Seyfarth Synopsis: The IRS has announced that the due date for contributions to a single-employer defined benefit pension plan due in 2020, previously extended to January 1, 2021 by the CARES Act, will be considered timely if made no later than January 4, 2021.

Under the funding rules for qualified defined benefit pension plans, plan sponsors generally must make any minimum required contributions no later than 8-1/2 months after the plan year to which they relate. For calendar year plans, this means that the minimum required contribution is due no later than September 15th of the year following the applicable plan year. Plans with a funding shortfall for the prior plan year also must make quarterly minimum required contributions (for a calendar year plan, these contributions are due April 15th, July 15th, October 15th and the following January 15th).

The CARES Act, enacted in late March 2020 in response to the COVID-19 pandemic, delayed the timing of any annual and quarterly minimum required contributions due in 2020 (i.e., attributable to the 2019 plan year for calendar year plans) until January 1, 2021. As a practical matter, because January 1, 2021, is a national holiday and banks will not transfer funds on that date, the delayed contributions were actually due no later than December 31, 2020. IRS Notice 2020-82, just issued on November 16th, effectively extends the deadline to the first business day after the new year, i.e., January 4th. The guidance is welcome news for plan sponsors who wish to make contributions in calendar year 2021 rather than 2020.

Subsequent to the issuance of the IRS Notice, the PBGC followed suit and revised its guidance to incorporate the extension for contributions due in 2020 to January 4, 2021 for PBGC purposes.

Seyfarth Synopsis: On October 30, 2020, the Department of Labor (“DOL”) released a final regulation amending the fiduciary regulations governing investment duties under the Employee Retirement Investment Security Act of 1974 (“ERISA”). This final regulation is clear that an ERISA fiduciary should not consider “non-pecuniary” factors such as environmental, social or corporate governance (“ESG”) or sustainability factors when considering an investment or investment strategy. Under the final rule, investment fiduciaries must evaluate investments and investment strategies solely based on pecuniary factors. The final regulation is generally effective 60 days after it is published in the Federal Register.

The DOL proposed this regulation on June 23, 2020, which is discussed in our July 1, 2020 post, Can You Invest Your Retirement Plan to Save the Planet? ERISA investment fiduciaries have been faced with the dilemma of whether social investing concepts have a role when investing ERISA plan assets. It appears that the DOL has answered this question. Specifically, social investing concepts only have a role if they potentially impact the risk of loss or opportunity for return of the proposed investment.

The DOL received numerous comment letters and objections critical to its proposed regulation, including claims that it was unnecessary rulemaking, reflected antiquated views, and provided too short a comment period. Despite the extensive comments it received, the final regulation is substantially the same as the proposed regulation. References to ESG were removed from the final regulation because the DOL did not want to narrow or limit the application of the final regulation. Under the final regulation, challenges remain for fiduciaries who consider non-pecuniary factors when making investment decisions.

The final regulation limited pecuniary factors to those factors that a fiduciary prudently determines are expected to have a material effect on the risk and/or return of an investment in light of the plan’s investment horizon, investment objectives and funding policy. While many investors may believe that a company that incorporates ESG principles to manage its risks and create opportunities offers an inherently less risky investment, the DOL does not appear to be willing to accept the argument that ESG in and of itself could be a pecuniary factor.

The final rule continues to provide for “tie breakers,” even though the preamble questions whether there could be a true tie-breaker situation. In such a situation, fiduciaries must document: why pecuniary factors were not sufficient to select the investment or investment course of action; how the selected investment compares to available alternatives; and how the non-pecuniary factors considered were consistent with the interest of the participants in their plan benefits. The DOL indicated in the preamble that whether an investment could increase plan contributions — e.g., investing the assets of a multiemployer plan in projects that will employ union members and increase contributions to the plan — was not a pecuniary interest. The same is true for adding an investment in response to interest expressed by plan participants.

For individual account plans that allow plan participants to choose from a range of investment alternatives, the regulation prohibits a fiduciary from considering or including an investment fund solely because the fund promotes, seeks or supports one of more non-pecuniary goals — e.g., an ESG focused fund. But, it does not prohibit including an ESG focused fund in the investment line-up. The final regulation, however, prohibits qualified default investment alternatives (QDIAs) with investment objectives or principal investment strategies that “include, consider, or indicate the use of one or more non-pecuniary factors.” This prohibition could be interpreted to cast a wide net.

