This interpretive bulletin sets forth the Department of Labor's (the
Department) interpretation of sections 402, 403 and 404 of the Employee
Retirement Income Security Act of 1974 (ERISA) as those sections apply
to voting of proxies on securities held in employee benefit plan
investment portfolios and the maintenance of and compliance with
statements of investment policy, including proxy voting policy. In
addition, this interpretive bulletin provides guidance on the
appropriateness under ERISA of active monitoring of corporate management
by plan fiduciaries.
(1) Proxy Voting
The fiduciary act of managing plan assets that are shares of
corporate stock includes the voting of proxies appurtenant to those
shares of stock. As a result, the responsibility for voting proxies lies
exclusively with the plan trustee except to the extent that either (1)
the trustee is subject to the directions of a named fiduciary pursuant
to ERISA Sec. 403(a)(1); or (2) the power to manage, acquire or dispose
of the relevant assets has been delegated by a named fiduciary to one or
more investment managers pursuant to ERISA Sec. 403(a)(2). Where the
authority to manage plan assets has been delegated to an investment
manager pursuant to Sec. 403(a)(2), no person other than the investment
manager has authority to vote proxies appurtenant to such plan assets
except to the extent that the named fiduciary has reserved to itself (or
to another named fiduciary so authorized by the plan document) the right
to direct a plan trustee regarding the voting of proxies. In this
regard, a named fiduciary, in delegating investment management authority
to an investment manager, could reserve to itself the right to direct a
trustee with respect to the voting of all proxies or reserve to itself
the right to direct a trustee as to the voting of only those proxies
relating to specified assets or issues.
If the plan document or investment management agreement provides
that the investment manager is not required to vote proxies, but does
not expressly preclude the investment manager from voting proxies, the
investment manager would have exclusive responsibility for voting
proxies. Moreover, an investment manager would not be relieved of its
own fiduciary responsibilities by following directions of some other
person regarding the voting of proxies, or by delegating such
responsibility to another person. If, however, the plan document or the
investment management contract expressly precludes the investment
manager from voting proxies, the responsibility for voting proxies would
lie exclusively with the trustee. The trustee, however, consistent with
the requirements of ERISA Sec. 403(a)(1), may be subject to the
directions of a named fiduciary if the plan so provides.
The fiduciary duties described at ERISA Sec. 404(a)(1)(A) and (B),
require that, in voting proxies, the responsible fiduciary consider
those factors that may affect the value of the plan's investment and not
subordinate the interests of the participants and beneficiaries in their
retirement income to unrelated objectives. These duties also require
that the named fiduciary appointing an investment manager periodically
monitor the activities of the investment manager with respect to the
management of plan assets, including decisions made and actions taken by
the investment manager with regard to
proxy voting decisions. The named fiduciary must carry out this
responsibility solely in the interest of the participants and
beneficiaries and without regard to its relationship to the plan
sponsor.
It is the view of the Department that compliance with the duty to
monitor necessitates proper documentation of the activities that are
subject to monitoring. Thus, the investment manager or other responsible
fiduciary would be required to maintain accurate records as to proxy
voting. Moreover, if the named fiduciary is to be able to carry out its
responsibilities under ERISA Sec. 404(a) in determining whether the
investment manager is fulfilling its fiduciary obligations in investing
plans assets in a manner that justifies the continuation of the
management appointment, the proxy voting records must enable the named
fiduciary to review not only the investment manager's voting procedure
with respect to plan-owned stock, but also to review the actions taken
in individual proxy voting situations.
The fiduciary obligations of prudence and loyalty to plan
participants and beneficiaries require the responsible fiduciary to vote
proxies on issues that may affect the value of the plan's investment.
Although the same principles apply for proxies appurtenant to shares of
foreign corporations, the Department recognizes that in voting such
proxies, plans may, in some cases, incur additional costs. Thus, a
fiduciary should consider whether the plan's vote, either by itself or
together with the votes of other shareholders, is expected to have an
effect on the value of the plan's investment that will outweigh the cost
of voting. Moreover, a fiduciary, in deciding whether to purchase shares
of a foreign corporation, should consider whether the difficulty and
expense in voting the shares is reflected in their market price.
(2) Statements of Investment Policy
The maintenance by an employee benefit plan of a statement of
investment policy designed to further the purposes of the plan and its
funding policy is consistent with the fiduciary obligations set forth in
ERISA section 404(a)(1)(A) and (B). Since the fiduciary act of managing
plan assets that are shares of corporate stock includes the voting of
proxies appurtenant to those shares of stock, a statement of proxy
voting policy would be an important part of any comprehensive statement
of investment policy. For purposes of this document, the term
``statement of investment policy'' means a written statement that
provides the fiduciaries who are responsible for plan investments with
guidelines or general instructions concerning various types or
categories of investment management decisions, which may include proxy
voting decisions. A statement of investment policy is distinguished from
directions as to the purchase or sale of a specific investment at a
specific time or as to voting specific plan proxies.
