|
Dear Mr. Donohue:
This is in response to your recent letter in which you
express concern about the use of pension plan assets by plan fiduciaries
to further public policy debates and political activities through proxy
resolutions that have no connection to enhancing the value of the plan’s
investment in a company. In view of the significance of the issues you
have raised, we are responding to your letter in the form of an advisory
opinion that further clarifies the application of Interpretive Bulletin
94-2 (29 CFR § 2509.94-2).
By way of background, section 404(a)(1)(A) and (B) of
the Employee Retirement Income Security Act of 1974 (ERISA, or the Act)
require that plan fiduciaries act prudently, solely in the interest of the
plan’s participants and beneficiaries, and for the exclusive purpose of
paying benefits and defraying reasonable administrative expenses.
Interpretive Bulletin 94-2 specifically addresses the application of
section 404(a)(1), as well as sections 402 and 403 of ERISA, to proxy
voting and shareholder-related activities. In that Bulletin, the
Department, among other things, set forth its view that the fiduciary
duties described in section 404(a)(1)(A) and (B) generally require that,
in voting proxies, the responsible fiduciary must only consider those
factors that affect the value of the plan’s investment and may not
subordinate the interests of the participants and beneficiaries in their
retirement income to unrelated objectives.
The Bulletin provides that the fiduciary obligations of
prudence and loyalty require responsible fiduciaries to vote proxies on
issues that affect the value of the plan’s investment. However, the
Bulletin also recognizes that fiduciaries need to take into account the
costs involved when deciding whether to exercise their shareholder rights.
Such costs include, but are not limited to, expenditures related to
developing proxy resolutions, proxy voting services, and the analysis of
the likely net effect of a particular issue on the value of the plan’s
investment. The Bulletin indicates that fiduciaries must take all of these
factors into account in determining whether the exercise of such rights
(e.g., the voting of a proxy), independently or in conjunction with other
shareholders, is expected to have an effect on the value of the plan’s
investment that will outweigh the cost of exercising such rights. This
same principle applies to fiduciary activities that involve monitoring or
influencing the management of a corporation. In this regard, the Bulletin
provides that an investment policy that contemplates activities intended
to monitor or influence the management of a corporation in which a plan
owns shares is consistent with a fiduciary’s obligations under ERISA
only where the responsible fiduciary concludes that there is a reasonable
expectation that such activities by the plan alone or in conjunction with
other shareholders is likely to result in an enhancement of the value of
the plan’s investment in the corporation sufficient to outweigh the
costs involved.
The Department has previously expressed strong concern
about the use of plan assets to promote particular legislative, regulatory
or public policy positions that have no connection to the payment of
benefits or plan administrative expenses.(1)
In this regard, the Department indicated that the mere fact that plans are
important participants in the national economy, and are generally affected
by legislation, regulations, actions and events that affect the economy as
a whole, does not convert legislative, regulatory or policy proposals
concerning the economy into a rationale for spending plan assets on the
policy debate. The Department rejects a construction of ERISA that would
render the Act’s tight limits on the use of plan assets illusory, and
that would permit plan fiduciaries to expend ERISA trust assets to promote
myriad public policy preferences, and believes that these principles apply
with equal force to a plan fiduciary’s support or pursuit of a proxy
proposal.
Under section 404(a)(1)(A) and (B) of ERISA, plan
fiduciaries must act solely in the interest of participants and
beneficiaries and for the exclusive purpose of paying benefits and
defraying reasonable administrative expenses. In our view, plan
fiduciaries risk violating the exclusive purpose rule when they exercise
their fiduciary authority in an attempt to further legislative, regulatory
or public policy issues through the proxy process when there is no clear
economic benefit to the plan. In such cases, the Department would expect
fiduciaries to be able to demonstrate in enforcement actions their
compliance with the requirements of section 404(a)(1)(A) and (B).
The mere fact that plans are shareholders in the
corporations in which they invest does not itself provide a rationale for
a fiduciary spending plan assets to pursue, support, or oppose a proxy
proposal unless the fiduciary has a reasonable expectation that doing so
will enhance the value of the plan’s investment. To the contrary,
Interpretive Bulletin 94-2 makes it clear that plan fiduciaries, when
considering whether to support or oppose a proxy proposal or to engage in
activities intended to monitor or influence the management of
corporations, must first take into account the cost of such action and the
role of the investment in the plan’s portfolio, and cannot act unless
they conclude that the action is reasonably likely to enhance the value of
the plan’s investment and will not subordinate the interests of plan
participants and beneficiaries to unrelated objectives. As the Department
has indicated in other contexts, plan fiduciaries may not increase
expenses, sacrifice investment returns, or reduce the security of plan
benefits to support or promote goals not directly related to the plan.
Consistent with these various pronouncements, the use
of pension plan assets by plan fiduciaries to further policy or political
issues through proxy resolutions that have no connection to enhancing the
value of the plan’s investment in a corporation would, in the view of
the Department, violate the prudence and exclusive purpose requirements of
section 404(a)(1)(A) and (B). For example, the likelihood that the
adoption of a proxy resolution or proposal requiring corporate directors
and officers to disclose their personal political contributions would
enhance the value of a plan’s investment in the corporation appears
sufficiently remote that the expenditure of plan assets to further such a
resolution or proposal clearly raises compliance issues under section
404(a)(1)(A) and (B).
This letter constitutes an advisory opinion under ERISA
Procedure 76-1. Accordingly, it is issued subject to the provisions of
that procedure, including section 10 thereof relating to the effect of
advisory opinions.
Sincerely,
Robert J. Doyle
Director of Regulations and Interpretations
Attachment
-
See letter from Alan D. Lebowitz,
Deputy Assistant Secretary for Program Operations, Employee Benefits
Security Administration, U.S. Department of Labor, to Jonathan P.
Hiatt, General Counsel, AFL-CIO (May 3, 2005) (copy
attached).
|