The regulations would make it difficult or impossible for plan fiduciaries to consider non-pecuniary factors (e.g., religious tenets, ESG factors, etc.) when selecting investment options under an ERISA participant-directed defined contribution plan. A potential solution could be offering a brokerage window, which can provide access to individuals who wish to invest their accounts according to non-pecuniary factors such as religious tenets. Brokerage windows have their pros and cons. In addition, a fiduciary’s duties and responsibilities with respect to a brokerage window are not settled.

Historically, the DOL’s position on the role of ESG in ERISA plan investing has shifted with changes in administrations. With these final regulations, there is no doubt that the DOL has clearly shifted against marketplace trends. But, with a Biden administration coming onboard, calls for the SEC to address ESG disclosures and a Senate task force aimed at overhauling corporate governance, questions remain on whether the door on the role of ESG investing is closed. For information on ESG in the broader marketplace and what it means from a company perspective, see our alert series here, here, here and here.

If you are concerned about an existing non-pecuniary investment or investment strategy (e.g., an ESG or sustainability investment) or are interested in such an investment or strategy, be sure to contact your Seyfarth employee benefits attorney.

Seyfarth Synopsis: Yesterday, the Supreme Court heard oral arguments on the most recent challenge to the Affordable Care Act. The case has the potential to invalidate the entire law. While the Court’s decision isn’t expected soon, the oral arguments may provide some clues as to which way the Justices are leaning. We stress, however, that statements made during oral argument are not binding, and Justices remain free to rule as they deem appropriate.

On November 10, 2020, the Supreme Court heard oral argument on the constitutionality of the ACA. The case is captioned California v. Texas, No. 19-10011.

The case was brought by a group of state attorneys general in the wake of the 2017 Tax Cuts and Jobs Act, which reduced the individual tax for failure to maintain health insurance coverage to $0. The Trump Administration chose not to defend the law, but the lower courts granted leave to other states’ attorneys general and to the House of Representatives to defend the law. The arguments in the case addressed the following three issues:

  1. Do the plaintiff states have standing to challenge the constitutionality of the individual mandate?
  2. If so, did Congress’s actions in “zeroing out” the penalty for the mandate render the mandate an unconstitutional exercise of Congressional power?
  3. If so, is the mandate severable from the remainder of the ACA, or should the entire law fall?

The Court had previously ruled in 2012 that the ACA’s individual mandate was constitutional, as it represented an exercise of the lawful power of Congress to tax, and provide citizens with a reasonable choice of purchasing approved health insurance or paying a tax as a penalty. In that ruling, however, five Justices found that Congress cannot rely on its Commerce Clause power to enact the ACA. In other words, the Court upheld the mandate only by finding that the mandate was a tax, not a penalty. So, the question before the Court at present is whether the mandate can truly be considered a tax if it generates no revenue.

The Court under Chief Justice Roberts has shown an aversion to wading into politically sensitive rulings, given the current politically polarized climate. And this case has a complicated political overlay. The Court’s ruling here takes on heightened significance in the wake of the recent election in which Republicans appear to have maintained control of the Senate, because that takes away the Democrats’ avenue to “cure” the challenged provision by simply implementing a tax above $0 to enforce the individual mandate.

There are two ways that the Court can avoid a finding of unconstitutionality.

First, there is the issue of Article III standing. As we have previously opined, there is a substantial question whether there is a sufficient injury traceable to the actions of the defendants to justify a lawsuit on the merits. The November 10 oral argument focused on whether an injury could be said to have occurred because of increased reporting requirements, Medicaid payments by the state and the ACA restriction on what health policies an American can purchase in the marketplace. But a failure to purchase insurance does not directly cause injury — the tax penalty is $0. Justice Thomas described this issue in terms that we all can understand given our COVID times. He asked whether an American could sue in federal court to challenge a mask mandate that is not enforced. Justice Gorsuch and some of the more liberal Justices, however, expressed some concern that if the Court were to grant standing in this case, it would open the door to more challenges to federal law.

Look for the Court to limit any finding of standing to the peculiar facts of California v. Texas, given the concern about the federal judicial chaos that could result from a broader ruling on standing.

Second, there is the issue of severability. It is true that the individual mandate remains a part of the ACA, and it does state that all Americans “shall” purchase compliant insurance. It is also true that the constitutionality of that mandate is based on Congress’s taxing power that now is exercised at $0. It is true as well that a future Congress might increase the tax above $0, which might explain why the 2017 reduction to that level was not accompanied with a repeal of the individual mandate.

