DOL Final Rule Limits Proxy Voting by Retirement Plan Fiduciaries

Fiduciaries' proxy votes must serve participants' financial interests

Stephen Miller, CEBS By Stephen Miller, CEBS December 15, 2020

Retirement plan fiduciaries will be barred from casting corporate-shareholder proxy votes in favor of social or political positions that don't advance the financial interests of retirement plan participants, under a Department of Labor (DOL) final rule released on Dec. 11.

These matters are often referred to as economic, social and governance (ESG) issues.

"Reforms to the current proxy advisory system were needed because decision-making has increasingly become subject to political pressure and personal influence," said Chris Burnham, president of the Institute for Pension Fund Integrity, which advocates for transparency and accountability in the management of public pension plans.

The DOL also posted a fact sheet summarizing the rule's key provisions, which take effect 30 days after the rule's upcoming publication in the Federal Register. Fiduciaries, however, have until Jan. 31, 2022, to comply with a requirement to review service provider proxy voting guidelines prior to following their recommendations.

The rule is considered a companion to a November DOL final rule restricting retirement plan fiduciaries for either defined benefit pension or 401(k)-type defined contribution plans from selecting plan investments based on nonfinancial factors.

Fiduciary Responsibilities

The Employee Retirement Income Security Act (ERISA) defines fiduciaries as plan decision-makers with discretionary authority and control over the management of the plan and its assets. Fiduciaries are required to act in plan participants' best interests. The final rule addresses fiduciaries' "prudence and exclusive purpose duties" under ERISA with respect to proxy voting and exercises of other shareholder rights. It affects employee benefits plans that own equities (i.e., stock shares) that require voting—primarily defined benefit pension plans.

In some circumstances, the rule could apply to welfare plans that hold stock assets or to defined contribution plans, such as those with collective investment trusts where the underlying assets are actually plan assets subject to the fiduciary voting process, DOL officials said when the proposed rule was issued for comment in September. However, the final rule clarifies that its provisions do not apply to voting and similar rights on shares in defined contribution plans, including employee stock option plans, that participants hold in their individual accounts.

"ERISA plan fiduciaries must put the growth and security of workers' retirement savings first," said Jeanne Klinefelter Wilson, acting assistant secretary of labor for the DOL's Employee Benefits Security Administration. "This rule will help ERISA plan fiduciaries follow the law and navigate their prudence and loyalty duties when exercising shareholder rights and obligations." 

Restrictions on Proxy Voting

The final rule is intended to protect the interests of participants and beneficiaries by:

  • Confirming that proxy voting decisions and other exercises of shareholder rights must be solely in the interest of, and for the exclusive purpose of, providing plan benefits to participants and beneficiaries.
  • Ensuring that plan fiduciaries do not subordinate the interests of participants and beneficiaries in their retirement income or financial benefits under the plan to any objective that does not have a material effect on plan assets' risk and returns.
  • Improving fiduciary practices relating to the selection and monitoring of proxy advisory firms. "A fiduciary may not accept the practice of following the recommendation of a proxy advisory firm or other service provider without determining that such firms' or such service providers' proxy voting guidelines are consistent with the fiduciary's obligation described in the rule," Wilson said during a Dec. 11 conference call briefing.

According to Burnham, the recommendations of some of the largest proxy advisory firms "have moved from a strict duty of loyalty and care to one of making political-based decisions, increasingly under the guise of ESG considerations that certainly have an essential role in the boardroom but, used as a political tool in their recommendations, clearly violate fiduciary duty."

Safe Harbor Practices

Plans may adopt safe harbors for satisfying the rule's fiduciary responsibilities with respect to whether to vote on a proxy ballot matter, Wilson said. Safe harbors under the rule include a policy to limit voting to matters that the fiduciary has prudently determined are expected to have a material effect on the value of the plan investment. Another safe harbor practice is adopting a policy to refrain from voting when a fiduciary determines that the plan's holding in the proxy issuer, relative to the plan's total investment assets, is sufficiently small that the matter being voted on would not have a material effect on the investment performance of the plan's portfolio.

Plan fiduciaries often mistakenly believe they must vote on all shareholder measures, DOL officials said. The new rule would thus "reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers' retirement savings to research and vote on matters that are not expected to have an economic impact on the plan."

Who Votes Proxies?

"Generally, the plan's trustee has responsibility for voting proxies, unless the trustee is subject to the instructions of a named fiduciary or an investment manager has been appointed," according to Mike Barry, a senior consultant at retirement plan advisory firm October Three. "Where proxy voting has been delegated to an investment manager or proxy voting firm, the plan fiduciary must prudently monitor their activities," he noted. 

Where a fiduciary generally follows the recommendations of a proxy advisory firm, the fiduciary must make a determination that that firm's guidelines are consistent with the economic interest of the plan and plan participants, for instance, by considering the costs involved, Barry explained.

Opposition Voiced

When the rule was proposed in September, social justice and labor advocates took issue with it. Some, for instance, argued it would restrict the ability of labor union pension funds to use their proxy votes to advance pro-union positions.

The rule "would create an overly burdensome and unjustified process for the consideration of voting proxies that would, in many cases, effectively prohibit ERISA plans from exercising their shareholder rights," the United Food and Commercial Workers International Union wrote in a comment letter. 

According to the Service Employees International Union, "The increase in proxy voting cited by the DOL reflects appropriate monitoring and engagement efforts by institutional investors ... and the growing recognition that the environment, diversity, and other societal issues present economic risks and opportunities."

Democrats generally were critical of the new rule when it was proposed, and of the DOL's earlier final rule restricting fiduciaries from selecting plan investments based on nonfinancial factors. Rep. Andy Levin, D-Mich., is drafting two bills—the Sustainable Investment Policies Act and the Retirees Sustainable Investment Policies Act—that would require fiduciaries to take socially responsible factors into account when making investment decisions for retirement plans, such as worker wages and rights, environmental risks, political spending and human rights policies, "taking the opposite approach" from the current DOL, InvestmentNews reported.

The new proxy voting rule is slated to go into effect 30 days after its publication in the Federal Register, with compliance delayed until Jan. 31, 2022, for certain recordkeeping and proxy voting policy requirements. While it's uncertain whether the incoming Biden administration will seek to replace the rule—a process that could take several months, should it happen—plan fiduciaries are advised to understand the rule and implement its provisions, as failure to do so could increase their liability to enforcement actions or participant lawsuits.

[Need help with legal questions? Check out the new SHRM LegalNetwork.]

Related SHRM Articles:

Final Rule Limits 401(k)s from Picking Funds Based on Nonfinancial Factors, SHRM Online, November 2020

DOL Proposes Limits on Proxy Voting by Retirement Plan Fiduciaries, SHRM Online, September 2020

DOL Proposes Less-Restrictive Fiduciary Standard for Investment Advisors, SHRM Online, July 2020



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