Reforming Pensions While Retaining Shareholder Voice

David H. Webber is Professor of Law at the Boston University School of Law. This post is based on his recent article, recently published in the Boston University Law Review.

In my article, Reforming Pensions While Retaining Shareholder Voice, published in the Boston University Law Review as part of the symposium on Institutional Investor Activism in the 21st Century: Responses to A Changing Landscape, I argue that the ongoing shift in the public sector from defined benefit to defined contribution pension plans is taking place in the worst possible way, at least from a shareholder rights perspective, one that silences the shareholder voice of millions of workers. I also offer alternative defined-contribution formulations that would help retain that critically important shareholder voice.

Some background: across the country, states and cities face enormous pressure to reform traditional defined-benefit pension plans and replace them with defined-contribution plans. Defined-benefit pension plans promise workers fixed payments in retirement. Defined-contribution plans, like the familiar 401(k), do not guarantee any benefit, instead offering workers a chance to save and invest on their own. The push to shift from defined-benefit to defined-contribution funds is motivated by concern over underfunded pensions, shifting the risk of underfunding from the employer to individual workers. The extent and scope of such underfunding is highly controversial.

There are excellent reasons to defend existing defined-benefit pensions, and many worker organizations and labor unions are appropriately dedicating to so doing. There is also evidence that defined benefit pension plans offer economies of scale and other benefits that make them less expensive than defined contribution plans. Regardless, some public employers have shifted, or are actively shifting, from defined benefit to defined contribution plans. Even more than legal reforms like changing shareholder voting thresholds or the prospect of mandatory arbitration provisions, these policy reforms pose an existential threat to the ability of workers to wield the collective shareholder voice they wield now via defined benefit pension plans. That is because, as a practical matter, the DB-to-DC shift means the smashing and scattering of collective and separately managed worker plans into millions of individually-managed 401(k)s farmed out to existing mutual funds. Individual 401(k) holders have comparatively little shareholder voice. In contrast, public DB plans have traditionally been some of the most active stewards of investment capital, filing shareholder proposals, litigating cases of fraud and corporate malfeasance.

Without endorsing the DB-to-DC shift, I offer some suggestions of how DC plans could be structured to retain worker-shareholder voice, and how states and cities that have already given away that shareholder voice could claw it back while retaining the DC structure.

The complete article is available for download here.

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