Faculty Forum: How Are Your Retirement Funds Spent?
By Sanford M. Jacoby
A 2006 study by the AFL-CIO, Retirement Security: How Do Investment Managers Stack Up? analyzes political contributions by large investment managers to groups lobbying for privatization of Social Security and for replacement of defined benefit pension plans with individual accounts. The AFL-CIO in recent years has become a respected voice for protecting employee pension funds and for good corporate governance. Its Office of Investments is member of the Council of Institutional Investors, to which major public and private pension funds belong.
Social Security and defined-benefit pension plans pool savings from individuals and guarantee in advance the receipt of specified dollar amount upon retirement. Defined-benefit plans are offered by many colleges and universities. The plans are often supplemented by additional tax-deferred retirement accounts such as 401(k) and 403(b) plans. Assets of defined-benefit plans are usually managed by private companies that must meet fiduciary standards.
Defined-contribution assets are managed solely by the employee or pensioner (although private companies provide the investment vehicles). In these plans, the individual bears the entire risk that the account may perform poorly—there is no guarantee that specified amount will be available upon retirement. If individual accounts complement defined-benefit plan, the risk is mitigated to some extent; if they are substitutes for such plan, there are potentially serious dangers to retirement security.
Most investment managers that promote individual plans do so because they expect that individualization will permit them to garner greater revenue: first, by receiving fees for administering privatized Social Security accounts; second, by charging higher fees on other individual accounts.
Political contributions by investment managers are not publicly disclosed. As the AFL-CIO report observes, “Money has flowed into the anti-retirement security campaigns through web of front groups that camouflage industry support.” TIAA-CREF, which administers retirement plans throughout higher education, is one of the better plan administrators. On the other hand, one of the more egregious investment managers mentioned in the report is Fidelity Investments. Fidelity has contributed to the American Legislative Exchange Council and to the Cato Institute, both of which promote an individualized approach to retirement savings. Fidelity also belongs to several industry groups that promote individualization.
Fidelity generates substantial fees from college and university retirement plans, part of which is being used to support groups opposed to Social Security and defined-benefit plans. Fidelity is not alone in this regard; similar investment managers include American Financial Group, Charles Schwab, and Wachovia.
Faculty should become aware of these issues. The objective is singular and nonpartisan: investment managers should not use profits from our retirement funds to support groups or politicians intent on weakening defined-benefit plans and Social Security. It is not unusual for pension fund members to pressure their investment managers to invest assets in manner consistent with principles. CalPERS, the giant pension fund for California state employees, has done this for years on behalf of environmental and social objectives.
A first step for concerned faculty is to find out who manages or co-manages their funds. Next, faculty should gather information—from the AFL-CIO or other groups—to see if their investment manager donates funds to groups seeking the individualization of pension plans and Social Security. If it does, campus administrators should be made aware of the problem and the investment manager should be put on notice that faculty do not want their savings to fund these activities. These actions might persuade the investment manager to behave in nonpartisan manner. If they do not, the next step would be to remove the investment manager and replace it with nonpartisan manager offering plans with competitive fees and rates of return (adjusted for risk). This need not be cumbersome process. Our retirement savings should not be used to undermine our future security.
Sanford M. Jacoby is professor of management, public policy, and history at the University of California, Los Angeles.
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