Fiduciaries May Adopt Safe Harbor Policies

On December 11, 2020, the DOL issued a final rule that establishes a framework for ERISA-governed fiduciaries to follow when they vote proxies and select and monitor proxy advisory firms. The proposed rule issued for comment in August would have required fiduciaries to cast proxy votes any time the matter being voted on would have an economic impact on the plan but also to only cast votes when there is an economic impact on the retirement plan. The final rule takes a more principles-based approach on proxy voting and expressly states that the fiduciary duty to manage shareholder rights does not require the voting of every proxy or the exercise of every shareholder right. The voting of proxies on shareholder proposals related to economic, social, and governance (ESG) issues will be adversely impacted by the rule, however.

What You Should Know

  • The principles-based approach of the final rule is based upon fiduciaries having a process for proxy voting and other exercises of shareholder rights by which they fulfill their duties prudently and solely in the interests of the plan participants and beneficiaries. The final rule addresses the application of the prudence and exclusive purpose duties under ERISA to proxy voting, the use of written proxy voting policies and guidelines, and the selection and monitoring of proxy advisory firms.
  • In addition to making it clear that fiduciaries are not required to vote every proxy, the final proxy rule provides that a fiduciary must:
    • Act solely in accordance with the economic interest of the plan and its participants and beneficiaries.
    • Consider any costs involved.
    • Not subordinate the interests of the participants and beneficiaries to any non-pecuniary objective.
    • Evaluate material facts that form the basis for any particular proxy vote or other exercise of shareholder rights.
    • Maintain records on proxy voting activities and other exercises of shareholder rights.
    • Exercise prudence and diligence in the selection and monitoring of proxy advisory firms.
  • Fiduciaries may satisfy their responsibilities when deciding whether to vote proxies by adopting one to two safe harbor policies:
  1. Limiting voting resources to particular types of proposals that the fiduciary has prudently determined are substantially related to the corporation’s business activities or are expected to have a material effect on the value of the plan’s investment.
  2. Refraining from voting on proposals when the plan's holding is below a prudently determined threshold.
  • The rule is in keeping with the DOL’s current position that private employer-sponsored retirement plans are not vehicles for furthering ESG objectives that are not in the financial interest of the plan. It is possible that the Biden administration could make change to the proxy voting rule; however, the rule has not been specifically identified as one the administration plans to review.
  • The final rule’s effective date is January 15, 2021 and applies to the exercise of shareholder rights after that date. Compliance dates may be delayed until January 31, 2022, for certain recordkeeping and proxy voting policy requirements.