Justice Thomas pressed the attorney for the House of Representatives on how he could argue that the mandate is severable when, in 2012, he had argued that it was the “heart and soul” of the law. On the other hand, many Court observers honed in on statements from Chief Justice Roberts and Justice Kavanaugh, both of whom seemed to express reservation at “reading into” Congressional intent rather than simply looking to the actions taken by Congress in zeroing out the individual mandate (while leaving the rest of the law intact). Justice Alito offered a hypothetical involving a plane that is presumed to be incapable of flight without a crucial instrument, but that then continues flying without issue once that instrument is removed.

While it is impossible at oral argument to discern how nine Justices will rule, hints from the arguments suggest the Court may have the votes to find standing (in a limited way) and declare only the individual mandate (and not the remainder of the law) to be unconstitutional as long as it is enforced by a $0 tax. We anxiously await the decision of the Court, and its reasoning.

On Wednesday, November 4, 2020, 9:00 a.m. to 5:00 p.m. ET, Seyfarth employee benefits attorneys Ben Conley, Jennifer Kraft and Howard Pianko will present at the Practicing Law Institute program “Applying ERISA Fiduciary Rules to Health Plans, Services and Products 2020.”

Howard is the program Chair and his panel will address prohibited transaction issues in the health and welfare space, such as hospitals providing services to their own employees. Ben will present an update on: (i) Department of Labor enforcement in the health and welfare space; and (ii) recent ERISA regulatory and legislative developments as well as what we might expect to see in benefit developments post-election. Jennifer will discuss fiduciary basics in the health and welfare area as well as onsite clinics, which more and more employers are exploring as a way to help provide cost-effective, quality care and combat rising healthcare costs.

For more information and to register for this program, visit www.pli.edu.

Seyfarth Synopsis: Many of the limitations that apply to tax-qualified plans, including 401(k) and 403(b) plans, are subject to cost-of-living increases. The IRS just announced the 2021 limits. The annual employee salary deferral contribution limits are not changing, but there are a few adjustments for 2021 that employers maintaining tax-qualified retirement plans will need to make to the plans’ administrative/operational procedures.

In Notice 2020-79, the IRS recently announced the various limits that apply to tax-qualified retirement plans in 2021. Notably, the “regular” 401(k) contribution limit and the “catch-up” contribution limit are not changing, and will remain at $19,500 and $6,500, respectively, for 2021. Thus, if you are or will be age 50 by the end of 2021, you may be eligible to contribute up to $26,000 to your 401(k) plan in 2021. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.

The annual plan limits that did increase for 2021 include:

  • the maximum that may be contributed to a defined contribution plan (e.g., 401(k) or 403(b) plan) in 2021, inclusive of both employee and employer contributions, will increase by $1,000 to $58,000; and
  • the maximum annual compensation that may be taken into account under a plan (the 401(a)(17) limit) will increase from $285,000 to $290,000.

The Notice includes numerous other retirement-related limitations for 2021, including a $6,000 limit on qualified IRA contributions (unchanged) and adjustments to the income phase-out for making qualified IRA contributions. Other dollar limits for 2021 that are not changing include the dollar limitation on the annual benefit under a defined benefit plan ($230,000), the dollar limit used to determine a highly compensated employee ($130,000), and the dollar limit used when defining a key employee in a top-heavy plan ($185,000).

Individuals should check their plan contribution elections and consult with their personal tax advisor before the end of 2020 to make sure that they take full advantage of the contribution limits in 2021. Although many limits are not changing, employers who sponsor a tax-qualified retirement plan should still consider any necessary adjustments to plan administrative procedures and participant notices to ensure proper administration of the plan in 2021.

Employers who sponsor defined benefit pension plans (e.g., cash balance plans) also should be sure to review the new limits in the IRS Notice and make any necessary adjustments to plan administrative/operational procedures.

On Tuesday, October 13, 2020, 9:00 am to 5:00 pm ET, Seyfarth attorneys Howard Pianko and Linda J. Haynes will participate in the Practicing Law Institute’s Pension Plan Investments 2020: Current Perspectives program. Howard is a co-Chair for the program and Linda will present as part of the “Plan Governance Issues” panel. In this program, experienced ERISA practitioners in the area of plan investments will provide their perspectives, and share their substantive knowledge, on recent structural and legal developments in this space. This conference also is an essential venue for learning about new plan investment products and market practices.

Find more information and to register for this program at www.pli.edu.

By: Mark Casciari and Joy Sellstrom

Synopsis:  On August 28, 2020, the federal Department of Labor (DOL) issued a final rule entitled “Promoting Regulatory Openness Through Good Guidance” (the “PRO Rule”) that establishes a data base with far fewer “Guidance” documents, thus placing a greater focus on statutory and regulatory interpretation.

