Changes to Proxy Voting Rules

On September 4, 2020, the DOL issued a proposal that would amend proxy voting rules in retirement plans subject to ERISA. The proposed rules aim to require fiduciaries to exercise more consideration to the financial interests of retirement plan participants over those of corporate financial institutions.

Currently, the investment duties regulation that mandates the duty of prudence as it applies to fiduciary decision-making on investments fails to specifically address the exercise of shareholder rights as it relates to how fiduciaries must act for the exclusive purpose of providing benefits to participants and beneficiaries. The proposed rule would remedy those gaps in the regulations.

In a fact sheet accompanying the proposal, the DOL acknowledged previous guidance may have contributed to the confusion about the duty fiduciaries hold when it comes to proxy voting and led to the misunderstanding that fiduciaries must vote on all proxies presented to them, rather than only proxy proposals that would have a material effect on the value of the plan’s investments. The DOL also cited concern that fiduciaries may be using plan assets to research and vote on proxy proposals that would not have a material impact on the value of the plan’s investments.

The proposal would, according to the DOL’s fact sheet, suggest making the following additions to the investment duties regulations (ERISA section 404(a)(1)(B)) for proxy voting and the exercise of shareholder rights:
 

  • Require plan fiduciaries, when deciding whether to exercise shareholder rights and when exercising such rights, including the voting of proxies, to carry out their duties prudently and solely in the interests of the plan participants and beneficiaries and for the exclusive purpose of providing benefits to participants and beneficiaries and defraying the reasonable expenses of administering the plan
     
  • Provide a list of obligations that fiduciaries must comply with when making decisions on exercising shareholder rights, including proxy voting, in order to meet their prudence and loyalty duties under ERISA section 404(a)(1)(A) and (B)
     

The DOL subsequently invited the public to comment (the deadline to submit comments was October 5, 2020) on its proposal.

Retirement plan fiduciaries will want to keep a close eye on the unfolding developments of the DOL’s proposal and determine how, if seen to fruition, the new rules could affect their company’s retirement plan. If you’re uncertain, tap into the advice of your third-party administrator or other service providers contracted to help you manage your retirement plan administrative duties.