[Congressional Record Volume 141, Number 158 (Thursday, October 12, 1995)]
[Extensions of Remarks]
[Pages E1938-E1939]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




           PUTTING ETI'S OFF LIMITS TO PRIVATE PENSION FUNDS

                                 ______


                            HON. JIM SAXTON

                             of new jersey

                    in the house of representatives

                       Thursday, October 12, 1995

  Mr. SAXTON. Mr. Speaker, I would like to bring to your attention an 
excellent article by Stuart Anderson, policy director of the Alexis de 
Tocqueville Institution. His article in Investor's Business Daily on 
September 28, 1995, ``Beware Politically Correct Investing,'' explains 
why the Federal Government should not require or encourage pension 
funds to make investments based on criteria other than the risk-
adjusted rate of return of an investment. This is an important and 
particularly timely article considering the Clinton administration's 
current efforts to conscript private pensions assets into so-called 
economically targeted investments, which are better described as 
politically targeted investments.
  The Alexis de Tocqueville Institution employed data provided by 
Morningstar, Inc. that compared the annualized returns of 13 ``socially 
conscious'' mutual funds that invested in growth funds to the universe 
of growth funds. The result was that, ``Over 3-, 5- and 15-year growth 
periods, the average growth fund always outperformed the average 
socially conscious growth fund.''
  This new report supports the conclusions of a previous report by the 
Republican staff of the Joint Economic Committee [JEC]. The JEC report, 
entitled ``The Economics of ETIs: Sacrificing Returns for Political 
Goals,'' showed how the investment underperformance caused by ETIs 
would cost an average of $43,298 per private pension plan participant 
after 30 years.
  These findings highlight the need for Congress to keep overzealous 
political appointees in check. In this case, the concern is Labor 
Secretary Reich's vocal advocacy of ETI's, even given their dismal 
record. If ETI's underperform non-ETI's, as numerous private studies 
have shown, then what possible rationale is there to support their 
implementation? One possible conclusion is that ETI advocates are more 
interested in the politically driven projects financed by ETI's than in 
protecting the pension savings of millions of Americans.
  It is simply not possible to reconcile two fundamentally conflicting 
goals assigned to pension plans by Secretary Reich. Traditionally, 
pensions have had but one goal: to maximize risk-adjusted rates of 
return. Secretary Reich, however, has added a second goal to pension 
plans: to utilize pension assets to achieve some political benefit for 
persons other than the pension beneficiaries. The Labor Secretary's 
desire to push such a risky political investment strategy, however, 
flies in the face of his duty to serve as a trustworthy guardian of the 
nation's pension system, safeguarding it from, among other things, 
unnecessary risk of pension losses.
  But ETIs are not the first time that Secretary Rich has required 
Congressional oversight. 

[[Page E 1939]]
Earlier this year, Secretary Reich attempted to politicize the long-
standing non-partisan status of the Bureau of Labor Statistics as part 
of his Central Oversight Group [COG]. Despite a public and unambiguous 
promise to the Congress that no such actions were being taken and that 
no memos on the subject existed, internal DOL memos surfaced that 
showed otherwise. At best, Secretary Reich was misleading about his 
efforts to politicize the Department of Labor in furtherance of a 
liberal welfare agenda.
  In order to strengthen and protect America's pension system, the 
House of Representatives recently passed a measure that would shut down 
the Department of Labor's clearinghouse to ecounrage ETIs. Moreover, it 
would make ETIs off limits for private pension funds. We want to 
encourage pension funds to make investments that would earn the 
greatest returns for pensioners. The government should not be 
encouraging social experiments, particularly ones that, as this article 
demonstrates, have already proven to produce a lower return on 
investment. I include the full text of the article by Stuart Anderson 
and recommend my colleagues read the analysis in it.

