Wednesday, January 04, 2017

DOL updates guidance for ERISA plan fiduciaries

By Mark S. Nelson, J.D.

The Department of Labor replaced existing guidance for ERISA plan fiduciaries on proxy voting with a new interpretive bulletin that restores much of the department’s mid-1990s guidance in order to clarify the scope of proxy voting by plan fiduciaries. The new guidance also updates DOL policy on proxy voting related to environmental, social and governance (ESG) matters. The DOL’s new guidance (IB 2016-01), which it issued just before the close of 2016, is already effective.

According to the DOL, its 1994 guidance (IB 94-2) along with its ESG and other guidance detailed in twin 2008 bulletins (IB 2008-1 and IB 2008-2), plus the department’s more recent guidance (IB 2015-1), could be misunderstood to hinder plan fiduciaries from voting proxies that involve ESG and other matters.

IB 94-2 stated a general principle that plan fiduciaries can engage with corporations on a range of matters if there is a reasonable expectation the action likely will enhance the plan’s investment in light of the costs. That guidance, said the DOL, was intended to spur proxy voting unless the costs of voting were beyond the best interests of the plan. But confusion may result if plan fiduciaries strictly quantify the cost-benefit analysis regarding engagement with companies via proxy voting. Moreover, third parties, such as proxy advisers, now provide voting advice at comparatively lower costs.

The DOL also said its existing guidance on proxy voting was poorly aligned with domestic and international trends on ESG matters. The department cited several examples: increased monitoring of companies’ ESG issues by other types of institutional investors; legally required corporate disclosures as exemplified by the Dodd-Frank Act’s say-on-pay shareholder advisory vote; voluntary actions by companies to be more proactive about ESG matters; and the development of stewardship codes by other countries.

“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,” said Phyllis Borzi, Assistant Secretary of Labor for Employee Benefits Security.

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