House Republicans Announce Formal Investigation of CalPERS’ ESG Investment Loss as Possible Violation of Tax Code’s “Exclusive Benefit” Rule
Three members of the House Education and the Workforce Committee contend that the California Public Employees’ Retirement System (CalPERS), a valued member of NCTR, may be failing to safeguard workers’ pension trust funds in order to “fund radical left-wing causes,” according to a committee press release. They have sent a letter to CalPERS demanding, on behalf of the Committee, detailed records related to the pension system’s investment in the CalPERS Clean Energy and Technology Fund (CETF), questioning whether this investment has violated the Internal Revenue Code (IRC) “exclusive benefit” rule, and in doing so, brought into question the plan’s tax-qualified status. This action can be seen as potentially laying the groundwork to build on House passage in January of the Committee’s legislation amending the Employee Retirement Income Security Act (ERISA) to limit fiduciary consideration of “nonpecuniary factors” such as environmental, social or governance (ESG) factors, requiring instead that fiduciaries focus solely on maximizing returns. Extending this ERISA provision to the tax code, thereby making it directly applicable to public plans, could be their ultimate goal.
CalPERS has invested more than $468 million in the CETF since 2007, according to the letter from House Committee on Education and the Workforce Chair Tim Walberg (R-MI); House Health, Employment, Labor and Pensions Subcommittee Chair Rick Allen (R-GA); and Kevin Kiley (R-CA), chairman of the Subcommittee on Early Childhood, Elementary, and Secondary Education. As of March 31, 2025, that investment had dropped to less than $138.1 million — a decline of roughly 71 percent, the three Congressmen assert, and press reports put the dollar loss at over $330 million. PLANSPONSOR attempts to put this loss in perspective, however, noting in their coverage of the letter that, as of February 12, the total market value of all of CalPERS’ assets was $610.49 billion, according to data on its website.
The letter seeks information about CalPERS’ due diligence process before investing in the CETF; the terms of the investment; monitoring practices; consultant and advisory expenses; and any costs associated with promoting or managing the fund. “We received and are reviewing the U.S. House Committee letter regarding the nearly two-decade-old investment,” a CalPERS spokesperson said in a statement. “As their investigation is ongoing, we have nothing further to add on the matter.”
The letter also claims that CalPERS’ loss in CETF is “just the most recent example of CalPERS prioritizing ESG considerations ahead of its responsibilities to safeguard the pension fund.” For example, the letter notes that on July 29, 2024, the Education and the Workforce Committee “began its investigation into CalPERS upon learning that the pension had joined the Biden-Harris administration as an asset owner in committing to the use of ‘public and pension fund capital’ to ‘promote strong labor commitments among funds, asset managers, and companies.’” According to the letter, information CalPERS provided in response “demonstrates that CalPERS has not acted ‘for the exclusive benefit’ of its employees but has instead advanced a political and social agenda.”
Expanding on this, the new letter points to CalPERS’ Responsible Contractor Policy (RCP), which the Committee characterizes as requiring “certain core managers and contractors to agree not to oppose union organizing.” The Committee asserts that the “purpose of this policy is to promote union organizing, rather than to provide benefits to participants in the pension or retirement system.”
The Committee also claims that CalPERS’ investment policy “is tailored around a ‘Sustainable Investments Program’ and a ‘$100 billion Climate Action Plan,’” and that “[i]ncurring expenses to purpose a social agenda is not a reasonable expense,” pointing to amounts paid to employ investment managers to integrate social investing into the investment portfolio. “This includes consultants, attorneys, and investment managers employed for the purpose of facilitating CalPERS social investment goals,” the letter emphasizes.
The letter concludes by stressing that CalPERS claims and receives “significant tax benefits” under IRC section 401(a) — which applies only to plans maintained “for the exclusive benefit of [an employer’s] employees or their beneficiaries” – but that CalPERS’ actions do not appear to be “consistent with this rule.” Therefore, “[t]o the extent that CalPERS is using plan assets for the benefit of social or political causes, the plan’s qualified tax status is no longer valid.” (Emphasis added.)
The letter also points out that ERISA contains a provision very similar to the “exclusive benefit” rule in the IRC, specifically providing that fiduciaries of plans subject to ERISA must discharge their duties “solely in the interest of the participants and beneficiaries and … for the exclusive purpose of providing benefits to participants and their beneficiaries.” While the letter observes that “[p]resently, ERISA does not apply to governmental plans such as CalPERS,” the implications of the word “presently” should not be overlooked. (However, it must also be acknowledged that no major bill since the early 1980’s has seriously attempted to federally regulate public plans on an ERISA basis.)
This focus on the “exclusive benefit” rule contained in both ERISA and the IRC is important to NCTR members for several reasons.
First, the House of Representatives voted January 15, 2026, to pass H.R. 2988 to amend ERISA to replace the regulations adopted by the Department of Labor (DOL) during the Presidency of Joe Biden with new statutory language on ERISA plan fiduciaries’ use of ESG factors when making investment decisions for retirement plans – mandating by law that plan fiduciaries prioritize financial returns using “pecuniary-only” standards.
