Fund managers shouldn't try to save the world at pensioners' expense

Fund managers shouldn't try to save the world at pensioners' expense
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A few years ago, CEOs came up with a saying to distract people from how much money they make: “Companies that do well need to do good!”

In addition to some precise English-language usage, the sentiment is very sound: If you make a lot of money, you should help others. This charitable attend is nothing new, it’s sort of a modern-day noblesse oblige, and it’s a principle that investors can tap into by sending their money to companies they feel are socially responsible.

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An article in Forbes earlier this year declared that such a strategy could even “earn better returns” for investors. They can do well and do good.

 

But this idea ignores an important group of people: retail investors (like pension fund members or 401(k) holders) who depend on those investments, but don’t have a particularly thorough understanding of the market or perhaps even the capital to indulge in social responsibility.

Shouldn’t they have a say in how their own money is invested?

Yes, they should, according to a new survey from the Spectrem Group, which polled public pension fund members on what they expect from their accounts and their fund managers.

Improving corporate governance and reducing environmental impacts may be worthy causes, but Spectrem found that members almost universally want fund managers to focus on what they pay them for: maximizing returns instead of chasing ego-stroking headlines.

“Members believe pension fund managers should be spending most of their time on performance related objectives and only a small amount of time using fund resources to advance political causes,” the Spectrem Group concluded.

Only 11 percent of those surveyed wanted their pension to prioritize “worthy political and/or social causes,” even if those generate lower returns. By contrast, nearly 80 percent of pension fund members nationwide believe fund managers primary goal should be returns.

Among those close to retirement — age 51 and older — the number increased to 91 percent, even if the pension member supported the particular cause.

People on a fixed income, who are struggling to do well, don’t have the luxury that a CEO does who wants to do good. It’s like Unilever CEO Paul Polman who “put superficial feel good policies ahead of sound business decisions” to the outrage of his shareholders and employees.

Spectrem surveyed various pension funds nationwide, but focused on the California Public Employees’ Retirement System (CalPERS) and the New York City Employees’ Retirement System (NYCERS).

Hailing from two very blue states, these funds have been the most active in so-called “socially responsible” investments, and neither fund is anywhere close to being fully funded: CalPERS is at 68.1 percent, and NYCERS is at 62 percent.

Fund managers’ emphasis on “saving the world” has come at the expense of their fiduciary duties. 

Unsurprisingly, 89 percent of CalPERS and NYCERS members expressed at least some concern about how much time fund managers spent on political and social causes. Over 40 percent said they were “very concerned” because every dollar spent on a cause was one less dollar spent providing for a retiree.

Not surprisingly, the only exception Spectrem found was among younger people (age 30-and-under), who were the most likely to support investments in politically favorable causes.

Younger people decades away from retirement again have the luxury of donating to causes they believe in. But even still, those who wanted to advance social causes expect returns to be in line with the broader market.

These findings underscore a bigger problem.

Investment fund managers can do whatever they want with little accountability. Individual retirement account holders want to retire with peace of mind, yet the managers who are tasked with that indulge in playing politics with other people’s money. They do good at the expense of other people doing well. 

The solution is not to abandon socially responsible investing. People should have the freedom to choose how to invest their money. But pensioners, 401(k) holders and other retail investors are largely removed from these decisions.

They should have the freedom to challenge fund managers who side with activist investors on social causes. Institutional investors are voting on shareholder proposals that directly impact workers’ future retirement. Shouldn’t those future retirees have a say in how their own money is being managed?

At the very least, there needs to be more accountability for fund managers. (Ironically, corporate accountability is frequently held as a metric of social responsibility!) Educating retail investors will help level the playing field by making sure managers focus on fund performance.

If those managers want to prioritize activist investing instead of chasing the best returns, the people who depend on those returns can provide the oversight they deserve. 

Fund managers are tasked with managing retirement accounts on behalf of working families, but as the Spectrem Group survey shows, they often seem to be serving their own sanctimoniousness more than anything else.

Until the retail investors are brought more into the fold, institutional investors will continue to play politics — even at the expense of future retirees’ well-being. This has to change. Those who want to do good need to do good for the people struggling to do well.

Jared Whitley is a senior communications consultant for Capital Policy Analytics, a consultancy that provides economic analysis to businesses both in the U.S. and abroad on how government policies affect markets and the broader economy. He worked as a press assistant for Sen. Orrin Hatch (R-Utah) in 2006-2008, as an associate director for rapid response in the George W. Bush White House in 2008-2009 and as a government and media coordinator in the defense industry.