WASHINGTON, D.C. | July 20, 2010
I would like to begin by thanking our distinguished panel for appearing today. We appreciate that they have taken time out of their busy schedules to share their experiences and expertise with us.
This is a critical issue. Some pension plans are experiencing funding shortfalls after the economic downturn, and plan sponsors are trying to find greater returns to meet obligations. However, I am somewhat concerned that we will be hearing testimony and recommendations today based on a government report that’s almost two years old. That’s essentially before the financial crisis occurred and without any of the recent statutory changes made by the Dodd-Frank Act – which, candidly, will have huge consequences, many not helpful, to the state of pensions. Nevertheless, we are open to examining this issue in an effort to better understand any potential problems.
The ERISA statute provides a longstanding framework to guide the activities of private pension plans and the people acting in a fiduciary capacity for those plans. Generally, a pension plan fiduciary, the person charged with running the plan and making those pivotal decisions, must act prudently in determining a pension plan’s obligations and ensure that sufficient assets exist to meet those obligations. Part of that obligation includes making good investment decisions.
Pension plans commonly spread their investments across a wide variety of vehicles, including stocks, bonds and mutual funds. Diversification appears to help pension plans avoid catastrophic losses and helps secure reasonable rates of return. Congress historically has encouraged diversification of pension assets and has mostly avoided mandating how private pensions invest their assets, leaving many of the details to those financial professionals responsible for pension plans.
As we’ll hear today, there are many different ways to invest pension assets – including some non-traditional vehicles such as hedge funds and private equity. We’ll learn about different types of alternative products, how they operate and help pension plans achieve their objectives, whether our witnesses believe that new regulations are advisable, how different states may enable or curtail pension plan investment in alternative products, and whether the new financial services law might shed some light on the operations of certain funds, like hedge funds.
When looking at the bigger picture, it is important to note that our economic system generally provides greater rewards, and potentially greater losses, to those who take greater risks. Now, the vast majority of pension investments are made by highly sophisticated financial advisors investing in good faith in legitimate private investment funds. This ultimately helps all pensioners receive their promised benefits. Have there been some bad actors? You bet. However, we should be careful at this hearing not to implicate an entire industry due to the conduct of a small number of unscrupulous individuals.
These issues are much too important and consequential to the majority of Americans to rush to action or draw incorrect conclusions that might limit the choices for pensioners or flexibility in their decision-making.
I look forward to hearing from our witnesses and exploring these matters further in the questioning period.
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