Proxy Votes Definition
In today’s retirement plan environment, the word “fiduciary” is almost inevitably associated with the Department of Labor’s (DOL’s) conflict-of-interest (fiduciary definition) guidance, issued in April 2016. But while investment advice is unquestionably the most high-profile fiduciary issue today, it is far from being the only fiduciary consideration of importance to those who sponsor, administer, or in some capacity serve retirement plans. The Employee Retirement Income Security Act (ERISA) of 1974, establishes expansive standards for operating employee benefit plans—including retirement plans—and provides rules that govern the conduct of plan fiduciaries. Among other things, ERISA demands that a fiduciary act solely in the interest of plan participants and beneficiaries.
On December 28, 2016, the DOL issued Interpretive Bulletin (IB) 2016-1, which addresses retirement plan fiduciaries’ responsibilities for voting proxies related to retirement plan investments. Notable in this guidance is the DOL’s affirmation that plan fiduciaries may consider environmental, social, and governance factors—sometimes called “socially responsible” factors—when voting proxies.
Investment Powers Shared by Plan Fiduciaries and Participants
One of the ERISA-derived responsibilities of retirement plan fiduciaries is “the power to manage, acquire or dispose of” plan assets. In ERISA’s early years, usually one or more plan fiduciaries were responsible for managing plan investments. But in today’s participant-directed retirement plan environment, this power is often delegated to participants, who, depending on plan provisions, may make most or even all investment decisions for their own accounts. One investment power that is still most often exercised by plan fiduciaries, however, is proxy voting.
What is Proxy Voting?
Authority to represent someone else, especially in voting or decision making, is the definition of “proxy.” In the world of securities investing, purchasing stock gives an individual an ownership stake in the business that issued the stock. This is different from investing in bonds, which represents lending by the investor to the business entity or unit of government that issued the bond. As a partial owner, a stockholder may be entitled to a voice in some aspects of the business’ operations (e.g., electing a board-of-directors, voting on merger or acquisition issues, or voting on company leaders’ compensation packages).
Because most investors do not personally attend a corporation’s shareholder meetings, their votes—generally based on the number of shares they own—may be cast by another to whom they delegate that voting right, their “proxy.” In the world of retail investing, shareholders commonly may assign their voting rights to a proxy of their choosing, such as a member of the company’s management, its board-of-directors, etc. The scenario may be quite different, however, in the world of retirement plans.
Who Votes Shares Held in a Retirement Plan?
Stocks are often among the investments in retirement plans. They may be in the form of individual shares of a company, or held within a mutual fund. Both may have some level of voting rights attached to them. Because the overall responsibility for successfully operating a retirement plan rests with its fiduciaries, ERISA generally assigns the voting of proxies for stock investments within a plan to the plan trustee unless either 1) the trustee is subject to the direction of a named plan fiduciary, or 2) a plan fiduciary chooses an investment manager to manage plan assets.
Individual Stock or Mutual Fund? How Proxy Voting May Differ
If a shareholder vote is being held by a company whose individual stock shares are held by a retirement plan, direct voting on that specific shareholder issue can be done under proxy authority by a duly authorized plan representative. But if that stock is just one of numerous stocks, or if other investments (like bonds) are held within a mutual fund, then plan voting is likely to be of an entirely different nature. Plans that are invested in shares of a mutual fund generally are restricted to voting on matters pertaining to the mutual fund’s operation or governance. For example, a mutual fund’s shareholders may vote on whether the fund should expand investing in alternative energy sources, or to divest investment in companies in countries with poor human rights records. But a plan trustee, investment manager, or named fiduciary, typically would not be able to vote on an individual company’s shareholder issues if that company’s stock was held within a mutual fund.
Policy “See-Saw” is Evident in Interpretive Bulletin 2016-1
In addressing the fiduciary duties associated with proxy voting, DOL IB 2016-1 replaces IB 2008-2, issued in 2008 during the Bush administration. IB 2008-2 contained cautions for fiduciaries who might consider voting their proxies based on investment strategies “that take into account environmental, social and governance factors.” To do so could—IB 2008-2 seemed to warn—under certain circumstances be seen as giving undue weight to employer social philosophies or objectives rather than financial benefits to plan participants and beneficiaries.
IB 2008-2 replaced IB 94-2, issued during the Clinton administration. IB 94-2 had asserted that, while inferior return on investment does not justify making plan investment decisions based on socially responsible factors, considering such factors was acceptable as a “tie-breaker” in investment choice. This guidance was viewed by the Bush administration as unduly encouraging fiduciaries to include social, environmental, or political considerations in plan investment decisions and proxy voting, thus its replacement with IB 2008-2.
In the December, 2016, news release announcing IB 2016-1, the DOL pointed to the Bush administration’s position as having caused some “confusion as to whether or how a plan fiduciary may consider environmental, social or governance issues in connection with proxy voting.” The first step in drawing back from that more conservative position actually occurred in October 2015, with the DOL’s issuance of IB 2015-1. In that guidance, the agency expressed its intention to revert to what the agency considers the less cautionary tone in IB 94-2.
Now, with the DOL’s official replacement of the Bush-era guidance, the pendulum appears to have swung back in a direction of greater flexibility for fiduciaries that may want to consider investment factors other than pure return on investment; flexibility not only in the selecting of investments, but in using the power of their proxies.