In FAB 2018-01, DOL Clarifies Its Views on Proxy Voting, Shareholder Engagement, and Plan Investments in ETIs

Practical Law Legal Update w-014-4392 (Approx. 5 pages)

In FAB 2018-01, DOL Clarifies Its Views on Proxy Voting, Shareholder Engagement, and Plan Investments in ETIs

by Practical Law Employee Benefits & Executive Compensation

Past DOL Guidance

Interpretive Bulletin 2015-01

In IB 2015-01, the DOL addressed the standards that apply to an ERISA plan fiduciary's decision to invest plan assets in ETIs. ETIs refer to any investment that is selected, in part, for its collateral economic or social benefits, apart from the investment return to the investor. The collateral benefits of an ETI are usually based on environmental, social, and governance (ESG) criteria.

IB 2015-01 established two standards regarding a plan investment in ETIs:

Where the Investment is Chosen Based Solely on Economic Considerations. If plan fiduciaries prudently determine that an investment in an ETI is appropriate based solely on economic considerations (including those derived from ESG factors), the fiduciary may make that investment without regard to any collateral benefits the investment may also promote. In other words, fiduciaries need not treat commercially reasonable investments as "inherently suspect" or "in need of special scrutiny" merely because they take ESG factors into consideration.
Where an Investment is Chosen Based on Economic and Collateral Considerations. Plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is economically equivalent to available investment options without those collateral benefits regarding return and risk to beneficiaries in the appropriate time horizon.

For more information on IB 2015-01, see Legal Update, For Plan Investments in ETIs, the All Things Being Equal Test Prevails (Again).

Interpretive Bulletin 2016-01

IB 2016-01 provided that:

A plan fiduciary's obligation to manage plan assets prudently extends to the voting of proxies on securities held in employee benefit plan portfolios. The fiduciary obligations of prudence and loyalty require the responsible fiduciary to vote proxies on issues that may affect the value of the plan's investment.
Maintaining an investment policy is consistent with the fiduciary standards under ERISA Section 404(a)(1)(A) and (B) (29 U.S.C. § 1104(a)(1)(A) and (B)). Investment policy statements may include policies:
- regarding the use of ESG factors to evaluate investments; or
- on integrating ESG-related tools, metrics, or analyses to evaluate an investment's risk or return.
Plan fiduciaries may engage in other shareholder activities intended to monitor or influence the management of corporations in which the plan owns stock 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.

The DOL noted that proxy voting and other shareholder engagement generally do not involve significant costs to individual plan investors. This is because institutional investment managers appointed by the fiduciary usually undertake those activities. The DOL recognized, however, that special circumstances may warrant a reasonable expenditure of plan assets for more active engagement with company management to protect the value of a plan's investment.

For more information on IB 2016-01, see Legal Update, DOL Issues Interpretive Bulletin 2016-1 on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios.

FAB 2018-01 Guidance

Clarifications to IB 2015-01

FAB 2018-01 clarifies that although the DOL recognized in IB 2015-01 that ESGs may be appropriate economic considerations in certain situations, fiduciaries must avoid "too readily" treating ESG factors as economically relevant to an investment choice.

FAB 2018-01 also contrasts the use of ESG-themed investment options for 401(k) plans and qualified default investment alternatives (QDIAs) (see Practice Note, Qualified Default Investment Alternatives (QDIAs)). In the 401(k) plan context, fiduciaries can add ESG-themed investment alternatives as investment options without having to forego non-ESG-themed investment options. For QDIAs, however, selecting an ESG-themed investment option based on the fiduciary's policy preference might raise concerns about the fiduciary's compliance with ERISA's duty of loyalty (see Practice Note, ERISA Fiduciary Duties: Overview: Duty of Loyalty).

Clarifications to IB 2016-01

Regarding shareholder activities that are likely to enhance the value of the plan's investment in a corporation, FAB 2018-01 provides that IB 2016-01 was not intended to indicate that:

Individual plan investors may routinely incur significant expenses to engage in direct negotiations with the leadership of publicly held companies in which the plan is one of several investors.
Fiduciaries should routinely incur significant expenses to engage in shareholder activities (for example, calling special shareholder meetings or actively sponsoring proxy fights on environmental or social issues).

Concerning investment policy statements, FAB 2018-01 clarifies that the statements are not required to include guidelines on ESG investments or ESG-related tools. Additionally, to the extent that an investment policy statement conflicts with ERISA, the fiduciary managing plan assets must disregard it.

In FAB 2018-01, DOL Clarifies Its Views on Proxy Voting, Shareholder Engagement, and Plan Investments in ETIs | Practical Law