DOL Proposes Limits on Proxy Voting by Retirement Plan Fiduciaries

On Sept. 4, the U.S. Department of Labor (DOL) published a proposed rule that would stop retirement plan fiduciaries from casting corporate-shareholder proxy votes in favor of social or political positions that don't advance the financial interests of retirement plan participants.

The proposed rule and a related DOL fact sheet address fiduciaries' "prudence and exclusive purpose duties" under the Employee Retirement Income Security Act (ERISA) with respect to proxy voting and exercises of other shareholder rights.

The rule would affect employee benefit plans that own equities (i.e., stock shares) that require voting—primarily defined benefit pension plans, but in some circumstances 401(k)-style defined contribution plans, as well as some welfare plans that hold assets, DOL officials said during a conference call on Aug. 31, when a pre-publication version of the rule and the fact sheet were released.

Some defined contribution plans hold pooled investment options, such as collective investment trusts or pooled separate accounts, "where the underlying assets are actually plan assets that are subject to the fiduciary voting process," DOL officials said. "They may also hold mutual funds that in and of themselves have matters to be voted on."

Secretary of Labor Eugene Scalia said in a statement, "The proposed proxy rule would ensure that individuals responsible for the retirement savings of millions of American workers are voting proxies only where it is financially in the interest of the plan to do so. The proposal would provide clarity and further the prudent management of plan assets and resources."

Comments can be submitted to the DOL through Oct. 5, 2020, at www.regulations.gov.

[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]

Restrictions on Proxy Voting

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 proposed rule, if finalized, would:

• Require fiduciaries to participate in any proxy vote when the fiduciary prudently determines that the matter being voted on would have an economic impact on the plan.
  

• Prohibit fiduciaries from participating in any proxy vote unless the fiduciary prudently determines that the matter has an economic impact on the plan.

To help fiduciaries comply with these duties, the proposal sets forth "permitted practices" under which the plan fiduciary can adopt certain proxy voting policies designed to serve the plan's economic interest. Among the examples the rule gives is a policy to focus voting resources only on "types of proposals that the fiduciary has prudently determined are likely to have a significant impact on the value of the plan's investment," such as proposals relating to corporate mergers and acquisitions, corporate repurchases of shares (buy-backs), or contested elections for directors.

DOL officials said that plan fiduciaries often mistakenly believe they must vote on all shareholder issues. "The proposed rule would 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," said a statement by Jeanne Klinefelter Wilson, acting assistant secretary of the department's Employee Benefits Security Administration.

Critical Views

Social justice and labor advocates took issue with the DOL's proposal.

Michael McCarthy, an associate professor of sociology at Marquette University, tweeted that the proposed rule would restrict the ability of labor union pension funds to use their proxy votes to advance pro-union positions.

"Rules in ERISA have long made it hard for labor to effectively mobilize the financial power their pension funds hold," he wrote. "Now the [DOL] is introducing rules that restrict proxy voting and weaken labor's potential power as collective shareholders."

Politics and Plans

In a related action on June 30, the DOL published a proposed rule that would establish new limits on using environmental, social and governance (ESG) funds as investment options for defined contribution retirement plans or as investments for defined benefit pensions. The DOL again said it was attempting to keep fiduciaries from making decisions that further social and political aims but do not advance the goals of growing and securing plan participants' retirement accounts.

Democrats have criticized these proposed rules, and a Biden administration could seek to replace them. Democratic majorities next year in both houses of Congress also could pass Congressional Review Act resolutions to overturn any rule finalized by a federal agency within 60 legislative days, which would take effect if signed by the president.

"Certainly, one of the key issues presented by these rules is the use of proxies to influence corporate policy on issues that some argue are not directly related to 'economic value,' including with respect to [ESG] issues," according to an overview of the DOL's 2020 regulatory agenda by October Three, a retirement plan advisory firm. "In this regard, there has to some extent been a different 'Republican Administration' and 'Democratic Administration' position at the DOL."

"While the ESG proposal has generated significant controversy, including within the investment community, the issue of proxy voting–notwithstanding that it raises similar political issues—may be less critical for nonpolitical constituencies," said Mike Barry, a senior consultant at October Three. "Indeed, the tighter limits on ERISA plan shareholder activism is likely to be welcomed by some plan sponsors," he noted.

The proposed proxy voting rule, however, "could be a game changer for ERISA fiduciaries," according to Julie Stapel, a partner in the Chicago office of law firm Morgan Lewis. "It would be very difficult to justify the voting of proxies on ESG issues given the regulations' required focus on the economic impact of the vote on the plan," she believes.

Next Steps

"Plan sponsors should consider their current proxy voting arrangements and ensure the processes are clearly outlined and documented," recommended Patrick Wisdom, a consultant at Callan, an institutional investment advisory firm. "In addition, sponsors should continue to monitor the situation and stay abreast of future developments, particularly following the comment period," he advised.