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UPDATE: Proxy voting on securities held in qualified plans

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“Who or what entity is responsible for proxy voting on securities held in a qualified retirement plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Texas is representative of a common inquiry related to stock or securities held in an employer-sponsored retirement plan.

Highlights of the Discussion

The first place to look for the answer as to who/what entity has voting rights for securities held in a qualified retirement plan is in the language of the governing plan document. For example, there generally will be a section entitled “Voting Rights” or “Voting.” The responsible party likely will be either 1) the plan participant or 2) another plan fiduciary (such as the trustee or investment manager).

In plans where investments are participant-directed, a plan participant has the responsibility to direct the trustee as to the manner in which any voting rights should be exercised, assuming the plan participant timely received all notices, prospectuses, financial statements and proxy solicitation. When participants fail to give instructions, the plan document should address who or what entity assumes the voting responsibility. For example, many plan documents will specify the plan trustee as the entity to vote in lieu of receiving participant instructions. Alternatively, the plan may specify another fiduciary such as an investment manager.

In circumstances where a plan fiduciary has been given proxy voting responsibility under the terms of the plan, responsible individuals must turn to Department of Labor (DOL) regulations for guidance. On December 1, 2022, the DOL published final regulations dealing with environmental, social, and corporate governance (ESG) investing and proxy voting entitled, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” The new rules took effect January 30, 2023, while certain provisions related to proxy voting will not apply until December 1, 2023.

The final rule amends the prior regulation to be clear that plan fiduciaries should vote proxies as part of the process of managing a plan’s investments, unless they determine that voting proxies may not be in the plan’s best interest. Plan fiduciaries should not be indifferent to the exercise of shareholder rights.

The final rule amends the prior regulation to remove the two ‘‘safe harbor’’ examples for proxy voting policies because the DOL believes these safe harbors do not adequately safeguard the interests of plans and their participants and beneficiaries. What remains is the requirement to prudently manage shareholder rights to enhance the value of plan assets or protect plan assets from risk.

The final rule eliminates the prior rule’s specific monitoring obligations related to the use of investment managers or proxy voting firms. Consequently, the statutory obligations of prudence and loyalty apply to monitoring the work of service providers.

The final rule removes from the past regulation a specific requirement to maintain records on proxy voting activities and other exercises of shareholder rights. The replaced provision was widely perceived as treating proxy voting and other exercises of shareholder rights differently from other fiduciary activities and, in that respect, had the potential to create a misperception that proxy voting and other exercises of shareholder rights are disfavored or carry greater fiduciary obligations than other fiduciary activities.

In the end, the long-standing standards of prudence and loyalty should prevail with respect to proxy voting. Plan fiduciaries should vote proxies as part of the process of managing a plan’s investments, unless they determine that voting proxies may not be in the plan’s best interest.

Conclusion

For guidance on the individual or entity responsible for the voting of proxies for securities held in a qualified retirement plan—turn to the governing plan documents. The authority for proxy voting should be addressed in the plan document and the process and procedures should comply with DOL regulations that emphasize prudence and loyalty.

 

© Copyright 2024 Retirement Learning Center, all rights reserved
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204(h) Notice

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“My client is merging his firm with another firm, and they will be combining the companies’ defined benefit plans. Some participants will experience a reduction in benefits. Is there any kind of notice to participants that applies in this situation.”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Nebraska is representative of a common inquiry related to reducing plan benefits.

Highlights of Discussion

If a plan amendment or other employer action (e.g., merger or acquisition) reduces future benefit accruals for participants and/or beneficiaries in a defined benefit, target benefit or money purchase pension plan, the plan sponsor must provide a special notice to the affected individuals under Sections 204(h) of ERISA and 4980F(e) of the Internal Revenue Code (IRC). This special notice (a.k.a., the “204(h) Notice”) must be given to plan participants, beneficiaries and each employee organization that will experience a “significant” reduction.

Significant is determined based on the reasonable expectations and the relevant facts and circumstances. For a defined benefit plan, it is a comparison of the retirement-age benefit after the amendment to the retirement-age benefit prior to the amendment. For a defined contribution plan, it is a comparison of the amounts to be allocated after the amendment to what would have been allocated prior to the amendment.

The notice must state the specific provisions of the amendment causing a reduction in future accruals and its effective date. However, the notice need not explain how the individual benefit of each participant or alternate payee will be affected by the amendment. The notice should be written so it is understandable by the average plan participant and must provide sufficient information to allow a participant or beneficiary to understand the impact of the reduction.

Timing of the 204(h) Notice is important and depends on the type of change. The timing rules are complicated, but, generally, plan sponsors must provide the notice at least

-45 days before the effective date of benefit reduction;

-30 days after the amendment for an early retirement subsidy in a merger or acquisition, and

-15 days for other mergers or if a small plan (fewer than 100 participants) is involved.

(See  Treas. Reg. §54.4980F-1(b), Q&A-9(a) for more details on the timing of notices.)

Failure to provide the notice could result in an excise tax of $100 for each day of noncompliance.

Conclusion

Plan sponsors must provide a 204(h) notice when a plan amendment or other employer action (e.g., merger or acquisition) reduces future benefit accruals for participants and/or beneficiaries in a defined benefit, target benefit or money purchase pension plan. There are content and timing rules associated with the notice. A penalty for failing to provide the notice could apply.

© Copyright 2024 Retirement Learning Center, all rights reserved
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Updating the Plan Administrator

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“In an M&A situation, where the acquiring organization does not assume the seller’s retirement plan, what is something that the selling company often overlooks with respect to its retirement plan?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in Minnesota is representative of a common inquiry related to company acquisitions and mergers (M&As).

Highlights of Discussion

M&A scenarios are notorious for treating retirement plans as an after-thought. Because little thought is given to plans in these situations, a great deal of confusion, many missteps and fiduciary risk arise. That said, failing to update the Plan Administrator—the person or entity that is authorized with plan service providers to make decisions related to the retirement plan—is a common oversight.

RLC consulted on a case where Company A purchased Company B in an asset sale and Company A did not take on Company B’s 401(k) plan. The person who had been identified as Company B’s Plan Administrator and signed the Forms 5500 no longer held that role after the acquisition. Months went by and the Plan Administrator role was not filled. That meant that the plan was in limbo, and the level of participant frustration was escalating, along with risk of Department of Labor involvement.

Until a new Plan Administrator was formally appointed and the proper documentation provided, the plan recordkeeper would not/could not make any decisions or take any actions with respect to the plan (for fear of fiduciary liability). The owners of Company B should have anticipated that after the sale, a new Plan Administrator would need to be appointed. Once the new Plan Administrator was officially installed, the plan was put on a course for payout and termination.

Conclusion

Little thought—if any—is given to retirement plans in M&A scenarios. Something as simple and common as failing to update the plan decision-maker (Plan Administrator) with service providers can render a plan dead-in-the-water.

© Copyright 2024 Retirement Learning Center, all rights reserved