TESTIMONY OF ROBIN DIAMONTE

ON BEHALF OF THE

the Committee on the Investment of

Employee Benefit Assets

BEFORE A HEARING OF THE

House Committee on Agriculture

JULY 10, 2008

**Testimony of** **Robin Diamonte**

**on behalf of**

**The Committee on the Investment of**

**Employee Benefit Assets**

**Before a Hearing of the House Committee on Agriculture**

**Washington, DC**

**July 10, 2008**

Mr. Chairman, Ranking Member Goodlatte, and other members of the
Committee, my name is Robin Diamonte and I am the Chairman of CIEBA's
Subcommittee on Defined Benefits.

Thank you for providing this opportunity to testify. The Committee on
Investment of Employee Benefit Assets \-- CIEBA \-- is the voice of the
Association for Financial Professionals on employee benefit plan asset
management and investment issues. CIEBA was formed in 1985 to provide a
nationally recognized forum and voice for ERISA-governed corporate
pension plan sponsors on fiduciary and investment issues. CIEBA members
are the chief investment officers of most of the major private sector
retirement plans in the United States. CIEBA represents 110 of the
country's largest pension funds and its members manage more than \$1.5
trillion of defined benefit and defined contribution plan assets, on
behalf of 17 million plan participants and beneficiaries nationwide.
According to Federal Reserve data, the \$966 billion managed by CIEBA
members in defined benefit plans represents half of all private defined
benefit plan assets.

The pension system has served millions of Americans for over half a
century and tens of millions of retirees rely on defined benefit and
defined contribution pension plans as a critical element of their
retirement security. We owe it to working Americans and their families
to ensure that any contemplated policy changes, no matter how well
intentioned, do not undermine their retirement.

The record prices for food and energy in the U.S. and abroad are of
great concern to all of us. We are sensitive to the urgency with which
this issue must be addressed and we applaud the need to investigate this
critical problem. Nonetheless, we are deeply concerned about the
prospect of any legislation that would bar pension plans from investing
in certain types of assets.

Congress has long recognized that direct government regulation of
pension plan investments is ill-conceived. ERISA -- the primary law that
regulates the investment of pension assets -- takes a very different
tack. Rather than requiring or prohibiting specific investments, ERISA
imposes rigorous fiduciary responsibilities on the persons that manage
pension plan assets. These rules require a plan's fiduciary to act
prudently, and to diversify plan investments so as to minimize the risk
of large losses. In addition, ERISA requires that a fiduciary act solely
in the interest of the plan's participants and beneficiaries and for the
exclusive purpose of providing benefits to the plan's participants.
Fiduciaries who violate these obligations face a range of civil and
criminal penalties.

The sole instance in which ERISA directly regulates pension investments
is with respect to investments in employer securities -- an area where
there are clearly unique considerations, including potential conflicts
of interest and the possibility of excessive concentrations of
investment risk. In fact, private pension plans today invest in a wide
range of different asset classes, including U.S. and international
equities, U.S. and international fixed income, emerging markets, real
estate, private equity, and natural resources. Plan fiduciaries use a
variety of investment techniques and tools, including derivative
instruments, to mitigate risk and enhance returns. Further, when
presented with emerging asset classes and investment strategies, the
Department of Labor -- the federal agency with oversight responsibility
for pension investments -- has consistently given its blessing as long
as the investment is prudent and for the exclusive benefit of
participants and beneficiaries.[^1]

Other countries have taken different approaches to the investment of
pension plan assets. Historically, some U.S. state government and some
European defined benefit plans had rigid investment guidelines,
prohibiting certain types of investments and requiring others. Many of
these rigid investment rules were eventually discarded because of the
negative impact such guidelines had on investment returns and thus on
employees' retirement security. Even today, European pension funds
subject to more restrictions on plan investments have been shown to be
consistently outperformed by funds subject to regimes such as ours,
which pair investment flexibility with strict fiduciary obligations. Put
simply, mechanical approaches do not work as well as the American
approach. It is critical that pension plans have the ability to invest
in accordance with modern portfolio theory and pursue the best
investment strategy available. The investment marketplace is constantly
changing and pension plans need to be able to adapt and evolve
accordingly without having to comply with lists of permitted and
impermissible investments.

