Should Congress Micromanage 401(k) Investments?

• Published date: 30 June 2023
• Subject Matter: Employment and HR, Strategy, Investment Strategy, Retirement, Superannuation & Pensions
• Law Firm: Cohen & Buckmann
• Author: Carol I. Buckmann

In the last two weeks, two separate bills have been introduced in Congress attempting to micromanage private employer retirement plan investments. Although the major impact would be on 401(k) plans, defined benefit plans and even IRAs could also be affected.

The Two Bills. Rep. Jim Banks introduced the Protecting Americans' Retirement Savings Act (HR 4008) attempting to amend ERISA to limit plan investment in "foreign adversary" countries (Iran, North Korea, Russia and China). The Ensuring Sound Guidance Act introduced by Rep. Andy Barr is a continuation of the political war against ESG investing. These bills come on the heels of the enactment of multiple state laws that seek to either ban ESG investments for state and local government plans or, on the opposite side, enactment or consideration of laws requiring divestment of specific classes of assets, such as fossil fuels, by these public plans. If enacted, these two recently introduced bills could have different implications for fiduciaries and participants than those envisioned by their sponsors.

What Does ERISA Say About Micromanagement? When ERISA was adopted, the idea of including lists of permissible and impermissible investments was rejected, and it was decided to rely on the compliance of fiduciaries with ERISA's prudence, loyalty and diversification requirements. ERISA's provisions contemplate that different fiduciaries can make different investment choices based on their investment analyses and participant population. The drafters understood that there is a range of decisions that can all be prudent and comply with ERISA's fiduciary standards. The U.S. Supreme Court recognized this in its 2022 Hughes v. Northwestern University decision (142 S. Ct. 737), and this flexibility is important given that even investment professionals don't agree on the best way to invest. Is exchanging flexibility for micromanagement the right policy decision, and will it hamper the ability of fiduciaries to make the best investments or to respond quickly to economic developments?

More ESG Restrictions? Earlier this year, a bill to restore the Trump administration's rules, which were interpreted by many as having a chilling effect on ESG investments, was passed by Congress but was vetoed by President Biden. The supporters of the bill were unable to get enough votes to override the veto. The new bill is a resurrected attempt to overrule the Biden Administration's more neutral rules on ESG investing, which explicitly...