Effective September 28, 2020, the DOL is changing the way it treats Guidance documents.  In response to President Trump’s Executive Order 13891, which directed federal agencies to treat Guidance issued outside of the context of formal rule-making as non-binding, the DOL issued the PRO Rule, 85 Fed. Reg. 168, to establish requirements for issuing Guidance and to make all Guidance available to the public. “Guidance” is defined as an agency statement of general applicability intended to affect the future behavior of regulated entities and persons that sets forth a policy on a statutory, regulatory, or technical issue, or an interpretation of a statute or regulation.   It includes opinion letters, memoranda, bulletins, and advisory opinions.

The PRO Rule provides that well-crafted Guidance can provide valuable means for an agency to interpret existing law or clarify how it intends to enforce the law.  However, Guidance may not establish new requirements that the agency treats as binding unless it is issued pursuant to applicable notice and comment requirements of the Administrative Procedure Act or other law.

The PRO Rule requires all DOL Guidance to be made available to the public in a searchable database. In creating this database, the DOL rescinded almost 3,200 Guidance documents.  What remains as DOL Guidance thus occupies a more limited universe.  And the PRO Rule allows the public to shrink this universe further by petitioning the DOL to withdraw or modify included Guidance.

All Guidance issued, modified or withdrawn after September 28, 2020, must be approved by an agency head who must ensure that it follows all relevant statutes.  Guidance documents also must now include a disclaimer stating that the document does not have the force and effect of law, or explain why the Guidance is binding.

Guidance may of course be helpful to employers and fiduciaries in interpreting laws and regulations.  But, arguably, by not including certain Guidance in the database, employers and fiduciaries will have more flexibility in their legal interpretations, albeit at the loss of some degree of certainty.  The PRO Rule thus should cause employers and fiduciaries, and their counsel, to hone their statutory and regulatory interpretation skills.  There are a number of well-accepted canons of constructions that should now be given more attention.  See e.g. https://www.law.georgetown.edu/wp-content/uploads/2018/12/A-Guide-to-Reading-Interpreting-and-Applying-Statutes-1.pdf.

One final thought worth passing on is that ERISA fiduciaries still may have the right to rely in good faith on the reasonable legal opinions of competent counsel.  Courts have the final say on what a statute and regulation means in the context of particular facts, and they may view fiduciary action based on the advice of counsel with some degree of deference.  See generally Restatement (Third) of Trusts § 93, comment c (2012). This means that employers and fiduciaries should not hesitate to seek out counsel on what a statute or notice and comment regulation means, especially in a space now suddenly lacking Guidance.

Our take-away:  The new PRO Rule will put a premium on the interpretative skills of employers and fiduciaries, and their counsel.

Thursday, October 8, 2020
3:00 p.m. to 4:00 p.m. Eastern
2:00 p.m. to 3:00 p.m. Central
1:00 p.m. to 2:00 p.m. Mountain
12:00 p.m. to 1:00 p.m. Pacific

REGISTER HERE

COVID-19 has changed the landscape of retirement readiness for many employees. Employees have been furloughed or lost jobs and plan account balances have been negatively impacted by changes in the stock market. While the CARES Act provides participants with more opportunities to gain access to plan benefits while employed, including new distribution and loan provisions, the question becomes – how will this impact retirement readiness? What about ESG investments? Are they options employers should consider offering in their plans?

Although not directly related to the pandemic, the Department of Labor has also relaxed its rules for electronic administration of plans. Although these changes facilitate access to plan information and money while quarantined at home, many are worried about the security and privacy of information and plan benefits.

Marsh and Seyfarth Shaw LLP are partnering in a discussion of the legal, compliance, fiduciary, investment and security/privacy issues related to these new developments.

Join our October 8, 2020 webinar to learn about:

  • Retirement readiness in light of coronavirus-related distributions, plan loan relief and ESG investments
  • Security, privacy and ERISA fiduciary concerns, especially in light of recent electronic administration relief, including electronic communications and remote notarizations

Who Should Listen: Human resource teams, finance teams, and retirement plan fiduciaries (and people who support them) who deal with plan investments, design elements, and the security of plan assets and data.

