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DOL Issues Final Regulation on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios
Practical Law Legal Update w-028-8114 (Approx. 7 pages)
DOL Issues Final Regulation on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios
by Practical Law Employee Benefits & Executive Compensation
| Published on 14 Dec 2020 • USA (National/Federal) |
The Department of Labor (DOL) has released a final regulation addressing fiduciary duties under the Employee Retirement Income Security Act of 1974 (ERISA) as they relate to voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights. The final regulation adopts a principles-based approach to proxy voting.
On December 11, 2020, the DOL released a final regulation addressing fiduciary duties under ERISA as they relate to voting of proxies on securities held in employee benefit plan investment portfolios and exercising other shareholder rights. The final regulation adopts a principles-based approach to proxy voting. The DOL also issued a press release and fact sheet.
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.
In November 2020, the DOL issued a final rule amending DOL Regulation Section 2550.404a-1 to clarify the legal standards under Sections 403 and 404 of ERISA that apply to a retirement plan fiduciary's decision to invest plan assets because of non-pecuniary objectives. The DOL reserved a section of that amended regulation as a placeholder for the additional guidance in this final rule on the exercise of shareholder rights, including proxy voting (see Legal Update, Final DOL Rule Addresses Use of Non-Financial Factors in Selecting Retirement Plan Investments).
Final Regulations
The preamble to the final regulation states that there has been confusion about whether plan fiduciaries must vote all proxies, as well as confusion regarding prior DOL guidance. In response, the DOL issued a proposed rule in August 2020 that would amend the DOL's investment duties regulation (29 C.F.R. § 2550.404a-1), addressing fiduciary duties under ERISA as they relate to proxy voting (see Legal Update, DOL Issues Proposed Rules on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios). The DOL issued the final regulation after reviewing approximately 300 written comments and 6,700 form letters that were received in response to the proposed regulation.
The final regulation applies to ERISA-covered retirement and health and welfare plans that hold shares of corporate stock, whether directly or through ERISA-covered intermediaries like common trusts, master trusts, pooled separate accounts, and 103-12 investment entities. The final rule does not affect employee benefit plans with respect to stock held through registered investment companies.
The final regulation provides that the fiduciary duty to manage plan assets consisting of shares of stock includes managing the related shareholder rights.
Principles-Based Approach
The final regulation adopts a principles-based approach to proxy voting under the DOL's investment regulation. The final regulation expressly states that the fiduciary duty to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right (29 C.F.R. § 2550.404a-1(e)(2)(ii)). Rather, the final regulation provides principles that plan fiduciaries must follow to fulfill their prudence and loyalty duties under ERISA Section 404(a)(1)(A) and (B) when deciding whether to exercise shareholder rights and when exercising shareholder rights. Specifically, plan fiduciaries must:
- Act solely in accordance with the economic interest of the plan and its participants and beneficiaries.
- Consider any costs involved.
- Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any non-pecuniary objective, or promote non-pecuniary benefits or goals unrelated to those financial interests of the plan's participants and beneficiaries or the purposes of the plan.
- Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights.
- Maintain records on proxy voting activities and other exercises of shareholder rights.
- Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to advise or otherwise assist with the exercise of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services.
Plan fiduciaries must periodically review proxy voting policies that are adopted under the final regulation.
General Proxy Voting Policies
Under the proposed regulation, fiduciaries would have been required to vote proxies if they prudently determined, after considering certain factors and costs, that the issue would economically impact the plan. Conversely, fiduciaries would have been required to not vote proxies for issues that do not have an economic impact on the plan. The final regulation eliminates these requirements. Under the final regulation, plan fiduciaries may adopt either, or both, of the following policies to satisfy their fiduciary responsibilities with respect to decisions on whether to vote proxies:
- A policy to limit voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the issuer's business activities or are expected to have a material effect on the value of the investment.
- A policy of refraining from voting on proposals or particular types of proposals when the plan's holding in a single issuer relative to the plan's total investment assets is below a quantitative threshold that the fiduciary prudently determines, considering its percentage ownership of the issuer and other relevant factors, is sufficiently small that the matter being voted upon is not expected to have a material effect on the investment performance of the plan's portfolio (or investment performance of assets under management in the case of an investment manager).
Other Requirements
The proposed regulation provided that, in regard to exercising shareholder rights, plan fiduciaries must investigate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights. That section of the final regulation provides that fiduciaries must evaluate, rather than investigate, material facts relating to a proxy vote or other exercise of rights.
If authority to vote proxies or exercise other shareholder rights has been delegated to an investment manager, proxy voting firm, or other advisor, the responsible plan fiduciary shall prudently monitor the proxy voting activities of such investment manager or proxy advisory firm and determine whether such activities are consistent with the requirements of the final regulation (the proposed regulation included a documentation requirement, which the final regulation eliminated).
Under the final regulation, 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. These requirements were also in the proposed regulation (DOL Regulation Section 2550.404a-1(e)(4)(ii)).
The final regulation requires fiduciaries to maintain records on proxy voting activities and other exercises of shareholder rights.
The final regulation removes IB 2016-01 from the Code of Federal Regulations (29 C.F.R. § 2509.2016-01).
Effective Date
The final regulation will be effective 30 days after its publication in the Federal Register and applies to exercises of shareholder rights after that date. However, the rule includes two later compliance dates, to reduce the cost and burden of complying with certain provisions:
- Fiduciaries that are not SEC-registered investment advisers have until January 31, 2022, to comply with the new requirements to:
- evaluate material facts providing the basis for exercising a right; and
- maintain records on proxy voting activities.
SEC-registered investment advisers must comply with these requirements as of the 30-day applicability date because the requirements are intended to align with their existing obligations under the Investment Advisers Act of 1940. - All fiduciaries have until January 31, 2022, to comply with the requirements:
- that fiduciaries review service provider proxy voting guidelines before following their recommendations to determine that the guidelines are consistent with their obligations under the final regulation; and
- that apply to investment managers of pooled investment vehicles.
Practical Implications
According to the preamble to the final proxy voting regulation and the accompanying fact sheet, the DOL believes that many benefit plan fiduciaries already are compliant with the final regulation because they are meeting the requirements of the DOL's sub-regulatory guidance. However, the DOL acknowledges that such practices are not universal. Plan fiduciaries should review the final regulation, understand how their affected employee benefit plans currently handle proxy voting matters, and bring their own plans into compliance, as necessary.