Our concern is both with specific restrictions on pension plan
investments in commodities and with the precedent that action will set
for allowing the government to intrude on pension investment decisions.
Today, commodities investments are not a significant part of most
pension plan investments. Preliminary results for CIEBA's 2007 profile
survey show that plans have less than one percent of assets invested
directly in commodities and natural resources. It may be that the actual
percentage of assets invested in commodities is modestly greater through
indirect investment vehicles, such as hedge funds. However, in total,
CIEBA members reported that only 3.15 percent of their assets were
invested in the broad category of hedge funds in 2006. We firmly believe
that commodities may be part of a prudent, well-diversified investment
portfolio by providing a hedge against inflation and minimizing
volatility, but our primary concern is with the principle that the
government should not micromanage pension plan investments.

Pension plans are long-term investors, not speculators. The most
successful plans do not 'chase' returns. Rather they have disciplined
strategies for minimizing risk and enhancing returns so that plan
sponsors can fulfill the promises they make to their employees.

Political temptation to intervene in pension investments is not
unprecedented. Congress in the past has considered legislation that
would bar plans from investing in particular investments or, conversely,
would require plans to invest in particular investments. There are
numerous instances in which there has been a first instinct to require
pension plans to make investment decisions with a view to promoting
social or political goals, such as protecting the environment or
stimulating business activity in certain geographic areas.

Congress, however, has consistently rejected legislation that would
subjugate the retirement security of millions of Americans and their
families to other social or political concerns, no matter how worthy. In
fact, when confronted with whether pension plans may take into account
social goals in considering economically targeted investments, the
Department of Labor interpreted "the requirements that a fiduciary act
solely in the interest of, and for the exclusive purpose of providing
benefits to, participants and beneficiaries as prohibiting a fiduciary
from subordinating the interests of participants and beneficiaries in
their retirement income to unrelated objectives."[^2]

Moreover, the case for limiting pension investments in commodities has
simply not been made. As others, including the Commodity Futures Trading
Commission ("CFTC"), have testified, it is far from clear that
institutional investors in the commodities market are driving the
surging prices. The allegations that institutional investors engage in
harmful speculation in the commodities markets have been almost entirely
anecdotal and we are not aware of any substantial analysis that supports
the allegations. Before acting, it is imperative that Congress step
carefully and allow the CFTC to analyze the commodities markets and
gather data to facilitate an informed approach.

Various proposals to restrict investments in commodities do not define
commodity investing with any specificity. If interpreted broadly, these
restrictions could apply to direct investment in commodities, any
commodities futures transactions, commodity indexes and even
publicly-traded companies who produce or distribute energy or
agricultural commodities. Compliance with such a prohibition would
significantly disrupt pension plans' overall investments, thereby
hurting plan participants.

Finally, regardless of one's view of whether institutional investors as
a whole have been a driver of rising prices, it is apparent that pension
investments have not been a material cause of the rising cost of food
and energy. As previously mentioned, investments in commodities are a
small fraction of CIEBA member pension funds' assets. Further, most
plans will rebalance their investments periodically to assure that they
stay within their guidelines and do not inadvertently get over-exposed
to any single asset class. Plans with exposure to commodities or
commodity indexes are very likely to sell when prices rise and buy when
prices fall in an effort to maintain a constant weighting with respect
to the whole portfolio.

Regulating pension investments would make it difficult for pension plans
to adequately diversify investments to hedge against market volatility
and inflation and, consequently, would put at risk the retirement funds
of the very workers the proposal is intended to help. In effect, such a
proposal could be a case of robbing Peter to pay Paul.

Again, thank you for this opportunity to testify. Please let me know if
there is additional information that you would like to receive from us.
We are happy to help you in any way we can.

[^1]: *See*, *e.g.,* Department of Labor Information Letter to Eugene
    Ludwig, Comptroller of the Currency (Mar. 21, 1997) (permissibility
    of investing pension assets in derivatives).

[^2]: 29 C.F.R. § 2509.94-2.