Speakers:

Liz J. Deckman, Partner, Seyfarth Shaw LLP
Benjamin F. Spater, Senior Counsel, Seyfarth Shaw LLP
Stephanie Gowan, Vice President, Marsh; Investment Advisor, MMA Securities, LLC
Thomas Fuhrman, Managing Director, Marsh Advisory

By: Mark Casciari and Ronald Kramer

Seyfarth Synopsis:  The courts have stated that their review of fiduciary decisions is both exacting and deferential.  A recent decision from the Court of Appeals for the Seventh Circuit offers help to ERISA benefit professionals who prefer to maximize judicial deference in favor of the fiduciaries.

One of the enduring paradoxes of ERISA litigation is the judicial standard of review of fiduciary decisions. The standard of review is important because an easier standard will uphold more fiduciary decisions in court and encourage more individuals to serve as fiduciaries.  No one who acts in good faith – as the vast majority of ERISA fiduciaries do – likes to make tough decisions and be sued or reversed.

On the one hand, the courts frame their review of fiduciary decisions in exacting terms.  For example, in Donovan v. Bierwirth, 680 F.2d 263 (2d Cir. 1982), the Court of Appeals for the Second Circuit said that the ERISA fiduciary’s duty of loyalty to plan participants and beneficiaries is “the highest known to the law.”

But, in Bator v. District Council 4, Graphic Communications Conf., No. 18-cv-1770 (7th Cir. Aug. 27, 2020), the court proffered another viewpoint.  It considered whether ERISA fiduciaries violated their duties by undercutting the financial health of the pension plan they managed.  The plaintiffs alleged that the fiduciaries breached their duties by not enforcing the contribution terms of the Trust Indenture when they allowed one participating local union’s members at one company to contribute to the plan at lower rates than other members form the same local at another company.. Notably, the case did not involve a review of a claim for benefits, and the court’s decision did not turn on claim review.

The Bator court upheld the fiduciary decision by reasoning that the fiduciary interpretation of the governing plan document “falls comfortably within the range of reasonable interpretations” and “is compatible with the language and the structure” of that document.  The Court did so even though it recognized that the plaintiffs’ interpretation of the Trust Indenture was equally reasonable.

So, how can these very different standards of judicial review be reconciled?

Yes, reconciliation is possible.  ERISA’s core focus is the governing plan documents.  If, as in Bator, they provide the fiduciary with broad discretion to interpret their terms, and provide that the fiduciary decision shall be final and binding, the court should give the fiduciary the benefit of the doubt.

One final point is worth noting.  Plaintiffs often argue that equitable principles should govern judicial review of fiduciary decisions.  But, as Justice Thomas said recently in his concurrence in Thole v. U.S. Bank, 140 S.Ct. 1615 (2020) (Seyfarth analysis here), the common law of trusts is not the starting point for interpreting ERISA.  The starting point is the statute itself, and the statute commands that the courts honor ERISA plan terms, including terms that give interpretative discretion to fiduciaries.

Our take away is – there is no substitute for good drafting of ERISA plan terms.

Seyfarth Synopsis: On the heels of the Department of Labor’s June proposed regulation throwing cold water on plan fiduciaries’ selecting investments in the environment, social and governance (ESG) space, the agency has now offered their viewpoint on a fiduciary’s obligation — nay, ability — to vote proxies for its plan’s holdings. See here for our prior post on ESG investments.

Background

The DOL’s prior subregulatory guidance can be found in Interpretive Bulletin 2008-02 (published under the Bush administration), Interpretive Bulletin 2016-01 (published under the Obama administration), and Field Assistance Bulletin 2018-01 (published under the Trump administration). In April 2019, President Trump issued a directive to the DOL to study their guidance in this area. The Executive Order said the DOL should review their “existing guidance on the fiduciary responsibilities for proxy voting to determine whether any such guidance should be rescinded, replaced, or modified to ensure consistency with current law and policies that promote long-term growth and maximize return on ERISA plan assets.”  This item then appeared on the DOL’s Fall 2019 regulatory agenda, and culminated in the proposed regulations issued August 31, 2020.

Prior to this latest guidance, it had been generally accepted that a fiduciary’s responsibility to manage plan assets included exercising shareholder rights associated with the plan’s investments — e.g., proxy voting — unless it would result in the expenses of plan assets out of proportion to the matter at hand. It is common for the plan’s investment policy to address proxy voting. Often this responsibility is delegated to investment managers.

Given the magnitude of assets invested by ERISA-governed retirement plans ($2.1 trillion in 2017 according to the DOL), through the new proposed regulations the current administration continues to express its concern with shareholder activism by plan fiduciaries. Previous attempts to address that issue focused on an admonition by the DOL that fiduciaries must be able “to articulate a clear basis for concluding that the proxy vote, the investment policy, or the activity intended to monitor or influence the management of the corporation is more likely than not to enhance the economic value of the plan’s investment before expending plan assets.” IB 2008-02.

