Proxy voting – sponsor fiduciary risk

This is the second of two articles on ESG (environmental, social, governance) investing and (ESG-related) proxy voting, focusing on sponsor fiduciary liability. This article focuses on the sponsor fiduciary’s obligations with respect to proxy voting. We begin with the bottom line.

Bottom line

As we discuss further below, the sponsor fiduciary’s responsibility with respect to proxy voting is typically indirect – generally, some other fiduciary (e.g., the plan’s trustee, an investment manager, or a proxy voting firm) will be directly responsible for proxy voting. In that situation, the sponsor fiduciary’s responsibility will be to monitor the conduct of the proxy voting-fiduciary (e.g., for compliance with ERISA’s duties of prudence and loyalty). And, within a range of plausibility, that duty will be more about process (reviewing/documenting review of the proxy voting-fiduciary’s policies and activity) and less about substance (less about, e.g., whether a particular proxy initiative is prudent).

Process – the sponsor fiduciary’s responsibility with respect to proxy voting

Unlike ESG investing, where sponsor fiduciaries typically are directly responsible for an ESG investment decision (e.g., the decision to include an ESG fund in a 401(k) plan fund menu), sponsor fiduciaries typically have no direct responsibility for voting of proxies for securities held by the plan. Generally, where the plan directly holds the security, the plan’s trustee is responsible for proxy voting, unless that responsibility has been delegated to someone else. Quoting the regulation:

The responsibility for exercising shareholder rights lies exclusively with the plan trustee except to the extent that either:

(1) The trustee is subject to the directions of a named fiduciary …; 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 ….

In these circumstances (that is, where someone other than the plan fiduciary is responsible for voting proxies), the sponsor fiduciary’s liability is (as we said) indirect. With respect to securities held directly by the plan, plan fiduciaries are responsible for monitoring the conduct of the plan’s trustee, the relevant investment manager, or a person delegated responsibility for proxy voting (as the case may be), including the (fiduciary) act of voting a proxy. Quoting the regulation:

When deciding whether to exercise shareholder rights and when exercising shareholder rights, plan fiduciaries must … [e]xercise prudence and diligence in the selection and monitoring of persons, if any, selected to exercise shareholder rights or otherwise advise on or assist with exercises of shareholder rights.

What does monitoring mean here? Generally, that the person voting proxies has a plausible argument for why its vote is “in accordance with the economic interest of the plan and its participants and beneficiaries.” (We discuss the substance of prudence with respect to proxy voting further, below.)

Where the sponsor fiduciary adopts a proxy voting policy

Sponsor fiduciaries “may adopt proxy voting policies providing that the authority to vote a proxy shall be exercised pursuant to specific parameters prudently designed to serve the plan’s interests in providing benefits to participants and their beneficiaries and defraying reasonable expenses of administering the plan.”

Where a sponsor fiduciary (e.g., a plan’s investment committee) has adopted a proxy voting policy that, e.g., takes a position on certain governance issues, that fiduciary decision to adopt that policy is (as the preceding quote from the regulation says) subject to ERISA’s prudence standard, and (we would add) ERISA’s duty of loyalty standard. A sponsor fiduciary direction of the trustee with respect to a proxy vote would also be subject to these fiduciary standards.

Sidebar: Interests in mutual funds. Where that plan’s interest is not, e.g., in a stock but instead is in, e.g., a mutual fund, securities held in the mutual fund will be voted by the investment company or an affiliate. It seems plausible in this situation that, e.g., a court would, with respect to the prudence of the decision to select this mutual fund, consider not just the mutual fund’s investment strategy but also its proxy voting policy.

At first glance, this issue (the duty to consider a mutual fund’s proxy voting policy in connection with investing in that fund) looks the same as any other investment-related issue, ESG or non-ESG, and our discussion in our last article, on ESG investing, would seem to apply. And that indeed may be the case with respect to investment in an actively managed fund.

But … consider for example (as may often be the case) a sponsor fiduciary’s decision with respect to, e.g., an S&P Index fund to use Provider A, which pursues an aggressive proxy voting strategy with respect to corporate governance, rather than Provider B, which does not. Assume both carry the same expense ratio. In these circumstances, the price and performance of the investment will literally be identical, regardless of which manager is chosen. But the proxy voting strategy pursued by Provider A may (at the margin) have an effect on the performance of the S&P Index itself, either positive or negative.

