Pension Protection Act Blog

On Friday, Ohio announced that its five public employee pension systems will adopt policies aimed at dropping investments in companies which do business in Iran and the Sudan. Recently, Illinois had adopted the same policy by state statute. That state statute was subsequently overturned by the U.S. District Court for the Northern District of Illinois. Illinois has enacted another statute with the same goal of divesting their five public employee pension systems from investments in the Sudan. Other states are adopting the same types of restrictions on their pension fund investments.

Two bills pending before Congress - S. 831, the Sudan Divestment Authorization Act and H.R. 1357 on Divestiture in Current Investment in Iran - are designed to authorize state and local governments to restrict investments in Iran and the Sudan.

For non-public employers who want to restrict investments in such a manner, can they do so? Besides restricting investments in Iran or the Sudan, there are a number of other public policy reasons which may motivate a plan sponsor to request a restriction on investments in their plan document. A plan sponsor may feel that the investment policy in their plan document should be consistent with their corporate mission statement. For example, a plan sponsor whose corporate mission statement is that they are environmentally friendly may want to restrict the ability to invest plan assets in non-environmentally friendly companies.

Plan documents contain a section on the investment alternatives of the trustee. These sections normally contain affirmative statements on what the plan assets can be invested in, such as stocks, bonds, money market instruments, mutual funds, property, and similar investments. There is not a requirement that the plan document only contain affirmative statements of what the plan can investment in. The Internal Revenue Code does not prohibit plan documents from containing a statement that the plan assets will not be invested in certain investments.

As a practical matter, incorporating these types of investment restrictions into plan documents has not become common because of the fear of unintended consequences. Failing to follow the language in the plan document is considered an operational failure by the IRS. The IRS defined operational failure in Revenue Procedure 2006-27 as:

“The term ‘Operational Failure’ means a Qualification Failure (other than an Employee Eligibility Failure) that arises solely from the failure to follow plan provisions.”

If the plan document states that the plan assets will not be invested in companies which do business in Iran, the Sudan or Darfur, the plan sponsor and trustee have the responsibility to ensure that the language in the plan document is followed. As a practical matter, it may be very difficult to ensure that plan participants are restricting their investment choices to investments which meet this restriction. Additionally, as litigation over plans increase, restricting investments may create another area where plan participants decide to litigation if they feel the restrictions are not in their best interest.

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