The proposed rule, issued on August 31, 2020, would revoke the DOL’s prior guidance and amend a regulation dated back to 1979. The proposal is very reminiscent of the DOL’s proposal concerning a fiduciary’s investment duties, which would amend the same regulations from 1979. The new proposal would create a bifurcated approach under which the fiduciary faces an affirmative obligation on one hand, and a prohibition on the other. Under the new guidance, when confronted with a proxy matter, the plan fiduciary must consider the cost involved with voting and whether the matter being voted on would have an economic impact on the plan’s investment. If it does, the fiduciary must vote the proxy. The new guidance provides that the plan fiduciary is actually barred from voting the proxy unless the plan fiduciary determines that the matter would have an economic impact on the plan.

The DOL justifies this position by stating that the new rule is actually protecting plan assets because it “would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.” Ironically, this split obligation/prohibition creates real problems for the plan fiduciary who analyze every proxy presented, or risk violating their fiduciary duties.

Proposed Rule

The proposed rule sets forth specific standards requiring fiduciaries to:

(A)       act solely in accordance with the economic interest of the plan considering only factors that they prudently determine will impact the economic value of the plan’s investment based on a determination of risk and return over an appropriate investment horizon consistent with the plan’s objectives and funding policy;

(B)       consider the likely impact on the plan’s investment performance based on such factors as the size of the plan’s holdings in the issuer relative to the total plan assets, the plan’s percentage ownership of the issuer, and the costs involved with voting;

(C)       not subordinate the financial interests of the participants to any non-pecuniary objective, or sacrifice investment return or take additional investment risk to promote goals unrelated to those financial interests;

(D)       investigate material facts that form the basis for any vote;

(E)       maintain records on proxy voting activities, including the basis for particular votes; and

(F)       exercise prudence and diligence in selecting and monitoring persons selected to advise on or assist with such voting rights.

The DOL states that where the authority to vote proxies has been delegated to an investment manager or other entity, in order to properly monitor such delegate to ensure these standards are satisfied the plan fiduciary must require documentation of “the rationale for proxy voting decisions … sufficient to demonstrate that the decision … was based on the expected economic benefit to the plan, and that the decision … was based solely on the interests of participants and beneficiaries in obtaining financial benefits under the plan.”

The rule then requires fiduciaries to vote the proxy where the matter could have an economic impact on the plan after considering the above standards. On the other hand, if the fiduciary concludes that the proxy matter would not have an economic impact on the plan, than the fiduciary must not vote the proxy at all.

In an acknowledgement it may be difficult to always know whether a proxy matter would affect the plan’s economic interest without conducting an expensive study, the DOL says that plan fiduciaries can develop proxy voting policies. The proxy voting policy could incorporate three permitted practices:

  1. A policy of ordinarily voting in accordance with management’s recommendation on matters that are “unlikely to have a significant impact.”
  2. A policy focused on voting only on certain types of proposals likely to have a significant impact on the plan’s investment, such as corporate transactions, share buy-back plans, issuance of additional dilutive shares, and contested elections for directors.
  3. A policy refraining from voting if the plan’s investment is below a quantitative threshold that makes it unlikely the outcome of a vote will have a material impact on the plan.

The DOL proposal specifically provides that a fiduciary is prohibited from following recommendations of a proxy advisory firm or other service provider without determining that the provider’s proxy voting guidelines are consistent with the plan’s economic interest.

Plan fiduciaries should note that if the obligation to vote proxies has been delegated to an investment manager, it is typical for the manager’s agreement to provide that it will vote proxies according to the manager’s underlying proxy voting guidelines, which may not align with the proposed fiduciary guidance. As a result, plan fiduciaries may have to revisit that delegation or the incorporated proxy voting policy to bring the practice into alignment with the new rules.

The proposal would require that plan fiduciaries review any proxy voting policies every two years, which the DOL notes is its understanding of the industry standard for reviewing investment policy statements. Interestingly, the DOL states — “To facilitate transparency, the Department also reminds fiduciaries that proxy voting guidelines must be made available to plan participants, either as a separate document or by including them in the plan’s existing investment policy statement.”

The DOL is looking for comments on its proposed rule, which are due 30 days after publication of rule in the Federal Register. If you wish to comment, please contact your favorite Seyfarth attorney.