In plans where investment management responsibility is delegated to
one or more investment managers appointed by the named fiduciary
pursuant to ERISA Sec. 402(c)(3), inherent in the authority to appoint
an investment manager, the named fiduciary responsible for appointment
of investment managers has the authority to condition the appointment on
acceptance of a statement of investment policy. Thus, such a named
fiduciary may expressly require, as a condition of the investment
management agreement, that an investment manager comply with the terms
of a statement of investment policy which sets forth guidelines
concerning investments and investment courses of action which the
investment manager is authorized or is not authorized to make. Such
investment policy may include a policy or guidelines on the voting of
proxies on shares of stock for which the investment manager is
responsible. In the absence of such an express requirement to comply
with an investment policy, the authority to manage the plan assets
placed under the control of the investment manager would lie exclusively
with the investment manager. Although a trustee may be subject to the
directions of a named fiduciary pursuant to ERISA Sec. 403(a)(1), an
investment manager who has authority to make investment decisions,
including proxy voting decisions, would never be relieved of its
fiduciary responsibility if it followed directions as to specific
investment decisions from the named fiduciary or any other person.
Statements of investment policy issued by a named fiduciary
authorized to appoint investment managers would be part of the
``documents and instruments governing the plan'' within the meaning of
ERISA Sec. 404(a)(1)(D). An investment manager to whom such investment
policy applies would be required to comply with such policy, pursuant to
ERISA Sec. 404(a)(1)(D) insofar as the policy directives or guidelines
are consistent with titles I and IV of ERISA. Therefore, if, for
example, compliance with the guidelines in a given instance would be
imprudent, then the investment manager's failure to follow the
guidelines would not violate ERISA Sec. 404(a)(1)(D). Moreover, ERISA
Sec. 404(a)(1)(D) does not shield the investment manager from liability
for imprudent actions taken in compliance with a statement of investment
policy.
The plan document or trust agreement may expressly provide a
statement of investment policy to guide the trustee or may authorize a
named fiduciary to issue a statement of investment policy applicable to
a trustee. Where a plan trustee is subject to an investment policy, the
trustee's duty to comply with such investment policy would
also be analyzed under ERISA Sec. 404(a)(1)(D). Thus, the trustee would
be required to comply with the statement of investment policy unless,
for example, it would be imprudent to do so in a given instance.
Maintenance of a statement of investment policy by a named fiduciary
does not relieve the named fiduciary of its obligations under ERISA
Sec. 404(a) with respect to the appointment and monitoring of an
investment manager or trustee. In this regard, the named fiduciary
appointing an investment manager must periodically monitor the
investment manager's activities with respect to management of the plan
assets. Moreover, compliance with ERISA Sec. 404(a)(1)(B) would require
maintenance of proper documentation of the activities of the investment
manager and of the named fiduciary of the plan in monitoring the
activities of the investment manager. In addition, in the view of the
Department, a named fiduciary's determination of the terms of a
statement of investment policy is an exercise of fiduciary
responsibility and, as such, statements may need to take into account
factors such as the plan's funding policy and its liquidity needs as
well as issues of prudence, diversification and other fiduciary
requirements of ERISA.
An investment manager of a pooled investment vehicle that holds
assets of more than one employee benefit plan may be subject to a proxy
voting policy of one plan that conflicts with the proxy voting policy of
another plan. Compliance with ERISA Sec. 404(a)(1)(D) would require such
investment manager to reconcile, insofar as possible, the conflicting
policies (assuming compliance with each policy would be consistent with
ERISA Sec. 404(a)(1)(D)) and, if necessary and to the extent permitted
by applicable law, vote the relevant proxies to reflect such policies in
proportion to each plan's interest in the pooled investment vehicle. If,
however, the investment manager determines that compliance with
conflicting voting policies would violate ERISA Sec. 404(a)(1)(D) in a
particular instance, for example, by being imprudent or not solely in
the interest of plan participants, the investment manager would be
required to ignore the voting policy that would violate ERISA
Sec. 404(a)(1)(D) in that instance. Such an investment manager may,
however, require participating investors to accept the investment
manager's own investment policy statement, including any statement of
proxy voting policy, before they are allowed to invest. As with
investment policies originating from named fiduciaries, a policy
initiated by an investment manager and adopted by the participating
plans would be regarded as an instrument governing the participating
plans, and the investment manager's compliance with such a policy would
be governed by ERISA Sec. 404(a)(1)(D).
(3) Shareholder Activism
An investment policy that contemplates activities intended to
monitor or influence the management of corporations in which the plan
owns stock is consistent with a fiduciary's obligations under ERISA
where the responsible fiduciary concludes that there is a reasonable
expectation that such monitoring or communication with management, by
the plan alone or together with other shareholders, is likely to enhance
the value of the plan's investment in the corporation, after taking into
account the costs involved. Such a reasonable expectation may exist in
various circumstances, for example, where plan investments in corporate
stock are held as long-term investments or where a plan may not be able
to easily dispose such an investment. Active monitoring and
communication activities would generally concern such issues as the
independence and expertise of candidates for the corporation's board of
directors and assuring that the board has sufficient information to
carry out its responsibility to monitor management. Other issues may
include such matters as consideration of the appropriateness of
executive compensation, the corporation's policy regarding mergers and
acquisitions, the extent of debt financing and capitalization, the
nature of long-term business plans, the corporation's investment in
training to develop its work force, other workplace practices and
financial and non-financial measures of corporate performance. Active
monitoring and communication may be carried out through a variety of
methods including by means of correspondence and meetings with corporate
management as well as by exercising the legal rights of a shareholder.
[59 FR 38863, July 29, 1994]
