WASHINGTON - The Department of Labor has waved the green flag for private pension funds to invest in economically targeted investments, but the go-ahead came with caution signals as well.
An interpretive bulletin issued by the Labor Department last week said ETIs give an economic benefit, which would include housing, job creation, and/or infrastructure development, in addition to investment return to a pension plan.
The big question fiduciaries had in the past was whether they could satisfy the 1974 Employee Retirement Income Security Act's prudence and diversification requirements if they were providing an additional benefit that was not exclusively for plan participants.
"Pension plan fiduciaries who invest funds in an ETI are acting well within their legal responsibilities so long as the ETI generates a competitive risk-adjusted rate of return, and so long as the ETI is an otherwise appropriate investment," said Labor Secretary Robert Reich at a recent Joint Economic Committee hearing on ETIs.
The bulletin clarifies the Labor Department's position on ETIs that there is no reason to exclude this investment vehicle because it offers an additional benefit, Mr. Reich said.
According to the bulletin, the ETI must produce a competitive risk-adjusted rate of return to the pension fund as well as an ancillary benefit to the economy.
Assistant Labor Secretary Olena Berg cautioned that ETIs constructed without regard to ERISA's fiduciary requirements would trigger a violation of the law.
"And of course, investment in an ETI still has to be reasonably designed as part of the plan's portfolio to further the purposes of the plan," Ms. Berg said at the hearing.
Some sources said the interpretive bulletin reiterated what Ms. Berg has been saying since she took office last summer, and it could have reached a bit further.
"It could've emphasized the importance of diversification within modern portfolio theory and how ETIs can strengthen a portfolio," one source said.
Still, others were pleased with the clarification and were hopeful institutional investors now will start looking at ETIs like other types of investments.
"It's important for funds to understand - with clarity - in looking at new investment instruments," said Richard Ferlauto, director of the Center for Policy Alternatives, Washington. "There has been a great deal of reticence on what ERISA really says, and this settles the questions."
But William A. Niskanen, chairman of the Cato Institute, Washington, called ETIs politically targeted investments and told members of the Joint Economic Committee, "keep your sticky fingers off my pension!"
Mr. Niskanen said he wanted Congress to prevent private pension plans from doing ETIs; he added ETIs are done in response to political direction or pressure and are not in the best interest of plan participants.
Ms. Berg said in an interview that the Labor Department is not changing its original stance on ETIs - the department merely has put its position on paper. She said she hoped the bulletin would have an encouraging effect on this type of investment.