WASHINGTON - Congress should ban pension plan sponsors from considering political and other non-economic factors when making an investment, a prominent professor of pension law told a congressional subcommittee this month.
That is the simple solution to the problem of economically targeted investments, said Professor John H. Langbein of Yale Law School.
Rep. Jim Saxton, R-N.J., has introduced a bill that essentially bans ETIs for pension plans regulated under the Employee Retirement Income Security Act of 1974. Mr. Saxton contends the Clinton administration has increased risk to pension plans by promoting these investments more than any previous administration.
"The initiative of this administration is to encourage more (economically targeted) investments that would take place above and beyond what's stated in the law," Mr. Saxton said. "When we see a track record of encouraging (ETIs), it has to increase risk to the plan."
But on the other side, Rep. Pete Stark, D-Calif., says banning economically targeted investments would be lethal and would bring "Nazism to Wall Street. I suggest this is overregulation, this is Washington run amok where it is not needed," Mr. Stark said.
But the current law camouflages costs, said Mr. Langbein, at a Joint Economic Committee hearing on Rep. Stark's bill.
At the hearing, Mr. Langbein testified that costs of certain projects are hard to value and therefore can't be fitted into the cost equation when evaluating an investment.
He called the department's interpretive bulletin on ETIs "a mess" because it didn't get into standards trustees could use to define collateral benefits.
"You cannot look up a price for these deals in the Wall Street Journal," Mr. Langbein said. "They lack just that comparability that is needed to demonstrate that the investment was indeed costly to the pension fund."
Also speaking at the hearing, Rep. Saxton said certain Labor Department initiatives - including releasing an interpretive bulletin last summer, creating an ETI clearinghouse and approving travel expenses to speak at conferences to promote these investments - shows the department is trying to promote a liberal agenda.
Mr. Saxton's bill, introduced earlier this month, intends to repeal the interpretive bulletin on ETIs, wipe out the department's travel budget for ETI promotion, and cut off funding for the ETI clearinghouse.
Assistant Secretary of Labor Olena Berg said the department would not advocate a risky investment for social gain. She said an ETI meets pension law requirements if the investment has a projected rate of return that mirrors other alternative investments with similar levels of risk.
"My primary mission .*.*. is to protect workers' pensions," Ms. Berg said. "I would never advocate a policy that I believed would put pension benefits at risk."
Despite the fact previous administrations held the same position on ETIs as the current one, Ms. Berg said there still seemed to be confusion over what that position is. In her testimony at the Joint Economic Committee hearing, Ms. Berg cited 23 letters where plan sponsors questioned whether specific ETIs violated ERISA.
The interpretive bulletin issued last year clarified what the Clinton administration and previous ones had been saying about ETIs. What's more, the ERISA Advisory Council, a bipartisan group of pension experts, recommended in 1993 that the department clarify its position on ETIs.
"It's up to the individual plan sponsors what the best investments are for them," Ms. Berg said. "We're just trying to make the law clear."
"I have a tough time understanding why this law needs to be made more clear" said Mr. Saxton, vice chair of the committee. "I don't have any trouble at all understanding this language."
Ian Lanoff, former administrator of the Labor Department's ERISA program from 1977 to 1981, agreed there may be extra costs in doing ETIs, but there are extra costs when evaluating other types of standard investments, such as real estate and venture capital.
Mr. Lanoff said the department essentially has stopped ETI-related abuses, and it is perfectly acceptable to take risks when considering an investment.
In the late 1970s "many investors were not investing in venture capital and real estate because they were afraid that ERISA banned investments that were any riskier than stocks and bonds," Mr. Lanoff said at the hearing. The Labor Department is faced with the same problem today where sophisticated investors are wary of investing in ETIs, he said.
"..... I am an enemy of no-risk rules," Mr. Lanoff said.
This is not the last round of debate on ETIs. Mr. Saxton's bill will move to the House Economic and Educational Opportunities Committee for a hearing next month.