Voting Instructions for company stock held in 401k plan

[Guest Tara Aguilar]

Our 401k plan includes a company stock fund. In voting the shares, the plan document specifies that the trustee will vote the share in accordance with participant instructions. The plan document is silent on what is to be done for shares of stock where no voting instructions have been provided. Is there a problem with instructing the trustee to vote these remaining shares proportionally in accordance with the instructions received? Should the shares be unvoted?

[LCARUSI]

I don't think you can "instruct" the Trustee. The Trustee is obligated to take all actions, including voting of stock, in the best interests of plan participants.

That having been said, it seems like a resonable thing to do - for the Trustee to decide to vote the rmaining shares in the same proportion.

[M R Bernardin]

Whichever fiduciary has control over the asset involved has the duty to vote the shares. The trustee may have a residual duty to take action if the appropriate fiduciary does not, and/or a more narrow duty to oppose the voting instructions received if contrary to ERISA. If the employer directed the trustee to make the employer stock fund available, then typically the employer has the duty to direct the voting of the shares, unless that right is passed through to participants. You should consider amending the document to address what to do when no directions are received from the participant with respect to allocated shares but, in the absence of any provision currently, I would think the employer makes the decision and directs the trustee accordingly. It would seem reasonable for the employer to direct the trustee not to not vote those shares, under the argument that a participant's failure to vote is an affirmative direction not to vote. Different considerations come into play with respect to unallocated shares, which typically cannot be voted on a mirror basis.

[401 Chaos]

I have a situation similar to that in the original post and was wondering if anyone had more thoughts or recent guidance on this.

401(k) plan permits investments in employer securities and provides for pass through voting in hopes of coming within 404©. There does not, however, appear to be any express direction on what to do with shares that are not voted.

In some plans it appears such shares simply go unvoted, in other plans they are voted proportionally with those shares that are voted and in other plans the shares are voted in the trustee's (or plan administrator's discretion.

1. Are all possible variations permissible provided notice is given to participants?

2. If approach must be specified in plan document or prospectus, is it too late to amend docs to provide for specific approach even if the plan may have handled differently in the past?

3. Does it matter how general shares outside the 401(k) plan are handled?

Thanks

[401 Chaos]

Just wanted to bump this up to see if anybody had any thoughts. Even if there is no clear answer to what is required, I would welcome thoughts on what most people see their or their client's plans do with respect to nonvoted shares of employer stock. Many thanks.

[401 Chaos]

I've had others suggest that the most conservative approach from an ERISA standpoint would likely be to have the Trustee vote the nonvoted shares as it deems in the participant's best interests. I suppose that might include voting in proportion to the shares actually voted so long as the Trustee did not have some strong reason to think that against the participants' best interests. In any event, some seem bothered by the Trustee not actually voting the shares. I can see arguments for all approaches.

I'm desperate for more opinions. Anybody care to offer more or different thoughts. Thanks.

[QDROphile]

The Department of Labor favors voting in the discretion of a fiduciary over a a mechanical method. Remember that the fiduciary always has the duty to override the vote and plan terms in unusual appropriate circumstances.

[401 Chaos]

QDROphile, Many thanks for your response.

[MoJo]

The DOL certainly does favor discretionary voting by a fiduciary - but in most cases, Trustees are unwilling to do so - preferring to hide behine the veil of being a "non-discretionary, directed trustee" who won't do anything absent explicit direction from the plan sponsor (as a fiduciary). Of course, you now have the problem of "management as fiduciary" directing the trustee, most likely to vote consistent with "management as management" - a potential conflict of interest, that may not be consistent with the precepts of ERISA.

In the past, several of the trustees' I've worked for have given participants "two votes." The first being "vote your own shares" and the second being "vote a proportional amount of shares otherwise not voted" which (presumably) means there never will be any shares unvoted for which the trustee has to excercise some discretion (God forbid!). Of course, the DOL would say, even in the case of a non-discretionary directed trustee, the trustee is still a fiduciary, and would have to determine 1) if the passing through of votes to participants is consisdent with fiduciary obligations under ERISA; and 2) if the inconsistent voting of shares (some in favor, some against any particular issue) is ALSO consistent with ERISA.

In cases of extreme importance (sale or merger of the company, etc.), I think it would be prudent to hire an independent, discretionary fiduciary (there are people who will do this - i.e. U.S. Trust - a sub of Bank of America) to make the call.

[401 Chaos]

MoJo,

Thanks for your response. This is very helpful and perhaps helps explain the range of different approaches that appear to arise rather than having everyone simply provide for voting in the fiduciary's discretion.

I understand the Trustee's overriding obligation to vote in the best interests of the participants and the potential conflicts raised by voting some shares for and some against. In situations involving routine and relatively non-controversial votes, I guess I'm still torn as to whether voting the non-voting shares as voted shares is really the best way to do it. Although it results in there being no non-voted shares, it seems to be sort of the worst of all worlds: (1) the trustee hasn't really exercised their own judgment or discretion and (2) the non-voters in the plan would be treated differently from other non-voting shareholders. I can see the appeal from the trustee's viewpoint and maybe it doesn't really matter as long as everybody is told up front of that approach but I guess I wonder if letting Management / Plan Administrator direct the Trustee on voting might not be better in those cases.

Thanks