                  Beware Politically Correct Investing

                          (By Stuart Anderson)

       President Clinton says he wants to protect current and 
     future retirees from Congress' assault on Medicare. But the 
     administration is itself undermining public- and private-
     sector retirement plans. It is encouraging pension funds to 
     undertake socially conscious investing--a proven loser for 
     the workers such funds are meant to benefit.
       In the past, the concept has been criticized even by 
     Clinton Treasury official Alicia Munnell, now a nominee to 
     the Council of Economic Advisers.
       A 1983 study by Munnell, then with the Federal Reserve Bank 
     of Boston, looked at public-employee pension funds, which are 
     exempt from ERISA requirements.
       She found that state ``pension fund managers failed to 
     exact appropriate returns on very standardized investments, 
     in the presence of obvious benchmarks, once they focused on 
     social considerations.''
       She found that annual returns were about two percentage 
     points lower for ``social'' investments, a number confirmed 
     by at least two more recent studies.
       An analysis by the Alexis de Tocqueville Institution shows 
     that private funds also lose on ``social investing.''
       Employing data provided by Morningstar Inc., we compared 
     the annualized returns of 13 ``socially conscious'' mutual 
     funds that invested in growth stocks to the returns of all 
     other growth mutuals. Over three-, five- and 15-year periods, 
     the average growth fund always outperformed the average 
     socially conscious growth fund.
       Socially conscious funds typically do not invest in defense 
     contractors, tobacco companies or industries at odds with 
     environmental groups.
       Of the 13 funds, only Dreyfus Third Century possessed a 15-
     year track record, and it performed far lower than the 
     average growth fund that did not set social criteria. A 
     $10,000 investment in Dreyfus Third Century would have 
     resulted in $48,759 after 15 years. Meanwhile, the same 
     $10,000 invested in the average ``non-social'' growth fund 
     would have produced $74,934, or $22,000 more for the 
     investor.
       Despite its obvious failings, the Clinton administration 
     has encouraged socially conscious investing.
       In June 1994, the California Public Employees' Retirement 
     System added how a company treats its employees to its list 
     of criteria for choosing which companies to invest in Labor 
     Secretary Robert Reich said: ``That is a big deal. It's 
     really the first time an institutional investor has 
     explicitly pointed to employer practices as important to its 
     analysis of company performance.''
       Public pension funds are often defined benefit plans--ones 
     that provide a fixed guaranteed rate. Any shortfall in return 
     forces state and municipal taxpayers to make up the 
     difference. Reich's support for CalPERS' policy could hurt 
     taxpayers around the nation.
       Reich is not a lone wolf on this issue. Arkansas Gov. Bill 
     Clinton supported a requirement that pension funds direct 5% 
     to 10% of assets to Economically Targeted Investments.
       And Reich hasn't stopped at cheerleading.
       Federal law--the Employee Retirement Income Security Act--
     requires a private pension fund manager to ``discharge his 
     duties with respect to a plan solely in the interest of the 
     participants and beneficiaries.'' ERISA names the Labor 
     Department to police this requirement.
       But last year, Reich issued an interpretive bulletin that 
     would allow private pension funds to pick investments 
     ``selected for their economic benefits apart from their 
     investment return to the employee benefit plan.''
       In other words, private funds could engage in what are 
     called Economically Targeted Investments--ones in public 
     housing or local infrastructure that have a social or 
     community aim. The administration also decided to set up a 
     clearinghouse to promote ETIs to private pension funds.
       Rep. James Saxton, R-N.J., vice chairman of Congress' Joint 
     Economic Committee, has taken the point against this Clinton 
     policy. He led the House to pass a bill to shut down the 
     clearinghouse and put ETIs off limits to private pension 
     funds.
       Instead of encouraging private pension funds to act more 
     like public pension funds, the federal government should 
     consider extending ERISA's reach to public pension funds.
       In the words of Nucor Corp. CEO Ken Iverson. ``The proper 
     role of institutional investors is to watch out first for 
     their investments not to get involved in social programs.''

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