salting away money for retirement.
Is this a good idea? Warren Buffett doesn’t think so. He warned his own Berkshire Hathaway shareholders in May 2019: “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest. If I were running a pension fund, I would be very careful about what was being offered to me.”
Many private equity funds have had high returns, but they also have a history of ladling debt onto businesses they acquire and cutting costs — and jobs. Rank-and-file investors, whose money may be locked up for years, are charged exorbitant fees, while the biggest shareholders make enormous profits. Is this really what you want in your retirement plan?
At the same time, the Labor Department is erecting new barriers to the use of E.S.G. factors in investing — development of sustainable and clean energy, for example, or workplaces that prize diversity and equitable pay scales — despite considerable evidence that emphasizing these issues can lead to better financial outcomes. A 2018 Morningstar report found that such investments have frequently outperformed the overall market over long periods. Focusing on sustainable energy can mitigate risk by, for example, reducing investment exposure to fossil fuel companies with coal, oil and gas assets that may not retain value in a warming world.
Let’s say, though, that you aren’t worried primarily about the investment returns in your retirement account. You just can’t bear to hold shares of companies that contribute to global warming or that manufacture handguns or that pay their employees poorly. You may even be willing to sacrifice a small amount of investment performance so that you can sleep better at night, knowing that your hard-earned money is doing some good. The Labor Department under Mr. Scalia is making it more difficult for you to be able to make that choice.
“The department’s proposed rule reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end,” Mr. Scalia wrote in an opinion article in The Wall Street Journal.
These disputes, fought over the fine print of regulations, can lead to major changes in policy. Along with the need to fully fund, preserve and expand Social Security, the most important retirement program for Americans, these issues are crucial for ordinary investors.
The battles aren’t over. They will be fought in the agencies, the courts and in Congress through the rest of the Trump administration and beyond. And, despite pressing needs on other fronts, these issues are worth keeping high on your agenda.