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Early Ramifications of the Trump Administration on Retirement Plans
In addition to the macroeconomic effects of President Trump's tariffs, the pending tax cuts, and the deregulatory policies of the U.S., there are some specific policy areas that will impact retirement plan investors.
By: Tony Roda, Williams & JensenPresident Trump's trade policy, which has manifested itself through on-again, off-again import tariffs, has created significant volatility in U.S. financial and foreign markets. The tariffs are indeed a moving target, and businesses like certainty. That comfort is being denied them at the moment.
As for now, President Trump and the Republican-controlled Congress are proceeding with a strategy that tariffs will produce economic benefit to the U.S., either through direct country-to-country negotiations that will result in a perceived advantage for the U.S., or through the restoration of the U.S. manufacturing base, or some combination thereof.
Potentially mitigating the general economic fallout in the U.S. are the Trump Administration's twin domestic policy priorities of steep tax cuts and deregulation. The Administration's hope is that this will tamp down volatility and temper the uncertainty in the markets.
For those individuals with defined contribution (DC) retirement plans and the trustees of defined benefit (DB) pension plans this would be welcome news. Valuations of account-based DC plans, such as the public sector's 457(b) and 403(b) plans, as well as DB plan trust assets took a tremendous hit following the tariffs imposed by the U.S. in April.
In addition to the macroeconomic effects of the tariffs, the pending tax cuts, and the deregulatory policies of the U.S., there are some specific areas that will impact retirement plan investors.
National Security
President Trump is focused on reducing the flow of U.S. investment dollars into companies of foreign adversaries, including investments made by institutional investors, such as retirement and pension plans. The America First Trade Policy requires a complete review of the Biden Administration's final regulation on such investments. Most observers believe that the Trump Administration's review will result in a series of new recommendations to further limit outbound investments.
In addition, President Trump's America First Investment Policy directs the U.S. Department of Labor (DOL) to publish updated fiduciary standards under the Employee Retirement Income Security Act (ERISA) related to investments in public market securities of foreign adversary companies. In particular, DOL is directed to ensure that foreign adversary companies are ineligible for ERISA-governed pension plan investments. The America First Investment Policy defines the term “foreign adversaries” to include the People's Republic of China, including the Hong Kong and Macau Special Administrative Regions.
State and local governmental retirement plans are not governed by ERISA. They are governed by the U.S. tax code. However, state and local governmental plans often consider ERISA's fiduciary standards when formulating their internal rules and investment policies.
ESG and DEI
Environmental, Social, and Governance (ESG) investing long has been a target of some Republican lawmakers at the federal and state levels. They argue this type of investing constitutes a breach of fiduciary responsibility because it is motivated by goals that are not specifically related to investment return. Proponents argue that the sustainability of an enterprise is a risk-and-return factor that fiduciaries are required to investigate. The battle is playing out in state legislatures, the halls of Congress, regulatory bodies, and in the courts.
In a parallel attack the Trump Administration has taken broad aim at any programs, hiring or training practices in the public or private sector that promote Diversity, Equity, and Inclusion (DEI), including any investment practices that are designed to promote DEI goals.
On January 28, twenty-two State financial officers wrote to the acting chairmen of the U.S. Securities & Exchange Commission and Department of Labor expressing concern over the misuse of retirement plan assets to advance ESG and DEI goals. In their letter they offered a blueprint of regulatory actions that the Trump Administration should take, specifically including the:
- Issuance of comprehensive guidance and a formal rulemaking that ERISA plan fiduciaries must discharge their duties solely in the financial interests of the plan participants, explicitly stating that investment decisions or proxy voting cannot be motivated, in part or in whole, by the goal of advancing ESG or DEI.
- Increase of oversight and enforcement of these fiduciary principles on ERISA plan fiduciaries, including heightened scrutiny of proxy voting activities.
Outside of the investment-driven initiatives discussed above, thus far the Trump Administration has shown little interest in the technical aspects or overarching policies of retirement and pension law. That could come later, however.
Tony Roda is a partner at the Washington, D.C. law and lobbying firm Williams & Jensen, where he specializes in legislative, regulatory, and fiduciary matters affecting state and local pension plans. He represents the National Conference on Public Employee Retirement Systems and state-wide, county, and municipal pension plans in California, Colorado, Georgia, Kentucky, Nebraska, Ohio, Tennessee, and Texas. Tony has an undergraduate degree in government and politics from the University of Maryland, J.D. from the Catholic University of America, and LL.M (tax law) from the Georgetown University Law Center.
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