Would economically targeted investments trigger a pension crisis?

0 Comments | Insight on the News, Sept 16, 1996 | by James Saxton, | Michael Calabrese

The economic effects of even a 5 percent ETI quota would be disastrous for retirees. Using the most conservative loss of 1.18 percent for ETIs, the 20-year aggregate loss would be $328 billion; a loss of 2.1 percent would result in a 20-year aggregate loss of $541 billion. What does that mean to the average pension beneficiary? At the minimum, the average retiree would lose $21,541 in his or her pension fund, and that figure could reach as high as $35,564. Of course, corporations with defined-benefit plans would be required to contribute more money to the pension to make up for these losses, but some companies would not have the funds to do so.

In light of the empirical research on ETIs and given their dubious legal standing, the next targets of the great pension-fund grab become easy to predict. The administration will seek ways for the federal government to offer subsidies, guarantees and other imaginative techniques to inoculate trustees from culpability when ETIs get into trouble.

An illustration of how the administration will attempt to cope with the obviously poor investment returns associated with ETIs can be gleaned from an information packet distributed to congressional offices by the Clinton Labor Department. The packet contains an article by Richard Ferlauto, a scholar at the Center for Policy Alternatives in Washington, which has worked hand-in-glove with Clinton administration officials to develop the ETI strategy. This revealing article lays out the true agenda behind ETIs, because while the administration proclaims publicly that ETIs are comparable to other investments, Ferlauto admits that ETI programs must be enhanced through the development of "risk-reduction mechanisms" such as state-funded loan guarantees and targeted subsidies.

In other words, after luring and/or coercing trustees of private-pension funds into the ETI game, the administration will extend the protective arm of government to shield them from the consequences of their actions. Sound familiar? It should. It would be savings-and-loan crisis all over again.

If private-pension plans invest even as little as 5 percent of their $3.5 trillion of pension funds in ETIs, they could lose billions of dollars and create huge gaps between pension liabilities and pension reserves. Senior citizens will be the most affected by failures in ETIs, which is why the United Seniors Association - and a number of other senior-citizen groups - have been actively fighting Clinton's ETI strategy.

Targeting the investments of pension funds is a radical and dangerous deviation from the law requiring a trustee to give complete loyalty to the true owners, the beneficiaries of the trust. ETIs violate this clear mandate of ERISA, which is unambiguous. A pension-fund manager is required to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and for the exclusive purpose of (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan." Exactly what parts of "solely" and "exclusive" doesn't the Clinton Labor Department understand?