DOL’s Updated Guidance on Proxy Voting Lets Plan Fiduciaries Exercise Shareholder Rights

by Jane Meacham, Contributing Editor
The U.S. Department of Labor (DOL), in late December 2016, reinstated earlier guidance on proxy voting for plan fiduciaries that encourages them to “responsibly” exercise their rights as shareholders.

Proxy votes

The DOL’s Employee Benefits Security Administration (EBSA) said the guidance provided in Interpretive Bulletin (IB) 2016-01 is better-suited for modern trends in investment management, which include growing attention to environmental, social, and governance (ESG) factors at listed companies and active shareholder engagement by asset owners such as retirement plans.

Employee benefit plans often hold large stakes in publicly traded companies, and the DOL has long stated that it is important for plan administrators to know what their responsibilities are when they vote proxies on the shares or exercise other shareholder rights.

The agency said existing guidance to plan fiduciaries on proxy voting has been “out of step with domestic and international investment management and has the potential to dissuade fiduciaries from exercising shareholder rights, including the voting of proxies, in areas that are increasingly being recognized as important to long-term shareholder value.”

‘Removes Perceived Impediments’

“This guidance removes perceived impediments to the prudent management of plans’ rights as shareholders, and encourages fiduciaries to manage those rights in the best interest of plan participants and beneficiaries,” Assistant Secretary of Labor for Employee Benefits Security Phyllis Borzi said in a December 28, 2016, release about the bulletin.

The new Interpretive Bulletin withdrew IB 2008-2 and brings back earlier guidance related to plans’ proxy voting. It also provided some updates to clarify what the law requires of plan fiduciaries, the DOL said.

“T[he] guidance appropriately notes the positive role fiduciaries play through the exercise of shareholder rights,” said The Forum for Sustainable and Responsible Investment (US SIF), a sustainable and responsible investment trade association, in a December 29, 2016, statement about IB 2016-01. “Additionally, this guidance also reinforces the language of IB 2015-1 on economically targeted investments [ETIs] which clarified that [ESG] impacts can be intrinsic to the market value of an investment.”

2015 Reversal on ESG Factors

In a related move, the DOL in October 2015 reversed 2008 guidance that discouraged retirement plan fiduciaries and their investment advisers from considering ESG factors when choosing companies for their portfolios. The reversal, made through another new interpretive bulletin, IB 2015-01, which reinstated 1994 guidance, recognized a growing consensus that fiduciary duty may in fact require fiduciaries to look at these aspects to protect plan participants’ retirement accounts from undue risk.

The DOL said in the 2015 bulletin that it wanted to clarify that plan fiduciaries should appropriately consider any factors that potentially influence risk and return.

The October 2008 DOL Interpretive Bulletin on ETIs that was replaced was seen as counseling retirement plan and other fiduciaries and professional investors to avoid taking into account ESG considerations when selecting plan assets. As a result, potentially billions of dollars of assets under management in the United States were diverted from companies that impartial investment research firms have found to have better ESG practices and scores.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.

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