Proxy voting

[Scuba 401]

Does anyone know the rules regarding proxy voting when employer stock is an investment election in a 401(k)? I know this is the ESOP board but thought maybe someone would know. Is the investment manager or fiduciary required to vote the proxies on behalf of the participants or does he have to distribute them to the participants so they can vote them?

[RLL]

It depends on whether the 401(k) plan documents provide for the "pass-through" of voting rights on employer stock to the participants. If not, the shares would be voted as determined by a named fiduciary, such as the trustee or investment manager.

If the employer stock is in an "ESOP portion" of the 401(k) plan, "pass-through" of voting rights would be required as provided in IRC Sec. 409(e).....on all issues if the employer is publicly-traded and on certain "major issues" if the employer is closely-held.

If the 401(k) plan does not include an "ESOP," the law does not require a "pass-through" of voting rights to participants unless the plan document (adopted by the employer) so provides. The summary plan description for the plan, as well as any prospectus provided to participants in connection with the offering of employer stock, should specify whether there is supposed to be a "pass-through" of voting rights.

[Guest Larry Goldberg]

The right to vote the stock is considered a part of the general power to decide how to invest the plan assets. So, in a self-directed investment 401(k) plan, since the participant has investment control over his account he or she would have the right to vote the company stock in the account, not the trustee or the investment manager. However, ERISA would permit the plan to provide by its terms that the right to vote stock in the account is reserved to another named fiduciary. Check the plan document to determine if such a reservation has been made. For a relevant discussion of proxy voting for non-company stock in a plan, see DOL Interpretive Bulletin 94-2.

Even if the participants do have the voting power, remember that they are not voting directly as shareholders, but rather they are directing the trustee of the plan as to how their shares should be voted.

Finally, note that many 401(k) company stock funds have been converted into statutory ESOPs to take advantage of the dividend deduction under Section 404(k) of the Code. For these plans, Section 409(e)(2) requires the vote to be passed through to participants.

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[Scuba 401]

Larry,

Are you saying that because the plan is a participant directed 401(k), the participants must be given the opportunity to vote the proxies. Our Plan document (the PPD prototype) says that the trustee is "authorized and empowered to ....have the rights of an individual owner (vote proxies) in accordance with the written direction of the "Named Fiduciary" (except to the extent the plan asset is subject to the control and management of a properly appointed Investment Manager or subject participant direction of investment.

Does this mean that the Participants should vote or we, as investment manager, should vote for them?