Pension Plans:

Additional Transparency and Other Actions Needed in Connection with Proxy Voting

GAO-04-749: Published: Aug 10, 2004. Publicly Released: Sep 9, 2004.

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In 1998, about 100 million Americans were covered in private pension plans with assets totaling about $4 trillion. The retirement security of plan participants can be affected by how certain issues are voted on during company stockholders meetings. Fiduciaries, having responsibility for voting on such issues on behalf of some plan participants (proxy voting), are to act solely in the interest of participants. Recent corporate scandals reveal that fiduciaries can be faced with conflicts of interest that could lead them to breach this duty. Because of the potential adverse effects such a breach may have on retirement plan assets, we were asked to describe (1) conflicts of interest in the proxy voting system, (2) actions taken to manage them, and (3) DOL's enforcement of proxy voting requirements.

Conflicts of interest in proxy voting can occur because various business relationships exist, which can influence a fiduciary's vote. When a portion of a company's pension plan assets are invested in its own company stock, the internal proxy voter may be particularly vulnerable to conflicts of interest because management has an enhanced ability to directly influence their voting decisions. Although situations representing conflicts will occur, limited disclosure of proxy voting guidelines and votes may make proxy voting more vulnerable to such conflicts. Because of limited transparency, concerned parties do not have the information needed to raise questions regarding whether proxy votes were cast solely in the interest of plan participants and beneficiaries. Some plan fiduciaries and the Securities and Exchange Commission (SEC) have taken steps to help manage conflicts of interest in proxy voting. Specifically, some plans voluntarily maintain detailed proxy voting guidelines that give proxy voters clear direction on how to vote on certain issues. The SEC has imposed new proxy voting regulations on mutual funds and investment advisers, requiring that specific language be included in the fund's guidelines on how fiduciaries will handle conflicts of interest. Some plan fiduciaries voluntarily make their guidelines available to participants and the public. In addition, some plans voluntarily disclose some or all of their proxy votes to participants and the public. Some plans also voluntarily put additional procedures in place to protect proxy voters from conflicts of interest in order to avoid breaches of fiduciary duty. For example, some plan sponsors hire independent fiduciaries to manage employer stock in their pension plans and vote the proxies associated with those stock. Plans may also hire proxy-voting firms to cast proxies to ensure that they are made solely in the interest of participants and beneficiaries. DOL's enforcement of proxy voting requirements has been limited for several reasons. First, participant complaints about voting conflicts are infrequent, at least in part, because votes cast by a plan fiduciary or proxy voter generally are not disclosed; therefore, participants and others are not likely to have information they need to raise questions regarding whether a vote has been cast solely in their interest. Second, for DOL, the Employee Retirement Income Security Act of 1974 presents legal challenges for bringing cases such that it is often difficult to obtain evidence that the fiduciary was influenced in his or her voting by something other than the sole interests of plan participants. Finally, even if such evidence existed, monetary damages are difficult to value and fines are difficult to impose. And, DOL has no statutory authority to impose a penalty without first assessing damages and securing a monetary recovery. In part, because of these challenges, DOL has devoted few resources to enforcing proxy voting by plans.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The Congress did not consider this matter when it addressed broader pension reform legislation.

    Matter: Congress may wish to consider amending ERISA to require that, at a minimum, an independent fiduciary be used when the fiduciary is required to cast a proxy vote on contested issues or make tender offer decisions in connection with company stock held in the company's own pension plan. In our view, this independent fiduciary requirement would not affect votes by a participant in an eligible individual account plan.

  2. Status: Closed - Not Implemented

    Comments: The Congress did not consider this matter when it addressed broader pension reform legislation.

    Matter: Congress may wish to consider amending ERISA to give the Secretary of Labor the authority to assess monetary penalties against fiduciaries for failure to comply with applicable requirements.

  3. Status: Closed - Not Implemented

    Comments: The Congress did not consider this matter when it addressed broader pension reform legislation.

