Arguments about activist investing are currently generating a lot of headlines. These debates and policies include some calling for a commitment to invest in securities and funds that meet certain environmental, social, and governance (ESG) ideals or standards while others call for laws and investments that expressly shun these screens and have anti-ESG sentiments.
These trends are becoming more prevalent, both in the choices individuals make with their own investments and the policies implemented by institutional investors and public pension systems.
Since ESG debates and activist investing look to be a significant subject of contention for the foreseeable future, it is essential to draw clear lines of when it is and is not appropriate to implement investment strategies that overstep the usual purpose of meeting specific financial objectives, especially in the case of retirement savings.
It is entirely appropriate for individuals to make whatever investment decisions they like with their assets. Giving individuals a choice in where to place their assets is healthy and consistent with long-standing American investment tradition. Look to the long history of specialized or sector funds for examples. Of paramount importance with these investments is that their objectives and methods are made clear to potential investors through the prospectus and other communications materials. Individuals having the ability to invest with their conscience in a way consistent with their beliefs and objectives is laudable and is consistent with a free society.
Recently, however, activist investing has been pushing in a more dangerous direction. There are serious concerns when activism is involved with pooled retirement investments, like public pension systems. Public pension plans should not engage in political activism. Unfortunately, lawmakers and officials on all extremes of the political landscape are increasingly attempting to dictate how investment funds maintained for various governmental functions must be invested. The trends, both promoting ESG and anti-ESG, are being directed at state and local government-run pension funds for public employees.
Pension fund investment managers have a fiduciary responsibility to manage their funds exclusively to best meet the financial needs of plan participants. In the case of retirement plans, those needs are for long-term income stability and sustainability within closely managed risk guardrails. It is also clear that activist investment mandates are inconsistent with these fiduciary responsibilities and retirement plan objectives.
To be clear, this is happening on both the left and right across the country’s political spectrum. For example, those that want to exclude oil company investments in public pension funds as well as those that want to mandate the inclusion of oil company investments in public funds. Neither of these positions is directed at improving public employee retirement incomes.
The demand for investments that match certain political or policy beliefs and the increasing pressure on state and local government-run pension systems to ignore their fiduciary responsibilities in favor of politically-motivated investing present more reasons for governments to examine alternative retirement plan designs immediately. It has become more widely understood that the traditional public sector defined benefit (DB) pension plan no longer meets the needs of many of today’s public employees and other impacted groups. Employees are increasingly mobile in their careers, and traditional defined benefit pension plans cannot effectively meet workers’ portability needs.
Traditional DB plans also fail to meet many employers’ needs, impacting their ability to recruit and retain qualified employees. Additionally, in many cases, traditional DB plans’ funding status continues to deteriorate, putting increasing pressure on taxpayers and on state and local government budgets.
From public pension debt to failing to serve today’s workers to misguided politically-motivated investment pressures, it is clear that the public retirement space is due for some recalibration.
Retirement plan designs that are built on a defined contribution (DC) foundation and have objectives focused on lifetime income and risk management can be the leading-edge answer to many of today’s public pension dilemmas. Sophisticated design structures incorporating defined benefit-like features into a defined contribution construct, uncomplicated from an employee perspective, are available and in use today.
With these plans, sponsors can make available many employee-selected investment options that do not force the employee into heavy-handed, politically-motivated investments or ones they oppose morally. With the help of an independent financial advisor, if desired, individual employees can build a portfolio that best meets their personal goals and objectives.
It should seem obvious that retirement plans must focus on meeting the objectives of several interested parties, most notably the public employee participants. Attempting to impose politically-motivated investment controls of any kind on public pension plans violates core fiduciary standards and is a gross over-reach by governments. Instead, lawmakers and workers should seek to modernize public retirement plan designs in ways that give individuals the flexibility to vote with their feet, have plan portability when they change jobs, and invest as they see fit.
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