TCS Daily

Union Blues: How Big Labor Flouts the Law to Harm Its Members

By Bryan O'Keefe - May 12, 2005 12:00 AM

The AFL-CIO got a rude awakening last week when the Department of Labor delivered a stern warning: labor pension funds are not to be used for political purposes. The directive was a blow to organized labor, which attempted to use its pension funds as a political weapon against Wall Street in the Social Security debate.

The Labor Department certainly deserves credit for raising the issue and it must continue to keep a careful eye on labor leadership. Some labor leaders have already given indications that they may ignore the warning. If big labor chooses that route, Congress and the Labor Department should pursue legislative and legal options to ensure that a pension fund's first responsibility is to beneficiaries, not union political allies.

Organized labor was trying to help its Democratic allies when they fired off several letters to Wall Street firms, threatening to pull their considerable pension fund management business from any firm that supported the president's plan for personal retirement accounts. With nearly $2 trillion dollars at stake in public-employee and multi-employer pension funds, Wall Street did not take the threat lightly. Edwards Jones and Waddell & Reed both left business coalitions that support Social Security reform. Other firms like Charles Schwab dropped their support for personal retirement accounts, too.

The Labor Department directly rebuked the AFL-CIO for these threats, saying that pension fund management must not be determined by how much a firm's politics agree with those of organized labor. The Department specifically wrote that, "it would be unlawful for a plan fiduciary to review the plan's service providers based...upon their views on Social Security or any other broad area of public policy."

The Department's letter also has ramifications beyond Social Security and goes to the very heart of labor's larger strategy to politicize their pension funds. The traditional definition of fiduciary duty was found in the 1974 Employee Retirement Income Security Act, which directed that pension funds were supposed to make calculated investment decisions designed to minimize risks and maximize returns.

But according to George Washington University Professor Jarol Manheim in his latest monograph "Power Failure, Power Surge," the AFL-CIO decided on its own to widen the scope of fiduciary duty. The labor federation published Proxy Voting Guidelines in 1991, which encouraged its pension funds to consider not only how investment decisions would affect financial interests, but also areas like communities, the environment, and the economy. This also allowed organized labor to join forces with other "progressive" organizations, which were already championing so-called socially responsible investing.

While this sort of shareholder activism might be fine if the goal were to actually improve a company's financial performance, that's not always been the case with big labor which has used pension funds for political battles. The problem is that some of these political battles could actually hurt the beneficiaries whose money is being invested.

Take Social Security as an example. Should union bosses really be deciding who manages their pension funds based on a firm's position on Social Security? Shouldn't actual financial performance count for something? If the AFL-CIO followed through on their threat, pension fund management would be determined not by which firm has the best performance but also by who shares labor's political beliefs. The real losers would be the union's pension fund beneficiaries, who could be stuck with lousy pension fund management just because of their leadership's politics.

While the clarification about what constitutes fiduciary duty from the Labor Department last week was a good first step, it still might not be enough to reign in union bosses. Bill Patterson, the AFL-CIO official who orchestrated the campaign against Wall Street, was quoted by the New York Times as being undeterred by the department's admonishment, saying "we're going to keep on doing what we've been doing."

This sort of defiance flies right in the face of the Labor Department's letter. Big labor should consider itself warned. If they ignore the Labor Department and follow Mr. Patterson's advice, Congress should not be afraid to enact additional legislation that protects beneficiaries. In the same way, the Labor and Justice Departments should use every legal remedy at their disposal to ensure that beneficiaries' pensions are not sacrificed in any way for political gain.

Beneficiaries deserve pension fund trustees who will put their financial interests first and Democratic politics second. It's not just the law -- it's the right thing to do.

Bryan O'Keefe is a research assistant at the American Enterprise Institute. He studied with Jarol Manheim at George Washington University.


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