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Directors Governance Center

January 12, 2017

DOL Guidance Clarifies Rights of ERISA Plan Fiduciaries


On December 29, 2016, the Department of Labor (DOL) issued updated guidance effective immediately for ERISA employee benefit plans.  The 2016 interpretive bulletin, which withdraws a 2008 interpretative bulletin (IB 2008-2) and also modifies other prior guidance (IB 94-2), is aimed at reinforcing and clarifying ERISA standards concerning the exercise of shareholder rights and responsibilities.  The new guidance, as summarized in the attached briefing by the American Society of Pension Professionals and Actuaries (ASPPA), sets forth the DOL’s supplemental views concerning the legal standards imposed by ERISA with respect to voting on 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 a shareholder.

In the supplemental background information provided with the new guidance, the DOL noted that the pervasiveness of US publicly-traded stock in ERISA plan investment portfolios, both directly and through pooled investment funds, including index funds, is another factor that contributes to the importance of proxy voting and shareholder engagement practices.  The DOL also expressed concern that its prior bulletins “have been misunderstood and may have worked to discourage ERISA plan fiduciaries who are responsible for the management of shares of corporate stock from voting.” In particular, the DOL said it was “concerned that IB 2008-2 has been read by some stakeholders to articulate a general rule that broadly prohibits ERISA plans from exercising shareholder rights, including voting of proxies, unless the plan has performed a cost-benefit analysis and concluded in the case of each particular proxy vote or exercise of shareholder rights that the action is more likely than not to result in a quantifiable increase in the economic value of the plan’s investment.”

Instead, the 2016 guidance clarified that the “essential point” of IB 94-2 was to articulate a general principle that a fiduciary’s obligation to manage plan assets prudently extends to proxy voting and confirms the DOL’s “longstanding position” that “the fiduciary act of managing plan assets which are shares of corporate stock includes decisions on the voting of proxies and other exercises of shareholder rights.”

Key takeaways on the 2016 guidance as noted by ASPAA include the following:

  • The DOL notes that 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 such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after taking into account the costs involved.” The bulletin observed that active monitoring and communication may be carried out through a variety of methods including by means of correspondence and meetings with corporate management as well as by exercising the legal rights of a shareholder.
  • While the DOL noted that ERISA does not permit fiduciaries to subordinate the economic interests of participants and beneficiaries to unrelated objectives in voting proxies or in exercising other shareholder rights, it pointed out that a reasonable expectation of enhancing the value of the plan’s investment through shareholder activities may exist in various circumstances, for example, where plan investments in corporate stock are held as long-term investments or where a plan may not be able to easily dispose of those investments.
  • Matters falling within the categories of “active monitoring and communication activities” – i.e., shareholder engagement – would include things like governance structures and practices, particularly those involving 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 (e.g., investment in training to develop its work force, diversity, equal employment opportunity), 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.
  • The 2016 IB notes that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring, and that in turn means that the investment manager or other fiduciary responsible for voting would be required to maintain accurate records as to proxy voting, including guidelines or general instructions concerning various types or categories of investment management decisions for fiduciaries.

In light of the new guidance, boards of directors and executives should prepare to include ERISA funds in their shareholder engagement efforts.

To see the full DOL guidance, click here.