Forcing Marginalized Communities to Compete

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Scholar argues that pension fund managers have pitted vulnerable retirees against marginalized communities.

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“If Black women were free, it would mean that everyone else would have to be free,” declares the Combahee River Collective, a Black feminist organization. The group reasons that if Black women were freed from all injustices, that would necessarily mean that “all the systems of oppression” had been dismantled.

The Combahee River Collective’s sentiments reflect a broader principle that marginalized communities ought not improve their socioeconomic conditions to the detriment of other vulnerable groups. And yet, in the realm of pension funds, that appears to be exactly what is happening, according to a recent article by law professor Abbye Atkinson. Without structural reforms, pension fund managers will remain “free to commodify and profit from the distress of others.”

Atkinson specifically argues that pension fund managers have pitted vulnerable retirees against historically marginalized communities—including low-income communities of color—who disproportionately take on “risky debt.”

Risky debt includes “payday loans, small-dollar installment loans, student loans to attend for-profit colleges,” and other types of high-interest loans. Researchers from the Brookings Institution note that people of color more frequently rely on risky debt—costing “up to $40,000 over” a vulnerable individual’s lifetime.

Atkinson argues that retirees have also become an economically vulnerable group as pension funds—often a source of retirement income for “workers of modest means”—have increasingly placed the “risk of realizing a fully funded retirement” on workers instead of employers.

Although employers previously were required to pay fixed benefits—or specified monthly payments—after a worker retired under traditional “defined benefit” pension plans, employers today bear a “much smaller burden and very limited risk” under modern “defined contribution” plans that only require employers to pay fixed contributions, not benefits, to workers. As a result, employees must ensure that they have enough savings for retirement, Atkinson notes.

But pension funds—which then invest the employer and employee contributions—are chronically underfunded, making higher “investment returns crucial” to fund an employee’s future retirement. As a result, pension fund managers have increasingly relied on “alternative investments, like marginalized debt, that promise higher yields crucial to fund pension obligations,” Atkinson argues. One recent study, for example, showed that “75 percent of pension funds” are invested in risky debt.

Furthermore, pension fund managers “have turned to private equity funds,” which then invest pension funds into companies for high returns. “Private equity funds,” Atkinson argues, “have sought to capitalize on the borrowing needs and habits of the most vulnerable borrowers” by investing in businesses that profit from risky debt. Private equity funds own “over 5,000 storefront payday and online lenders” that offer high interest loans.

One study showed that some private equity funds intentionally invest in for-profit schools, which depend on marginalized debt from “disproportionately poor, minority, single parents, and military personnel” for profits. Because most for-profit college students receive federal aid, private equity funds benefit from loans that are subsidized by the federal government.

Atkinson argues that, given the role of private equity funds in risky debt, the U.S. retirement system has “driven ordinary workers, through their representatives, to secure their retirement wellbeing on the backs of vulnerable borrowers.” As a result, the difficult financial conditions of marginalized communities have become a source of wealth for “retirement-insecure workers, another vulnerable community,” effectively pitting them against each other.

Because investors profit from a continuous supply of high-risk, marginalized borrowers, Atkinson claims that this retirement system creates an incentive for investors to create harmful socioeconomic conditions that require marginalized communities to engage in risky borrowing.

Atkinson contends that regulators should prohibit pension fund managers from investing in marginalized debt by broadening pension fund managers’ fiduciary duties. Currently, pension fund managers have legal duties to maximize benefits for the participants in their plan, and equity fund managers owe limited legal duties to funds that become their partners. But their duties do not require them to consider how their investments harm the public. To address this gap in their legal responsibilities, Atkinson highlights proposals by other scholars that would require pension fund managers to account for the social impact of their investments.

In addition, Atkinson argues that “private equity firms should be subject to greater oversight and regulation of their internal processes.” Currently, private equity firms are “subject to relatively minimal oversight” because they are exempt from mandatory disclosure requirements under securities laws, she explains.

The Securities Act of 1933, for example, includes a “safe harbor” that allows private equity firms to “sell shares in their funds” to unlimited investors without oversight by the U.S. Securities and Exchange Commission. Similarly, the Investment Company Act of 1940 exempts funds that primarily sell to “qualified purchasers”—“which includes most pension funds”—from a requirement to disclose “information about the fund and its investment objectives.”

Legislative change, Atkinson emphasizes, can increase regulatory oversight of private equity firms. Although the Investment Advisors Act of 1940 exempt private equity firms from disclosure requirements, the Dodd–Frank Wall Street Reform and Consumer Protection Act narrowed this exception, requiring private equity funds to abide by the Act “once they have at least $150 million in assets under management.”

Atkinson noted that the Stop Wall Street Looting Act—initially introduced in 2019 and reintroduced in October 2021—would similarly “require private equity firms to disclose increased financial information about their funds,” including in which entities the fund has invested.

But reforms are not enough, according to Atkinson. She emphasizes that, although reforms could reduce some harm inflicted by pension fund and private equity fund managers, “more regulation would nevertheless skirt the larger, structural problems” that encourage them to pit “one vulnerable group against another in the name of wealth extraction.”

The U.S. retirement system, Atkinson laments, forces vulnerable communities to rely on market forces to attain financial security, essentially asking the market to redistribute wealth. But private individuals and entities in the market are only obligated to maximize their wealth by the most efficient means available. As a result, they lack a “duty to consider the means by which that end is achieved,” Atkinson argues.

Real change is not possible, Atkinson concludes, until society addresses the structures that require members of vulnerable communities “to rely on debt for survival and for opportunity in the current welfare regime.”