Abstract

http://ssrn.com/abstract=2380661
 


 



The Use and Abuse of Labor's Capital


David H. Webber


Boston University School of Law

December 2014

89 New York University Law Review 2106 (2014)
Boston Univ. School of Law, Public Law Research Paper No. 14-7

Abstract:     
The recent financial crisis has jeopardized the retirement savings of twenty-seven million Americans who depend on public pension funds, leading to cuts in benefits, increased employee contributions, job losses, and the rollback of legal rights like collective bargaining. This Article examines ways in which public pension funds invest against the economic interests of their own participants and beneficiaries, and the legal implications of these investments. In particular, the Article focuses on the use of public pensions to fund privatization of public employee jobs. Under the ascendant — and flawed — interpretation of the fiduciary duty of loyalty, public pension trustees owe their allegiance to the fund itself, rather than to the fund’s participants and beneficiaries, notwithstanding the fact that the duty of loyalty commands trustees to invest “solely in the interest of the participants and beneficiaries” according to ERISA and similar state pension codes. I argue that this “fund-first” view distorts the duty of loyalty and turns the role of trustee on its head, leading to investments that undermine, rather than enhance, the economic interests of public employees. I turn to ERISA, trust law, agency law, and corporate law to argue that public pension trustees should consider the impact of the funds’ investments on the jobs and job security of the funds’ participants and beneficiaries, where relevant. I also adduce evidence that these controversial investments are widespread. I propose that public pension funds be governed by a “member-first” view of fiduciary duty focused on the economic interests of public employees in their retirement funds, which go beyond maximizing return to the funds. I argue that this view is more faithful to the original purpose of the duty of loyalty than is the fund-first view. I suggest ways to implement the member-first view, discuss potential extensions beyond the jobs impact of investments, and assess the proposed reform’s practical effects.

Number of Pages in PDF File: 84

Keywords: fiduciary duty, duty of loyalty, exclusive purpose rule, public pensions, Taft-Hartley, ERISA, pensions, defined benefit

JEL Classification: E22, E62, G23, G31, H55, O16, R53


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Date posted: January 18, 2014 ; Last revised: January 1, 2015

Suggested Citation

Webber, David H., The Use and Abuse of Labor's Capital (December 2014). 89 New York University Law Review 2106 (2014); Boston Univ. School of Law, Public Law Research Paper No. 14-7. Available at SSRN: http://ssrn.com/abstract=2380661 or http://dx.doi.org/10.2139/ssrn.2380661

Contact Information

David H. Webber (Contact Author)
Boston University School of Law ( email )
765 Commonwealth Avenue
Boston, MA 02215
United States
617-358-6194 (Phone)
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