The House Education and Workforce Committee reported this legislation, which was sponsored by Congressman Rick Allen (R-GA), one of the signatories of the new CalPERS letter. Also, codifying the new DOL rule – converting the substance of an existing regulation and writing it into the statute authorizing the rule – should be seen as “locking in” and strengthening a regulatory requirement. [For more information on this, see the “NCTR FYI” for January 21, 2026, entitled “Legislation Codifying Restrictions on ESG Passes House.”]
This now leaves the IRC “exclusive benefit” rule to be, potentially, similarly modified, which Congressman Allen attempted to do in the 118th Congress (2023-2024), when he introduced H.R. 4237, which would have amended the tax code to impose a pecuniary‑only standard through IRC Section 401(a). While he has not reintroduced the bill in the current Congress, and it would be referred to the House Ways and Means Committee if he did – to which he does not belong and where he attracted no cosponsors of his 118th Congress bill – the actions of the Education and the Workforce Committee and its focus on the ERISA exclusive benefit rule and the letter to CalPERS raising the comparable tax code rule, could nevertheless be viewed as an effort to revive efforts to have the House tax-writing committee advance a “companion” to the ERISA bill.
What would such a measure entail? In short, it would amend IRC Section 401(a) to say that a plan is not tax‑qualified unless investment decisions are made solely on pecuniary factors; fiduciaries do not subordinate returns to non‑pecuniary goals; proxy voting follows the same pecuniary‑only rule; and plan assets are used exclusively for providing benefits and defraying reasonable expenses. The IRS — through its Employee Plans auditors and Chief Counsel — would decide whether a plan violated this pecuniary‑only rule, thereby failing to satisfy Section 401(a), and become subject to disqualification.
So, what’s all the fuss? Why is a public pension plan’s tax-qualified status under the IRC so important?
First, tax‑qualification ensures that employee contributions are not taxed when contributed; employer contributions are not taxable to the employee; and investment earnings inside the trust grow tax‑deferred, with benefits taxed only when distributed. In short, losing tax qualification would immediately expose pension plan members to current‑year taxation on contributions and accruals, and the pension trust fund would become a taxable entity, meaning trust fund annual investment income could be taxed.
That is why maintaining a plan’s tax-qualified status is essential and requires continuous compliance with the core structural requirements of IRC Section 401(a) – particularly the exclusive‑benefit rule, required minimum distributions (RMDs), benefit limits, and the written‑plan and anti‑alienation rules.
But has a public pension plan ever been disqualified? The answer is there is no recorded instance of the IRS ever fully disqualifying a state or local governmental pension plan under IRC Section 401(a). In short, the IRS treats governmental plans as “too big to fail” from a tax‑qualification standpoint. Instead, the IRS uses correction programs instead of disqualification by permitting governmental plans to routinely correct operational or document failures through the Employee Plans Compliance Resolution System (EPCRS); the Voluntary Correction Program (VCP); and closing agreements during audits. Even serious failures such as RMD errors and benefit‑limit violations are resolved through correction, not disqualification.
So, then, isn’t tax disqualification really a “paper tiger?” Perhaps, when it comes to its actual exercise. But consider this scenario:
- Treasury Department leadership publicly announces that it will be “enhancing oversight” of governmental plans’ compliance with IRC Section 401(a) — especially the exclusive‑benefit rule, given Congressional concerns that some public plans are “using plan assets for the benefit of social or political causes” and their qualified tax status “is no longer valid.”
- IRS Employee Plans (EP) opens a targeted audit initiative — a compliance campaign focusing on governmental plans.
- IRS selects a large public plan for audit, requesting extensive documentation and questioning whether certain investment decisions align with the exclusive‑benefit rule – perhaps using the new ERISA standard that the House has passed?
- IRS asserts multiple technical failures – perhaps RMD operational failures; Section 415 benefit‑limit failures; and plan‑document failures – along with exclusive‑benefit rule concerns tied to investment practices. The IRS could claim that the failures are systemic and require broad correction, plan amendments, administrative changes, training, and new internal controls.
- IRS threatens a “notice of intent to disqualify,” stating that the plan’s failures could jeopardize qualification if not corrected, and aggressively publicizes it. Hasn’t this happened before — a procedural step, not an actual disqualification, designed to force the plan into a closing agreement?
- The IRS and the plan negotiate a closing agreement requiring correction of all technical failures, payment of a “compliance fee,” adoption of new administrative procedures, and periodic plan reporting to the IRS for a limited time. If IRS auditors find a violation of the exclusive benefit rule — whether or not the possible amendments to Section 401(a) dealing with a pecuniary standard for ESG investments, discussed above, have been adopted – then perhaps they could also impose a tax on any trust fund earnings associated with just those investments. In effect, make it a targeted, select disqualification, with assurances that only the trust fund and not plan participants will be impacted?
A sobering scenario, whether likely or not. But then again, stranger things have happened over the last year. Department of Labor modifications of ERISA standards and even a potential codification of those regulation as has passed the House have potential worrisome implications for public plans – as ERISA is seen as effectively the national “benchmark” for fiduciary conduct, with state courts, state legislators, and public trustees viewing ERISA as the “gold standard” for duties of loyalty and prudence, among others.
But making the consideration of “nonpecuniary factors” in investment decision-making a violation of the tax code’s exclusive benefit rule and a ground for tax disqualification – to be identified by IRS auditors no less – could present a very serious threat to public pension plans.