DOL Issues Proposed Rules on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios | Practical Law

DOL Issues Proposed Rules on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios | Practical Law

The Department of Labor (DOL) has released proposed regulations addressing fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) as they relate to the voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights. Among other things, the proposed regulations would clarify that fiduciaries need not vote all proxies and, in some cases, have a duty to refrain from voting.

DOL Issues Proposed Rules on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios

by Practical Law Employee Benefits & Executive Compensation
Law stated as of 02 Sep 2020 • USA (National/Federal)
The Department of Labor (DOL) has released proposed regulations addressing fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) as they relate to the voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights. Among other things, the proposed regulations would clarify that fiduciaries need not vote all proxies and, in some cases, have a duty to refrain from voting.
On August 31, 2020, the DOL released proposed regulations addressing fiduciary duties under ERISA as they relate to the voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights. Among other things, the proposed regulations would clarify that fiduciaries need not vote all proxies and, in some cases, have a duty to refrain from voting.
The DOL's proposed regulations on proxy voting are the latest in a series of actions this summer relating to fiduciary duties and plan investments, which have included the:

Fiduciary Duties and Proxy Voting

Under ERISA, a plan fiduciary must manage plan assets prudently and for the sole benefit of plan participants and beneficiaries (29 U.S.C. § 1104(a)(1)(A) and (B); see Practice Note, ERISA Fiduciary Duties: Overview: Duty of Loyalty and Duty of Prudence). This obligation extends to voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights.
The DOL has issued guidance on fiduciaries' duties regarding proxy voting and exercising other shareholder rights. In 1988, the DOL issued an opinion letter (Avon Letter) in which it stated that "the fiduciary act of managing plan assets which are shares of corporate stock . . . include[s] the voting of proxies appurtenant to those shares of stock" (, at *2). The DOL also issued a series of interpretive bulletins (IBs), including:
  • IB 94-2, which provided that plan fiduciaries may engage in other shareholder activities intended to monitor or influence corporate management where the responsible fiduciary concludes that there is a reasonable expectation that those activities are likely to enhance the value of the plan's investment in the corporation, after taking into account the costs involved.
  • IB 2008-2, which replaced IB 94-2 and clarified that fiduciaries may only consider factors relating to the plan's economic interests when voting proxies and may need to not vote proxies if the costs of doing so outweigh the economic benefits.
  • IB 2016-01, which reinstated the language of IB 94-2 with modifications.
(See Legal Update, DOL Issues Interpretive Bulletin 2016-1 on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios.)

Proposed Regulations

The preamble to the proposed regulations notes that there has been confusion regarding whether plan fiduciaries must vote all proxies, resulting in unnecessary burdens and costs for plans and fiduciaries. In response to this confusion, along with recent Securities and Exchange Commission (SEC) actions concerning proxy voting and changes in plan investment trends and proxy voting, the DOL is proposing to amend the investment duties regulation (29 C.F.R. § 2550.404a-1).
The proposed regulations would apply to ERISA-covered retirement and health and welfare plans that hold shares of corporate stock, whether directly or through intermediaries like master trusts.
The proposed regulations would provide that:
  • The fiduciary duty to manage plan assets consisting of shares of stock includes managing the related shareholder rights.
  • Fiduciaries must meet certain standards when deciding whether to exercise, and exercising, shareholder rights, such as investigating material facts and maintaining records.
  • If authority to vote proxies or exercise other shareholder rights has been delegated to an investment manager, proxy voting firm, or other advisor, fiduciaries must require the person or entity with delegated authority to provide enough documentation of the reasoning for the proxy voting decisions and recommendations to show that the decision or recommendation was based:
    • on the plan's expected economic benefit; and
    • solely on the economic interests of the participants and beneficiaries.
  • Fiduciaries must vote proxies if they prudently determine, after considering certain factors and costs, that the issue would economically impact the plan. Conversely, fiduciaries must not vote proxies for issues that do not have an economic impact on the plan.
  • Fiduciaries may adopt general proxy voting policies that are prudently designed to serve the plan's economic interest. The proposed regulations include examples of permissible proxy voting policies. Such policies would need to be reviewed at least once every two years.
  • Investment managers of pooled investment vehicles with assets of multiple plans, which may have conflicting investment policy statements, must reconcile conflicting policies if possible. Investment managers may develop investment policy statements and require participating plans to agree to the statements to avoid such conflicts.
In addition, the proposed regulations would remove IB 2016-01 from the Code of Federal Regulations (29 C.F.R. § 2509.2016-01).

Practical Implications

Plan fiduciaries should review the DOL's proposed regulations and understand how their employee benefit plans currently handle proxy voting matters. The DOL has requested comments on all aspects of the proposed regulations. Comments are due 30 days after the proposed regulations are published in the Federal Register. The proposed rule would be effective 30 days after publication of the final rule.