    Matter: If the Congress wishes to better protect the interest of plan participants and increase the transparency of proxy voting practices by plan fiduciaries, it may want to amend ERISA to require that plan fiduciaries given SEC's proxy vote disclosure requirements for mutual funds, annually disclose votes as well as voting guidelines to plan participants, beneficiaries, and possibly also to the public. From a practical perspective, this disclosure could apply to all votes, but at a minimum, it should include those votes that may affect the value of the shares in the plan's portfolio. Such disclosures could be made electronically on the applicable Website. Since many plans often use multiple fiduciaries for voting proxies, the plan also could provide participants and others directions on how voting records by the various fiduciaries could be obtained. We believe that Congress should assure that participants have the right to request proxy voting records at least annually, consistent with their current right to request other plan documents.

  4. Status: Closed - Not Implemented

    Comments: The Congress did not consider this matter when it addressed broader pension reform legislation.

    Matter: If the Congress wishes to better protect the interest of plan participants and increase the transparency of proxy voting practices by plan fiduciaries, it may want to amend ERISA to require that plan fiduciaries include language in voting guidelines on what actions the fiduciaries will take in the event of a conflict of interest.

  5. Status: Closed - Not Implemented

    Comments: The Congress did not consider this matter when it addressed broader pension reform legislation.

    Matter: If the Congress wishes to better protect the interest of plan participants and increase the transparency of proxy voting practices by plan fiduciaries, it may want to amend the Employee Retirement Income Security Act of 1974 (ERISA) to require that plan fiduciaries develop and maintain written proxy-voting guidelines.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In lieu of conducting another proxy voting study, the Department of Labor took other appropriate actions to more regularly assess the level of compliance by plan fiduciaries and external asset managers with proxy voting requirements. In FY05, EBSA began a national project on Employee Stock Ownership Plans (ESOPs). Every ESOP investigation reviews proxy voting. ESOP investigative guidelines on EBSA's internal Best Practices web site include a section on evaluating proxy voting including, but not limited to, a review of proxy procedures and any potential conflict of interest in proxy voting. Investigators examine plan documents and corporate articles and by-laws to ensure that fiduciaries are voting shares in accordance with the corporate charter as well as complying with ERISA standards. The guidelines refer to DOL Interpretive Bulletin 94-2 (29 CFR 2509.94-2), which describes DOL's position on proxy voting, and fiduciary responsibilities. Potential violations involving proxy voting are tracked by field offices in EBSA's Enforcement Management System (EMS), which contains information on every investigation, identifying proxy voting as an issue being reviewed. Because all ESOP investigations review proxy voting, this issue is only entered into EMS when it appears that there is a violation involving proxy voting.) EBSA runs reports that provide the number of ESOP investigations, and the number of those investigations. Evaluations of a region's ESOP project results are formally done at least once a year. However, regions continually review ongoing factors, such as issues that indicate actual violations, that contribute to a successful project. Potential violations of proxy voting have occurred in only three investigations during the ESOP project, which has had 410 investigations closed. Even then, the issues have all involved the possible failure of pass-through voting rights rather than improper voting by fiduciaries.

    Recommendation: To improve oversight and enforcement of proxy voting, the Secretary of Labor should direct the Assistant Secretary of the Employee Benefits Security Administration (EBSA) to increase the Department's visibility in this area by conducting another enforcement study and/or taking other appropriate action to more regularly assess the level of compliance by plan fiduciaries and external asset managers with proxy voting requirements. Such action should include examining votes, supporting analysis, and guidelines to determine whether fiduciaries are voting solely in the interest of participants and beneficiaries.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: The Department of Labor has taken several steps to improve its coordination with the Securities and Exchange Commission (SEC). All regional field offices have contacted their local counterparts with the SEC. The two local agencies meet on either a formal or informal basis to discuss issues of interest to each agency. Some EBSA offices have conducted joint investigations with the SEC. Others have either provided assistance to SEC examinations or received assistance from the SEC. Assistance can include both specific information on the entity being investigated and general information concerning the issue being investigation (i.e., EBSA may explain ERISA requirements to the SEC or the SEC may explain their filing requirements to EBSA). Local offices have engaged in cross-training, and meet formally or informally which may result in cases referred. In addition, EBSA and the SEC have developed an access letter that allows either agency to request information on a specific entity and have finalized a Memorandum of Understanding.

    Recommendation: To improve oversight and enforcement of proxy voting, the Secretary of Labor should direct the Assistant Secretary of EBSA to increase the Department's visibility in this area by enhancing coordination of enforcement strategies in this area with SEC.

    Agency Affected: Department of Labor

 

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