DOL Issues Interpretive Bulletin 2016-1 on Voting of Proxies on Securities Held in Employee Benefit Plan Investment Portfolios

The Department of Labor (DOL) issued Interpretive Bulletin 2016-1, which provides the DOL's supplemental views on the voting of proxies on securities held in employee benefit plan investment portfolios, the maintenance of and compliance with statements of investment policy (including proxy voting policy), and the exercise of other legal rights of plan shareholders. Interpretive Bulletin 2016-1 withdraws Interpretive Bulletin 2008-2 and reinstates the language of Interpretive Bulletin 94-2 with certain modifications.

Practical Law Employee Benefits & Executive Compensation

On December 28, 2016, the DOL issued Interpretive Bulletin 2016-1 (IB 2016-1), which provides the DOL's supplemental views on:

  • The voting of proxies ( www.practicallaw.com/0-382-3721) on securities held in employee benefit plan investment portfolios.

  • The maintenance of and compliance with statements of investment policy (including proxy voting policies).

  • Plan fiduciaries' exercise of other shareholder rights, including guidance on the appropriateness under ERISA of active engagement with corporate management.

(81 Fed. Reg. 95879 (Dec. 29, 2016).)

IB 2016-1 withdraws DOL Interpretive Bulletin 2008-2 (IB 2008-2) and reinstates the language of DOL Interpretive Bulletin 94-2 (IB 94-2) with certain modifications.

 

Previous Interpretive Bulletins

In IB 94-2, the DOL provided guidance to retirement plan fiduciaries explaining how ERISA affects decisions on proxy votes and other exercises of shareholder rights (29 C.F.R. § 2509.94-2; 59 Fed. Reg. 38863 (Jul. 29, 1994)). A plan fiduciary's obligation to manage plan assets prudently extends to proxy voting. The plan trustee has the duty to vote proxies except when the power to manage plan assets has been delegated to an investment manager under ERISA Section 402(c)(3) (29 U.S.C. § 1102(c)(3)) (for more information on investment managers, see Practice Note, Selecting and Hiring an Investment Manager ( www.practicallaw.com/5-504-8278) and Standard Document, Investment Management Agreement (IMA) for Pension Plans ( www.practicallaw.com/7-505-8445) ). Plan trustees and investment managers must comply with written statements of investment policy that include guidelines on voting proxies on securities held in plan investment portfolios (see our Standard Document, Investment Policy Statement for Defined Contribution Plan ( www.practicallaw.com/9-503-1624) ).

Under IB 94-2, 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.

In 2008, the DOL replaced IB 94-2 with IB 2008-2, which was intended to clarify certain issues. The DOL also issued Investment Bulletin 2008-1 (IB 2008-1), which replaced IB 94-1 and addressed fiduciary consideration of investments and investment strategies that take into account environmental, social, and governance (ESG) factors (see Legal Update, For Plan Investments in ETIs, the All Things Being Equal Test Prevails (Again) ( www.practicallaw.com/w-000-7096) ).

The DOL has concluded that IB 2008-2 created confusion among ERISA fiduciaries and may have discouraged them from voting proxies. Therefore, the DOL has issued IB 2016-1 to clarify the rights and duties of ERISA fiduciaries' exercise of shareholder rights. IB 2016-1 reinstates the language of IB 94-2 but clarifies when monitoring or communication with management is likely to enhance the value of the plan's investment in the corporation.

 

Proxy Voting

On the issue of voting of proxies on securities held in employee benefit plan portfolios, IB 2016-1 provides that a plan fiduciary's obligation to manage plan assets prudently extends to proxy voting. The plan trustee has the duty to vote proxies except when:

  • The trustee is subject to the directions of a named fiduciary under ERISA Section 403(a)(1) or (2) (29 U.S.C. § 1103(a)(1) or (2)).

  • The power to manage plan assets has been delegated to an investment manager under ERISA Section 403(a)(2). No person other than the investment manager has the right to vote proxies in this situation except to the extent a named fiduciary has reserved this right.

If the plan document or investment management agreement provides that the investment manager is not required to vote proxies, but:

  • Does not expressly preclude the investment manager from voting proxies, the plan's investment manager has exclusive responsibility for voting proxies.

  • Expressly precludes the investment manager from voting proxies, the plan's trustee has exclusive responsibility for voting proxies.

Under the fiduciary duty requirements of ERISA Section 404(a)(1)(A) and (B) (29 U.S.C. § 1104(a)(1)(A) and (B)):

  • A fiduciary that votes on proxies must consider the factors that may affect the value of the plan's investment and not subordinate the interests of plan participants and beneficiaries to other objectives.

  • A named fiduciary that appoints an investment manager must periodically monitor the activities of the investment manager regarding plan assets, including the decisions and actions taken by the investment manager regarding proxy voting decisions.

