Pension plan assets must be invested and used solely for plan participants' retirements, not to advance political, corporate or other goals, according to two new bulletins from the Department of Labor.
The Labor Department's guidance on economically targeted investments clarifies that “fiduciary consideration of non-economic factors should be rare and, when considered, should be documented in a manner that demonstrates compliance” with the fiduciary standards of the Employee Retirement Income Security Act.
Guidance on shareholder rights issues clarifies that plan fiduciaries “must be prepared to articulate a clear basis for concluding that the proxy vote, the investment policy, or the activity intended to monitor or influence the management of the corporation is more likely than not to enhance the economic value of the plan's investment before expending plan assets.”
Officials at the U.S. Chamber of Commerce, Washington, have been seeking clarification on the subjects. They claimed that DOL policy adopted in 1994 during the Clinton administration — and applied up until now — encouraged unions and others to consider non-economic factors when investing pension funds.
“This is an effort to bring the pendulum back to make it absolutely clear that investment decisions should be made on economic factors alone,” said Randy Johnson, the chamber's vice president, labor, immigration and employee benefits.
But others said the new guidance, although clarifying the procedures that fiduciaries should use to make decisions about economically targeted investments and shareholder rights issues, has not changed the basic fiduciary obligations announced during the Clinton administration.
“This doesn't reflect a significant departure,” said Andrew Oringer, an ERISA attorney at the New York law firm of White & Case LLP.
“What we're trying to do is give fiduciaries more guidance on the process they should follow in making prudent decisions in these areas,” Bradford P. Campbell, assistant secretary of the DOL's Employee Benefits Security Administration, said in an interview. “We've laid out a process here that helps fiduciaries feel more confident that they've abided by their duty.”
The bare-bones Clinton administration DOL bulletin on economically targeted investments, issued on June 23, 1994, essentially said that plan fiduciaries could consider non-economic factors in an investment if the expected rates of returns and risks of the investment were equivalent to another potential investment.
Unlike the Clinton administration document, the new guidance on ETIs warns there are few legitimate opportunities in the area.
“Before selecting an economically targeted investment, fiduciaries must have first concluded that the alternative options are truly equal, taking into account a quantitative and qualitative analysis of the economic impact on the plan,” the new document said.
On shareholder activism, the guidance issued July 29, 1994, gave a green light to a plan's monitoring and influencing the management of corporations in which it had an investment, when there was “a reasonable expectation that such monitoring or communication with management ... is likely to enhance the value of the plan's investment in the corporation, after taking into account the costs involved.”
The new document on shareholder activism says that a plan's influence can be legitimately exercised only if there is a reasonable expectation that the influence “will enhance” — not just is likely to enhance — the economic value of the plan's investment in the corporation, after taking into account the costs involved.