Retirement Plans Newsletter

BULLETIN
August 31, 2020

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Benefits in General

[Official Guidance]

Text of DOL Proposed Rule: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (PDF)

96 pages. "The Department has tried to convey in its sub-regulatory guidance that fiduciaries need not vote all proxies. A fiduciary's duty is only to vote those proxies that are prudently determined to have an economic impact on the plan after the costs of research and voting are taken into account. Nevertheless, a misunderstanding that fiduciaries must research and vote all proxies continues to persist, causing some plans to expend their assets unnecessarily on matters not economically relevant to the plan.... [T]his problem has been exacerbated by the fact that since 1988 the amount and types of shareholder proposals have increased substantially. Therefore, the Department has decided to propose rule amendments that expressly state that fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement activities that do not have an economic impact on the plan, whether by themselves or after the costs of engagement are taken into account....

"The proposed provisions confirm that when making their voting decisions, fiduciaries must perform reasonable investigations ... [F]iduciaries must be prepared to articulate the anticipated economic benefit of proxy-vote decisions in the event they decide to vote....

"[T]he Department recognizes that fiduciaries may reasonably delegate their proxy voting authority to investment managers. In such cases, ERISA requires fiduciaries to monitor proxy voting decisions made by their investment managers to ensure such entities are voting, or refraining from voting, in a manner that maximizes investment returns and does not sacrifice economic benefits for non-pecuniary objectives ... [C]onsistent with the duty to monitor, fiduciaries should require documentation of the rationale for proxy-voting decisions so that fiduciaries can periodically monitor proxy-voting decisions made by third parties. A plan fiduciary must also assess and monitor an investment manager's use of any proxy advisory firm ...

"[T]he Department has proposed potential options for fiduciaries that are intended to reduce the need for fiduciaries to consider proxy votes that are unlikely to have an economic impact on the plan ... These various options (labeled 'permitted practices' in the proposed rule) will thus help fiduciaries more cost-effectively comply with the obligations under paragraphs (e)(3)(i) and (ii).... [T]he Department proposes to assist plan fiduciaries by providing in paragraph (e)(3)(iii) that it is permissible to adopt general proxy voting policies or parameters for exercising voting rights that are prudently designed to serve the plan's economic interest. Paragraphs (e)(3)(iii)(A), (B), and (C) provide examples of such policies....

"In addition to the solicitation of public comments on the particular proposed permitted practices, the Department requests comment on whether the proposed permitted practices should contain additional examples regarding when advance proxy voting directions may be exercised pursuant to specific parameters designed to serve the plan's economic interest and, if so, what situations those examples should cover." Icon to read more

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

[Guidance Overview]

Text of DOL Fact Sheet: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights

"The proposal makes the following major additions to the Investment duties regulation in regard to proxy voting and the exercise of shareholder rights: ...

  1. New regulatory text to codify the Department's longstanding position that ERISA requires plan fiduciaries when deciding whether to exercise shareholder rights and when exercising such rights, including the voting of proxies, to carry out their duties prudently and solely in the interests of the plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan....
  2. A list of obligations that fiduciaries must comply with when making decisions on exercising shareholder rights, including proxy voting, in order to meet their prudence and loyalty duties under ERISA section 404(a)(1)(A) and (B) ...
  3. A new provision on proxy voting that explains that fiduciaries must vote proxies only when the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan and are prohibited from voting proxies unless the fiduciary prudently determines that the matter being voted upon would have an economic impact....
  4. A provision that outlines certain 'Permitted Practices' under which plan fiduciaries may adopt proxy voting policies and parameters reasonably designed to serve the plan's economic interest....
  5. A new provision under which plan fiduciaries must require that investment managers and proxy voting or advisory firms sufficiently document the rationale for proxy voting decisions or recommendations to demonstrate to the plan fiduciary that the decision or recommendation was based on the expected economic benefit to the plan....

"The proposal states that Interpretive Bulletin 2016-01 no longer represents the view of the Department on the proper interpretation of ERISA with respect to the exercise of shareholder rights by fiduciaries of ERISA-covered plans[.]" Icon to read more

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

DOL Proposes Rule on Employee Benefit Plan Proxy Voting and Exercises of Other Shareholder Rights

"The proposal includes provisions that would articulate general duties requiring fiduciaries to vote any proxy where the fiduciary prudently determines that the matter being voted upon would have an economic impact on the plan. It also prohibits fiduciaries from voting any proxy unless the fiduciary prudently determines that the matter has an economic impact on the plan. To assist fiduciaries comply with these duties, the proposal also sets forth 'permitted practices' under which the plan fiduciary can adopt certain proxy voting policies and parameters reasonably designed to serve the plan's economic interest." Icon to read more

Employee Benefits Security Administration [EBSA], U.S. Department of Labor [DOL]

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