This argument may sound abstruse, but it is literally the basis offered for shareholder activism by at least one major government plan – that the only way the plan could affect its own asset performance was to, through shareholder activism, affect “the market” (e.g., returns on the S&P 500).

While, in the preamble to the 2022 Regulation, DOL states that “the tiebreaker test … is not applicable in this context,” this might in fact be an area in which it could be applied.

Substance – the duties of prudence and loyalty in proxy voting

So … which proxy initiatives violate ERISA’s fiduciary standards and which don’t?

In the 2022 Regulation, DOL articulated the substance of a fiduciary’s duties with respect to proxy voting as follows:

When deciding whether to exercise shareholder rights and when exercising shareholder rights, plan fiduciaries must:

(A) Act solely in accordance with the economic interest of the plan and its participants and beneficiaries, in a manner consistent with paragraph (b)(4) of this section;

(B) Consider any costs involved;

(C) Not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to any other objective;

(D) Evaluate relevant facts that form the basis for any particular proxy vote or other exercise of shareholder rights;

(E) Exercise prudence and diligence in the selection and monitoring of persons, if any, selected to exercise shareholder rights or otherwise advise on or assist with exercises of shareholder rights, such as providing research and analysis, recommendations regarding proxy votes, administrative services with voting proxies, and recordkeeping and reporting services.

This is little more than a recitation of ERISA fiduciary basics. DOL’s reluctance to say more on these issues reflects that fact that, with respect to proxy voting, for many (if not most) proxy initiatives, there are arguments “on both sides” – arguments for why the change advocated for will improve the issuer’s financial results and arguments for why it won’t. And there is little objective basis for deciding between these dueling arguments – both sides have their studies.

There are, of course, limits. A proposal that the issuer should “stop making profits” or devote all its efforts to UFO research are (most would agree) clearly imprudent. Another limit would be a proxy initiative that presents an obvious conflict of interest or otherwise might violate ERISA’s prohibited transaction rules.

But the kind of proxy initiatives that most commonly come up – with respect to corporate governance, climate change policy, diversity initiatives – generally do not present these problems.

The most that can be said, for plan fiduciaries charged with “monitoring … persons … selected to exercise shareholder rights,” is that advocacy of outlandish proposals should be ruled out, but that most/nearly all ESG policy initiatives are likely to pass this minimum test.

Beyond that, plan fiduciaries should (as we said at the top) focus on process: on reviewing the conduct of the persons responsible for voting proxies and documenting the reasons why particular proxy voting policies/initiatives have been adopted.

It’s all about process …

While we always talk about process when discussing ERISA fiduciary obligations, with respect to proxy voting process is really important. It may be perfectly legal to vote a proxy against management on a key governance issue, so long as the fiduciary doing so has a basis (hopefully, a documented basis) for that vote – a plausible reason for its decision. A proxy vote made without due consideration could be a problem.


We have noted that Republicans in Congress are particularly focused on the issue of ESG proxy voting – see our article Criticism of current proxy voting policy – the Republican House Financial Services Committee Working Group. Their focus, however, seems to more on Securities and Exchange Commission policy than on ERISA.

The current Administration is favorably inclined towards ESG proxy voting – hence DOL’s rewrite of the (Trump DOL) 2020 ESG/proxy voting regulations. This “regulatory posture” decreases the likelihood that shareholder activism by ERISA plans will be targeted. A Republican Administration/DOL may be more hostile to it. One possibility is that a Republican Administration might impose more process requirements on ESG proxy initiatives, e.g., requiring more data/documentation in support of an argument that a particular initiative will improve corporate financial results.

Another possibility is that a Republican Administration might “encourage” fiduciaries to simply not vote proxies in many cases. Thus, the (Trump DOL) 2020 proxy voting regulation included a statement that “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right.” The (Biden DOL) 2022 proxy voting regulation eliminated that statement out of concern that “it may be misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.”

Nevertheless, it seems that, in a Republican Administration (if there is one sometime in the future), most of the “action” on proxies will be at the SEC/under the securities laws and not at the DOL/under ERISA.

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We will continue to follow this issue.