In August of last year, the Department of Labor published a proposed rule that plan fiduciaries must follow in voting proxies and exercising certain shareholder rights. The final rule was published December 16th of last year and is effective January 15th, 2021. Plan sponsors have until January 30th of next year to comply.
The rule is mostly of concern to defined benefit pension plans that hold stocks directly. Although there has been some confusion about the proxy voting obligations of fiduciaries of defined contribution plans, the final rule clarifies that it does not apply to shares held in participants’ individual accounts (including ESOPs) where voting rights are passed through to participants.
Sponsors of defined benefits plans must review their written proxy voting policies to ensure they are consistent with the new rule as well as the policies of investment managers voting proxies on behalf of the plan and any proxy advisory firm the plan has retained.
The new rule rejects previous guidance that non-pecuniary factors referred to as social, environmental, and corporate guidance concerns (“ESG”) may be considered. Under the new rule, in voting proxies and exercising other shareholders rights, plan fiduciaries may not vote in favor of social or political positions if these do not advance the financial interests of plan participants. Proxies must now be voted solely in accordance with the plan’s economic interests, considering only factors that affect the value of the plan’s investments.
The new rule also resolves the longstanding question of whether fiduciaries must vote every proxy. In fact, Department officials, in publishing the new rule, expressed their concern that fiduciaries should not expend plan resources voting proxies where the issue at stake will not have a significant economic impact on the plan. In deciding whether to vote proxies fiduciaries may:
Vote proxies per management’s recommendations (with conditions for additional analysis of matters involving conflicts of interest or a significant economic impact).
Vote proxies only on specific proposals that are substantially related to significant business activities such as mergers and corporate buy backs; and
Refrain from voting proxies unless a plan’s investment in the issuer exceeds a specified threshold.