Look For The Union Label -- In Finance

Labor's new plan to manage its own assets could set Wall Street back a bundle

When AFL-CIO leaders gathered in Las Vegas in early March to discuss strategies for reversing labor's decline, they couldn't agree on much of anything. But they did reach a quick consensus on an idea so obvious that it's a wonder no one proposed it sooner: vastly expanding labor's lucrative financial-services businesses. After all, labor-owned companies already sell union members everything from life insurance to credit cards. But the companies don't work together and have never even tried to reach all of the country's 16 million union households.

To make that happen, AFL-CIO President John J. Sweeney appointed a working group to look at consolidating labor's profit-making financial entities into one holding company. The goal: hire professional managers to ramp up labor's efforts in as many financial markets as possible. If it works -- a big if, given the many hurdles -- the labor movement could capture hundreds of millions of dollars a year that now go to traditional providers such as insurers, credit-card companies, and Wall Street investment managers.

That would add up to a tremendous boon for labor. Doubling, tripling, even quadrupling the AFL-CIO's $120 million annual budget would give it extensive new resources for recruitment and politics. What's more, managing hundreds of billions of union pension-fund assets -- a key part of the plan -- would magnify union efforts to influence proxy votes on CEO pay and other corporate governance issues. "Instead of all the profits going to Corporate America, why not put them back into growing the American labor movement?" asks Laborers' Union President Terence M. O'Sullivan, who is also the CEO of ULLICO Inc., a labor-owned life insurer. He put the consolidation idea on the agenda at the Vegas meeting.

The AFL-CIO's new plan is likely to shake up many industries that now provide these services to unions and their members. Almost all the gains unions seek would come right out of the pockets of other companies. Even if labor fails to create successful new ventures on its own, it almost certainly could expand its partnerships with traditional providers, an approach used successfully by nonprofits such as AARP. The seniors group reaps $300 million a year by offering services such as health insurance and travel that for-profit companies sell under the AARP brand -- splitting the fees with AARP.


Still, labor faces unique problems that other membership groups don't. For one thing, it's in the middle of an increasingly divisive leadership struggle that could muddle the attempt to unify its financial entities. O'Sullivan is part of a group led by Service Employees International Union President Andrew L. Stern that's unhappy with Sweeney's track record. In recent weeks, insiders say, Sweeney has privately told people that if the Laborers were ever to quit the AFL-CIO, as Stern has threatened to do, Sweeney would ask loyal unions to kick O'Sullivan out of his ULLICO job. Similarly, another Stern ally, United Brotherhood of Carpenters President Douglas J. McCarron, already split from the AFL-CIO four years ago. At the Las Vegas powwow, Sweeney took steps to remove the Carpenters from related AFL-CIO bodies. If he follows through, McCarron could yank the $500 million or so his union has invested in ULLICO and AFL-CIO housing investment trusts.

More broadly, labor has long faced a problem with conflicts of interest regarding its financial assets. Among the worst cases was when some Teamsters leaders helped mobsters loot their union's pension funds several decades ago. More recently, former Plumbers union honchos made a spectacularly disastrous investment in a South Florida hotel a few years ago that burned up several hundred million dollars of the union's pension and other funds. O'Sullivan stepped into ULLICO two years ago after the prior CEO, a longtime labor leader, left under pressure, accused of running the business into the ground and making millions for himself in secret ULLICO stock deals. O'Sullivan vows to avoid such problems by bringing in professionals to manage the new companies that labor would create. Still, they would remain union-owned assets under the ultimate control of labor leaders.

One easy move labor can make is to take a bigger role in the management of union pension-fund assets. Right now, various labor companies administer about $20 billion of the $400 billion-plus in multi-employer pension funds. They have hired professional staff to manage some of it -- such as the AFL-CIO's successful $3.6 billion Housing Investment Trust, which invests in real estate debt. Most of the rest is co-managed à la AARP, meaning Wall Street firms pick the stocks and bonds and give labor a sales and marketing fee.


In principle, unions should be able to capture a huge chunk of pension business. After all, union funds are run by trustees who are 50/50 union and management, and the company representatives typically defer to the labor officials. While union trustees are bound by fiduciary obligations, they can favor labor-owned investment products as long as they're competitive, says Jack M. Marco, chairman of Marco Consulting Group, a Chicago firm that advises union trustees on which investment managers to choose. A labor investment management firm could also bid for business from the $2.6 trillion public employees pension funds, many of which have union trustees as well.

Labor will probably start by partnering with Wall Street firms, says O'Sullivan. But his goal is to build up in-house investment expertise and eventually take over the stockpicking, too -- giving labor the full management fee. Marco and other experts think that's a tall order, since it would mean competing directly against major Wall Street houses. Still, plenty of firms would be likely to jump at the chance to grab market share by joining with labor. "We'd be happy to become part of the AFL-CIO family, because they could do a better job of bringing in labor assets," says Garrett Walls, who heads up North American institutional asset management at JPMorgan Chase (JPM ), which manages $11 billion in union pension funds.

O'Sullivan thinks the AFL-CIO can do likewise in everything from health insurance to home mortgages. For example, ULLICO currently covers 1.1 million union members with a variety of health insurance products supplied by companies such as Medco Health Solutions Inc. (MRK ) But there's plenty of opportunity for expansion, given the nearly 40 million people numbered among the country's 16 million union households.

A labor health insurer could grow quickly using the ULLICO partnering approach. But setting up in-house claims administration or doctor networks to go head-to-head against large insurers would be a Herculean task. "We've invested $1 billion in technology to handle the oceans of data coming from claims, which would be a significant challenge" for labor, says Cigna Corp. (CI ) Senior Vice-President Christopher DeRosa, who's in charge of union and government business. About 10% of the 9.7 million people Cigna insures are in union health plans.

If labor, like AARP, becomes a consumer powerhouse with lots of goodies to offer, it might attract more members. "We're service organizations, and we should provide these kinds of services," says International Association of Machinists Research Director Stephen R. Sleigh. That's a long way off, but if the AFL-CIO comes even close to its vision, the slogan "buy union" could one day take on a whole new meaning.

By Aaron Bernstein in Washington

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