  • The named fiduciary must act solely in the interests of the participants and beneficiaries without regard to its relationship to the plan sponsor.

  • The duty to monitor requires that the investment manager or other responsible fiduciary maintain accurate records of proxy voting. These records must enable the named fiduciary to review:

    • the investment manager's voting procedure regarding plan-owned stock; and

    • actions taken in individual proxy voting situations.

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. According to the DOL, when proxy voting involves high costs or unusual requirements, the plan fiduciary should:

  • Consider whether the plan's vote, either by itself or together with the votes of other shareholders, is expected to have an effect on the value of the plan's investment that warrants the additional cost of voting.

  • When deciding whether to purchase shares, consider whether the difficulty and expense in voting the shares is reflected in their market price.

 

Investment Policy Statements

IB 2016-01 states that maintaining an investment policy (IPS) 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)). The IPS is a written statement that provides fiduciaries responsible for plan investments with guidelines or general instructions on investment management decisions. The IPS should include a statement of the plan's proxy voting policy.

If a plan's named fiduciary appoints an investment manager under ERISA Section 402(c)(3) (29 U.S.C. § 1002(c)(3)), the named fiduciary has the authority to condition the appointment on acceptance of an IPS. Without an express requirement to comply with an IPS, the authority to manage the plan assets placed under the control of the investment manager lies exclusively with the investment manager. An investment manager who has authority to make investment decisions, including proxy voting decisions, will never be relieved of its fiduciary responsibility if it follows directions as to specific investment decisions from the named fiduciary or any other person.

An IPS is part of the "documents and instruments governing the plan" within the meaning of ERISA section 404(a)(1)(D). An investment manager is required to comply with the policy unless doing so would be imprudent. ERISA Section 404(a)(1)(D) does not shield the investment manager from liability for imprudent actions taken in compliance with an IPS. IB 2016-1 also discusses when a plan trustee is obligated to follow the IPS.

The named fiduciary must periodically monitor the investment manager's management of plan assets. Under ERISA Section 404(a)(1)(B), the activities of the named fiduciary and the investment manager must be properly documented.

Furthermore, a named fiduciary's determination of the terms of an IPS is an exercise of fiduciary responsibility. An IPS may need to take into account factors such as:

  • The plan's funding policy.

  • The plan's liquidity needs.

  • Issues of prudence, diversification, and other fiduciary requirements of ERISA.

IB 2016-1 provides guidance for investment managers of a pooled investment vehicle that holds assets of more than one employee benefit plan and is subject to proxy voting policies that are in conflict. Generally, ERISA Section 404(a)(1)(D) would require the investment manager to:

  • Reconcile the conflicting policies, if possible.

  • If necessary and lawful, vote the relevant proxies to reflect those policies in proportion to each plan's interest in the pooled investment vehicle.

 

Shareholder Engagement with Corporate Management

IB 2016-1 reiterates the view of IB 94-2 on shareholder engagement by plan fiduciaries. 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. A reasonable expectation may exist when:

  • Plan investments in corporate stock are held as long-term investments.

  • A plan may not be able to easily dispose of an investment.

  • The same shareholder engagement issue is likely to exist in the case of available alternative investments.

IB 2016-1 modifies IB 94-2 by providing additional examples of the issues that plans may monitor and influence to enhance the value of the plan's investment in a corporation. Areas of shareholder engagement include:

  • The independence and expertise of candidates for the corporation's board of directors.

  • Assuring that the board has sufficient information to carry out its responsibility to monitor management.

  • Governance structures and practices, including:

    • board composition;

    • executive compensation;

    • transparency and accountability in corporate decision-making;

    • responsiveness to shareholders;

    • the corporation's policy regarding mergers and acquisitions;

    • the extent of debt financing and capitalization;

    • the nature of long-term business plans including plans on climate change preparedness and sustainability;

    • governance and compliance policies and practices for avoiding criminal liability and ensuring employees comply with applicable laws and regulations;

    • the corporation's workforce practices (such as investment in training to develop its work force); and

    • policies and practices to address environmental or social factors that have an impact on shareholder value and other financial and non-financial measures of corporate performance.

These shareholder activities may be carried out through a variety of methods, including correspondence, meetings with corporate management, and exercising the legal rights of a shareholder.

 

Practical Implications

Employee benefit plan fiduciaries that control or manage plan investment portfolios, including investment managers, should be aware that IB 2016-1 largely reinstates IB 94-2 and provides new examples of shareholder activities that are permissible for plan fiduciaries. The DOL believes that IB 94-2 (as modified in IB 2016-1) is a better expression of the fiduciary obligations under ERISA Sections 402(c)(3), 403(a), and 404(a)(1)(A) (29 U.S.C. §§ 1102(c)(3), 1103(a), and 1104(a)(1)(A)).

For additional resources on this topic area, see:

 
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