In the midst of rightly placed concerns over proposed new Department of Labor (DOL) fiduciary rules for brokers, the DOL has also issued a new interpretive bulletin designed to politicize investment choices. How so? As Andy Kessler writes in the Wall Street Journal, a previous 2008 Interpretive Bulletin issued by the DOL encouraged pension fund managers to weigh social and environmental factors when selecting investment choices for their clients. Since fund managers have a fiduciary responsibility to maximize returns for their clients, the primary consideration must be the economic return on investment. But “all things equal,” secondary social factors such as climate change can act as a “tie breaker” between two investments.
That has all changed, writes Kessler. The new interpretive bulletin puts environmental, social and governance issues on par with economic returns, stating:
“Environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
This means that a pension fund manager could be potentially sued for selecting the “big bad” oil stock over the “environmentally friendly” green energy stock.
Several years ago, a colleague and I compared socially responsible mutual funds to oil and tobacco index funds. The results were astonishing. From 2004 to 2009, Amex Oil and Amex Tobacco outperformed the S&P 500 with positive returns on investment, while three out of four of the Socially Responsible Investing (SRI) funds we measured produced negative returns that were even worse than the S&P 500. This is not to say that “sin” funds always outperform socially responsible funds, but pension fund managers would be failing their fudiciary duty by judging an investment on politically correct, socially conscious factors that may have nothing to do with economic performance. The Department of Labor should be obligated to investment and product neutrality, lest they ruin the retirement plans of many.
In today’s low-interest rate climate, there are not many good investments for long-term savers to hang their hats on outside of stocks and stock funds. Fundamentally strong, low-debt firms with potential for growth are what will lead savers to a comfortable retirement – touchy feely, politically correct, do-goodism will not.