Some public and union pension fund officials are using not-so-subtle intimidation tactics to prevent Wall Street firms and money managers from participating in the debate over two issues – Social Security private accounts and public sector 401(k) plans.
Officials of two state pension systems have asked money managers about their firms' stance on the Bush Administration's Social Security proposal. They want money managers to disclose contributions or other support they've given to organizations that may favor replacing defined benefit plans or Social Security reform.
The AFL-CIO has prepared its own list of managers considered inimical to defined benefit plans and traditional Social Security.
The implied threat is that firms whose executives speak out in favor of Social Security private accounts or public employee 401(k) plans will receive no business from the public employee or union funds.
This is inappropriate use by the trustees and others of the clout of the pension funds.
The board of the Vermont State Teachers' Retirement System, Montpelier, in a search for international large-cap equities, asked finalists about their positions on the Bush administration's Social Security proposal – an issue that has absolutely no relevance to the managers' international investment expertise.
All but one of the managers had "absolutely" no connection to any parties interested in the proposal and were not promoting it, while one "had a mixed past" on the issue but assured the board it was not promoting the plan.
The board approved a resolution that it would "carefully consider the activities and involvement of investment firms in efforts to promote privatization during the selection and retention process of such firms" when searching for managers. The resolution said Social Security privatization is not in the interest of plan participants.
Jeb Spaulding, Vermont state treasurer, said he was confident a firm's stance on the subject would not be a defining factor in hiring or not hiring a manager. Then why ask the question?
It's intimidation, pure and simple. In effect, the sponsors are asking for a loyalty oath from managers. And by what divine inspiration did the trustees determine that Social Security private accounts are not in the interests of the plan participants?
The New York City Employees' Retirement System also asked managers about their support of Social Security proposals.
The rhetoric surrounding Social Security private accounts and public sector 401(k) plans verges on the ridiculous.
For example, Frederick H. Nesbitt, executive director/legislative counsel of the National Conference of Public Employees Retirement Systems, Washington, was quoted as saying, "As a trustee, if you're doing business with a company, and in another state they're trying to destroy public plans, (you) should be aware of that information."
Who is trying to destroy public plans? If anyone, it's state government officials who provide costly retirement benefits to public employees and then underfund the plans, and also trustees who abuse the power the assets of the funds provide to them.
Managers certainly aren't trying to destroy public DB plans. Most probably prefer to manage defined benefit plans because they don't have to establish the mutual funds and all the infrastructure DC plans require.
Vermont and New York City plan trustees and AFL-CIO officials are attempting to muzzle the free expression of money managers with these implied threats. State and local government and AFL-CIO officials would react with outrage if large corporate plans asked prospective money managers about their failure to publicly support 401(k) plans, implying that they would not hire managers who were not vocal in their support of such plans.
Firing or hiring manages because their position on DC plans and Social Security is a violation of fiduciary duty. Yet, policy has trumped performance in other political circumstances. One state fund last year dropped a longtime, outperforming manager for failing to meet a minority-owned brokerage trading goal.
So DB trustees need to look at their operations, their use of conflicted consultants and money managers that recommend and implement investment strategy, and to the elected officials who fail to provide adequate funding.
Trustees have enough to worry about in managing volatile capital markets, both from the investment and liability sides, without intimidating money managers over political issues.