DOL limits retirement-plan proxy votes to those affecting financial returns

The move could curb shareholder actions related to sustainable investing.

The Department of Labor issued a final regulation Friday that would limit retirement plans’ proxy voting to matters that affect their financial performance, a move that critics say could curb shareholder efforts to promote sustainable investing.

The regulation amends the investment duties of fiduciaries for company-sponsored plans under federal retirement law, the Employee Retirement Income Security Act. The rule lays out six principles for exercising shareholder rights. They include acting only in the economic interests of the plan and its participants, considering the costs involved and not subordinating investment returns to “non-pecuniary,” or nonfinancial, goals.

“The rule aims to ensure that ERISA plan fiduciaries keep their eyes properly focused on the financial interests of ERISA plan participants,” Jeanne Klinefelter Wilson, acting DOL assistant secretary for the Employee Benefits Security Administration, said during a media conference call. “The rule would benefit plans and participants by ensuring that voting resources are reserved for matters that are expected to have a material effect on the value of the plan’s investment or the investment performance of the plan’s portfolio … after taking into account the costs involved.”

Under the regulation, plan fiduciaries would not have to vote on every proxy matter that comes up. The measure also guides the selection and management of proxy advisory firms.

The promulgation of the final proxy voting rule follows the October release of a final rule that requires retirement plan fiduciaries to select investments and strategies based solely on how they affect the plan’s financial performance.

Critics say the two regulations would curb the use of environmental, social and governance factors in retirement investing.

The proxy voting proposal drew more than 300 written comments and about 6,700 form letters, the vast majority of which were in opposition, according to an analysis last month by US SIF, Morningstar, Ceres and Impax Asset Management.

“The proposal doubles down on DOL’s widely opposed ESG investing rule first proposed in June, ignoring the value to plan beneficiaries of incorporating environmental and social considerations in investment, engagement, and proxy-voting decisions,” the report states.

The final proxy voting rule was changed in such a way that it will become effective 30 days — instead of 60 days — after publication in the Federal Register. The Federal Register appearance likely will happen in time for the rule to be in place before President-elect Joe Biden is inaugurated on Jan. 20.

I hope to work with the incoming Biden Administration to reverse the damage of this rule and advance steps that strengthen the financial security of people across the country as they work to weather this crisis,” said Sen. Patty Murray, D-Wash. and ranking member of the Senate Health Education Labor and Pensions Committee, in a statement.

Because the rule goes into effect before the new administration takes office, it becomes much harder for a Biden DOL to overturn it.

The 30-day time frame for an effective date was made possible because the expense of the regulation was “substantially reduced” for retirement plans, Wilson said.

The original proposal was modified by removing prescriptive provisions and replacing them with a principles-based approach. That will result in small incremental costs for plans because many will use the rule’s safe-harbor policies and the required actions under the rule are already reflected in common practices, Wilson said.

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