DOL Clarifies ERISA Rules; Restricts Use of Benefit Plan Assets

Union officials have made little secret of their desire to use member benefit plans as leverage to achieve a higher social good. Such a goal, however, may conflict with another, overriding goal inscribed in federal law:  prudent and sound asset management. The Employee Retirement Income Security Act of 1974, or ERISA, requires fiduciaries of most private-sector benefit plans to base investment decisions solely on the welfare of their participants and beneficiaries. Advancement of broader social objectives, however desirable they might be, is not a criterion. The U.S. Chamber of Commerce, in recent years a target of union shareholder activists, recently wrote a letter to the U.S. Department of Labor asking for a clarification of the permissibility of a planned AFL-CIO shareholder campaign. In its response, dated June 27, 2008, the DOL wrote back that it was not. Employers thus won – this round anyway.      


Sections 404(a)(1)(A) and (B) of ERISA explicitly mandate that all benefit plan fiduciaries must discharge their duties solely for the benefit of participants and beneficiaries, while defraying reasonable expenses. In its letter to U.S. Chamber of Commerce Executive Vice President David Chavern, the Department of Labor reiterated that principle. “The ERISA statute and all subsequent guidance issued by the department,” wrote DOL Director of Regulations and Interpretations Robert J. Doyle, “make it clear that in deciding whether and to what extent to make, or refrain from making, a particular investment, a fiduciary may only consider factors relating to the interests of plan participants and beneficiaries in their retirement income.” 


The AFL-CIO doesn’t think this opinion tells the full story. It insists the law, properly interpreted, allows pension funds to be used for union campaigns, especially when expressed through proxy resolutions at corporate shareholder meetings. In a 2003 monograph titled, “Exercising Authority, Restoring Accountability: AFL-CIO Proxy Voting Guidelines,” the Washington, D.C.-based labor federation proposed a series of ERISA regulatory reforms to reflect recent scandals at Enron, WorldCom, Tyco and other major corporations. While acknowledging the importance of basic fiduciary duties spelled out in ERISA, the authors of the report added: “These specific requirements, however, do not represent the only duties imposed on a fiduciary. Rather, ERISA incorporates basic principles derived from the common law of trusts, and the court also applies those general fiduciary principles when deciding ERISA cases.”


Apparently, health care has been on the AFL-CIO’s mind lately. Last year the labor organization announced a campaign to divest from health plans affiliated with companies whose executives and directors contribute to political candidates opposing AFL-CIO health policy initiatives. This wasn’t the first time the federation had put forth a proposal of this sort. Back in 2005, the AFL-CIO had encouraged affiliated pension funds to threaten withdrawal of assets from companies whose leaders supported a Bush White House Social Security reform proposal. The union campaign earned a stern rebuke from the Labor Department.     

The Department of Labor sided with employers this time around as well. In Advisory Opinion 2008-05A, the DOL’s Doyle wrote: “The Department believes the use, or threat of use, of pension plan assets or plan management to achieve a particular collective bargaining objective is activity that subordinates the interests of participants and beneficiaries in their retirement income to unrelated objectives.” The AFL-CIO vows to raise this issue again. (AFL-CIO, 2003; U.S. Chamber of Commerce, 9/17/07; U.S. Department of Labor, 6/27/08; NU Online News Service, 7/8/08).