By Edward Zelinsky
A group of California state senators, including senate president pro Tem Darrell Steinberg, has called for California’s public employee pension plans to protest Russia’s homophobic laws and policies by ceasing to make Russian investments. While the senators are right to denounce Russia’s assault on human rights, they are wrong to call for the divestment of the Golden State’s public pension funds. The divestment of pension funds is not a proper means of advancing this or any other political protest, as meritorious as such protest may be.
Pension fiduciaries should invest pension resources solely to generate prudent, diverse, and productive returns to finance employees’ retirement benefits. Pension funds should not be used to promote other agendas, as worthy as those alternative agendas may be.
Public pension plans are a tempting target for advocates of various political and social goals. These advocates often act in good faith and frequently promote compelling objectives. However, the use of public pension funds to pursue alternative agendas is inappropriate, even to advance the most commendable of goals. Pension funds should be used to finance employees’ retirement benefits — period.
Similar efforts to divert public pension funds occurred in the wake of the Newtown massacre. To protest gun violence, pension funds in New York City, Chicago, and California sold their stocks in gun manufacturers. In that situation also, a compelling public policy goal — the reduction of gun violence — was pursued by inappropriate means, namely, the divestiture of public pension funds.
For two reasons, such divestiture is wrong. First, it is futile. When a pension plan sells its investments, someone else buys them. If the California public pension plans sell their Russian investments or decline to make such investments, someone else will purchase these investments. This game of musical chairs shuffles ownership but has no net economic impact.
Second, the use of pension funds for Cause A opens the door to the use of such funds for Cause B. If California pensions sell their Russian investments as they sold their gun stocks, there is no reason to stop there. The world is full of good causes. There are also causes with which I disagree but which are sincerely advocated by their supporters. There is no principled limit to pension fund divestiture once it starts.
For this reason, the law has evolved the fiduciary principle variously known as the duty of loyalty or as the exclusive benefit rule. Under this time-honored tenet, pension trustees can only invest pension funds to advance the financial welfare of retirees.
The precarious financial state of California’s pension plans demonstrates the wisdom of this fiduciary rule. The Golden State’s public pensions are seriously underfunded. This underfunding is ignored in Sacramento by assuming unrealistic rates of return. California’s pensions shouldn’t be used to pursue social agendas, even worthy ones. California’s pension trustees should invest pension resources to maximize prudent financial returns, not to pursue other agendas.
Senator Steinberg and his colleagues implicitly admit the validity of this critique, acknowledging that California’s pension trustees should only avoid Russian investments if such avoidance is “consistent with their fiduciary responsibilities.” However, it is never consistent with a pension trustee’s fiduciary responsibilities to make investment decisions on political or social policy grounds — as compelling as those grounds may be. Pension trustees should invest the funds committed to their care solely to provide retirement benefits.
Individuals, of course, should spend their own money as they like and should invest their own funds (including their IRAs and self-directed 401k accounts) as they see fit. If someone offered me a free trip to the Russian Olympics (no one has), I would say “no thanks” for the reasons Senator Steinberg and his colleagues articulate: to protest the use of “government as an instrument of discrimination [and] persecution.”
But that would be my individual decision relative to my own resources. A pension trustee’s fiduciary duty is not to pursue his own sense of right or wrong with plan resources, but to maximize the financial return to the plan and its participants.
I stand with Senator Steinberg and his colleagues in protesting Russia’s assault on human rights. But I respectfully disagree that public pension funds are proper instruments for advancing this or any similar protest.
Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.
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