The drama played out in the theater of the Department of Labor between the U.S. Chamber of Commerce and organized labor about the use of pension assets to promote union objectives is much ado about nothing new.
The chamber sought DOL guidance on whether the fiduciary rules of the Employee Retirement Income Security Act of 1974 prohibit the use of plan assets to promote union organizing campaigns and union goals in collective bargaining negotiations.
In response, Robert J. Doyle, the DOL's director of regulations and interpretations, issued an advisory opinion June 27, writing, A decision to make or refrain from making an investment may not be influenced by a desire to promote a particular industry or industry member, or to generate employment within that industry or industry member, unless the investment, when judged solely on the basis of its economic value to the plan, would clearly be equal or superior to alternative investments available to the plan.
Mr. Doyle essentially reaffirmed an ERISA interpretive bulletin the Labor Department issued in 1994 allowing fiduciaries to consider collateral objectives, such as economically targeted investments, so long as they have an expected rate of return that is commensurate to rates of return of alternative investments with similar risk characteristics and fit the appropriateness for a plan in terms of diversification and investment policy.
Mr. Doyle's advisory opinion might repeat the earlier interpretation, but the chamber achieved what it wanted, challenging any use of pension assets to promote union activity. How do union organizing campaigns generate any rate of return, let alone, as the advisory opinion notes, a return commensurate to other investments of similar risk characteristics?
Randy Johnson, the chamber's vice president, labor, immigration and employee benefits, appears to agree with the long-established law. We're trying to raise a yellow flag here. If unions are going to use their pension funds in ways that are not directly related to rate of return, then they may be violating the law, Mr. Johnson was quoted as saying in a story in Pensions & Investments.
Union representatives, for their part, might think no new ground was broken in the advisory opinion, but the DOL reinforced the tough hurdles of fiduciaries in investing with collateral objectives.
The chamber, however, if it believes organized labor has violated the standard established for the use of collateral objectives, should bring specific complaints to the Labor Department.
Investing and reaching investment objectives is tough enough without trying also to meet collateral objectives as witnessed by market upheavals from the late 1990s' dot-com bubble, the corporate corruption scandals, the current credit crisis and the skyrocketing rise in oil prices.
A new report about the $162.2 billion California State Teachers' Retirement System provides some valuable instruction, although as a public fund it isn't covered by ERISA. CalSTRS reported that banning tobacco stocks in 2000 cost the fund more than $1 billion in opportunity costs, or lost gains, over seven years. It is now reconsidering reinvesting in tobacco stocks. CalSTRS is only one of many examples of troubles with collateral objectives.
Over the years, other public funds and a few ERISA funds have been devastated financially when expected returns of ETI or other socially targeted investments never materialized and became, instead, huge losses.
The Labor Department rightly continues to place the interests of beneficiaries paramount, reconfirming collateral objectives cannot subordinate appropriate expected return and risk. Fiduciaries have to be warned to avoid political interference, whether of the Washington-type or corporate- or union-type.
As corporations face competitive pressures to curtail defined benefit plans, it would be hard to find a collateral goal for a pension plan's investment that could be as worthy to society as the objective of providing appropriate, secure and adequately funded retirement income for participants.