A bedrock principle of the three-decades-old Employee Retirement Income Security Act (ERISA) is under fire: That fund for pensions and healthcare must benefit the workers and retirees that earned them and them alone. There is clarity and beauty in the statutory language that the pensioners’ estate must be managed “for their exclusive benefit” and that fiduciaries must consider “solely” the interest of beneficiaries. Our pension system is sorely in need of reform. But while shoring up the system, Congress must be sure not to breach the protective wall that surrounds pension and healthcare money.

Federal law explicitly prohibits those who invest and manage this money from doing business with these funds for their own profit, a prohibition that was a founding principle of the ERISA when it was passed in 1974. These strict prohibitions are needed to protect pension and healthcare funds from the depredations that inevitably follow when there is any confusion about the limitations on fiduciary authority, and trillions of dollars are at stake. Workers and retirees depend on these benefits, and can ill afford the losses if this money is misused.

I led the Pension and Welfare Benefits Administration (now the Employee Benefits Security Administration), during the Reagan Administration. On September 12, 1984, at a meeting of the ERISA Advisory Council as part of the National Pension Forum on the tenth anniversary of passage of the Bill, former Senator Jacob Javits, one of the principal authors and now severely disabled with Lou Gehrig’s disease, was asked by some of this former assistants, how private practitioners, to reconsider some of these same fiduciary protections prohibiting transactions between interested parties.

He concluded: “First, I believe the prohibited transaction provisions should be maintained because we are dealing with a very great evil of the day’s [sic] before ERISA and the fact that the climate for honesty and fiduciary fidelity has been greatly improved. Now we are dealing with one of the problems which the improvement has suggested. No, I believe we should continue these sections.”

Unhappily, experience has confirmed the fears of one of the “Fathers of ERISA”. Let’s consider a current situation from the perspective of how fiduciaries manage their conflict of interest to protect beneficiaries’ interests. Barclay’s Global Investors, Fidelity, Northern Trust and Dodge & Cox are Investment Managers of the Defined Contribution plan for the Employees of Pfizer; they are also four of the largest five shareholders of Pfizer owning almost 10% of the outstanding shares. An initiative to withhold votes for the reelection of four directors, who comprise the Compensation Committee, in protest over the compensation arrangements for the Chief Executive Officer has been widely publicized and supported by the professional proxy advisory services.

Plainly, the Investment Managers owe fiduciary obligations to Pfizer plan participants to vote on the resolution to reelect directors; they are obligated to consider “solely” the interests of the plan participants and not their own commercial interest with the Plan Sponsor. The results of the voting on April 27th suggest that very few institutions considered their beneficiaries’ interests to be paramount.

How did they vote?

How did they resolve their conflicts of interest?

We may have a partial answer to this question in June, as the SEC – incredibly not the Department of Labor – requires institutions subject to its review to disclose how they voted publicly.

The financial services industry is pushing for exceptions to the “plan asset” definition (which was released under my stewardship) in the pension reform bill now in conference between the House and Senate.

These companies have already succeeded in convincing the House to loosen these rules by allowing pension and healthcare plans to invest more liberally in private equity vehicles like hedge funds, which have only recently begun to be regulated by the SEC. This is a grave risk to retirement security—particularly because it is often those companies whose pension plans already have cash-flow problems who are most tempted to ignore the high risks inherent in such ventures, in hopes of banking big returns. We need to look no further than the headlines each day to see examples of mismanagement of hedge funds or some novel new investment scheme that promised record returns and instead led to higher fees and even financial ruin. Workers in already beleaguered manufacturing companies can ill-afford such losses. The Federal Employment Retirement System does not permit such investment for 3,000,000 federal employees.

The House bill would also allow those who provide services to pensions to self-deal with this money by buying or selling property or borrowing money from the plan. Financial service firms also continue to press to allow an investment manager to engage in active cross-trades between a pension fund and its other clients. And to complete the evisceration of these rules, the House bill would drastically reduce the penalties for engaging in conflicts of interest.

These exemptions would effectively permit hundreds of thousands of self-dealing transactions each year with workers’ and retirees’ hard-earned pensions. It would be impossible for the Department of Labor to effectively police them. The result is to jeopardize the retirement security of over 40 million American workers and retirees—at a time when their safety net is already full of holes.

The arguments that others have access to these types of investments misses the point. Pension funds are not ordinary investments. They hold the money working Americans count on to provide for their most basic needs in old age – a time when their ability to absorb losses caused by risky investments is at its lowest. Our policies should accordingly reflect the need to protect these benefits. Congressional pension reforms will be of little use if we require money to be put into pension plans only to have it siphoned off at the other end by investment managers and those greedy for their own profits.