October 5, 2020
Council Weighs in with DOL/EBSA on Proxy Voting Proposal
Echoing many of the themes and messages from a prior letter on environmental, social and governance (ESG) standards for retirement plans, the American Benefits Council recently offered its perspective on proposed regulations addressing the duty of ERISA fiduciaries as it relates to proxy voting and the exercise of other shareholder rights. In so doing, the Council affirmed the importance of ERISA’s prudence and loyalty standards for fiduciaries but expressed concern that the proposal in its current form could have negative consequences for plans and their investment managers.
As we reported in the September 8 Benefits Byte, the U.S. Department of Labor (DOL) Employee Benefits Security Administration (EBSA) issued proposed regulations on September 8 amending ERISA’s standing investment duties regulation in part by stating that a fiduciary must 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 sacrifice investment return or take on additional investment risk to promote goals unrelated to those financial interests of the plan’s participants and beneficiaries or the purposes of the plan.” (A detailed summary of the proposed proxy voting regulations, prepared by Davis & Harman LLP, is available on the Council website.)
Together with the ESG proposal published on June 30, these proposals have important implications for plan sponsors making investment decisions in that they advance the position that ERISA’s duties of prudence and exclusive purpose require plan fiduciaries to act solely for the economic benefit of plan participants and beneficiaries when managing plan assets (see the Council’s June 26 Benefits Byte, EBSA’s official fact sheet and a detailed summary of the proposal, prepared by Davis & Harman, for more details on the ESG proposal).
The Council’s October 5 letter to DOL/EBSA, like our July 31 written comments on the ESG proposal, emphasized the importance of traditional notice-and-comment rulemaking (with a formal economic analysis), while noting that the proposal could have far-reaching implications for plan sponsors. “This proposed regulation will impose significant, and in some cases troubling, new obligations on fiduciaries with respect to proxy voting and the exercise of other shareholder rights. While our members have varying levels of concern, the proposed regulation will affect … literally anyone who serves as a fiduciary of an ERISA-governed plan with responsibility for exercising proxy voting or other shareholder rights for plan assets,” the Council wrote.
Among the other recommendations articulated by the Council:
- The “binary choice” regarding voting proxies should be removed.
- Specificity on ERISA’s prudence and loyalty requirements is unnecessary, as is the mandate to review proxy voting policies every two years.
- DOL should reconsider its analysis of the additional costs imposed on ERISA plans.
- Additional clarifications are needed with regard to pass-through voting, mutual funds and the timeframe for the consideration of long-term investment challenges and opportunities.
- The proposed effective date should be delayed.