The U.S. Department of Labor (DOL) has issued final rules providing guidance on the exercise of shareholder rights, including proxy votes, connected to plan-held securities by fiduciaries of plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The biggest takeaway is these rules prohibit ERISA fiduciaries from considering environmental, social, and corporate governance, or similar considerations (ESG) in a way that would subordinate pecuniary factors when exercising proxy vote rights.

These regulations are preceded by other similar DOL rules, as we have discussed in prior advisories found here and here, emphasizing that fiduciaries who consider non-pecuniary factors in choosing investments at the expense of lower investment returns or higher investment risk or fees may be shirking their fiduciary duties under ERISA.

This line of rulemaking from the DOL is in response to a growing movement to emphasize ESG factors in investments. Unlike the proposed rules that the DOL issued earlier this summer, the final rules take a less prescriptive, and more principles-based approach to proxy voting, as described below.

Effective Date

The final regulations will go into effect with respect to investment actions taken after January 12, 2021. However, plans will have until April 30, 2022, to make any changes to their qualified default investment alternatives (QDIAs) necessary to comply with the rules.

Fiduciary Principles for ERISA Proxy Voting

The final regulations make clear that ERISA plan fiduciaries are not required to vote every proxy or exercise every shareholder right. Instead, a fiduciary must act in accordance with the following principles when deciding how to cast a proxy vote (or whether to refrain from doing so):

  • 1. Act solely in accordance with the economic interests of the plan and its participants;
  • 2. Consider any costs involved;
  • 3. Do not subordinate the financial interests of plan participants to any non-pecuniary objectives, or promote non-pecuniary benefits or goals unrelated to plan participants' financial interests;
  • 4. Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights;
  • 5. Maintain records on proxy voting activities and other exercises of shareholder rights; and
  • 6. Exercise prudence and diligence in the selection and monitoring of persons (if any) selected to advise or assist with proxy votes (such as providing research and analysis; recommendations regarding proxy votes; or other administrative, recordkeeping, and reporting services).

If an advisor who is chosen by a fiduciary to provide services relating to proxy votes has its own proxy voting guidelines, the fiduciary must ensure that the advisor's guidelines are consistent with the fiduciary's own obligations under the first five principles set forth above.

Safe Harbors for Establishing Proxy Voting Policies

The final regulations also establish two safe harbors with respect to proxy voting policies. Fiduciaries who make proxy voting decisions pursuant to one or both of the following types of policies will be deemed to have met their obligations under ERISA, as long as the policies are also developed in accordance with the principles described above:

  • 1. A policy to limit voting to proposals that the fiduciary has prudently determined are substantially related to the security issuer's business activities or are expected to have a material effect on the value of the investment.
  • 2. A policy of refraining from voting on proposals where the plan's holding in the security issuer is sufficiently small (as determined by a quantitative threshold percentage that the fiduciary must prudently set) so as not to have a material effect on the plan's investment performance.

These are safe harbors, meaning that they are not the exclusive means for fiduciaries to satisfy their obligations under ERISA with respect to proxy voting.

Applicability to Individual Account Plans

The regulations do not apply to shareholder rights, including proxy voting rights, that are passed through directly to plan participants with accounts in individual account plans holding the applicable securities.

In light of these regulations, plan fiduciaries should evaluate their criteria for exercising shareholder rights, including proxy voting rights, to ensure that they comply with their obligations under ERISA. However, with the upcoming transition to the Biden administration, the DOL's position on this topic may soon change. Please consult with your legal counsel for up-to-date guidance.