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Proxy voting on securities held in qualified plans

“Who or what entity is responsible for proxy voting[1] 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

For the definitive answer, one must turn to the language of the governing plan document. The responsible party will be different depending on whether the plan specifies that plan investments are directed by 1) the plan participant; 2) a discretionary trustee; 3) an ERISA 3(38) investment manager; or 4) plan administrator or other named fiduciary. The DOL issued guidance on this matter in Interpretive Bulletin (IB) 2016-01.

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, the terms of the plan document should address who or what entity assumes the voting responsibility when participants fail to give instructions. 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 plan fiduciary such as an investment manager.

In some cases, the plan trustee, who has investment discretion, has the obligation to vote proxies on securities held in a qualified retirement plan. That responsibility is an extension of the trustee’s fiduciary responsibility to prudently manage plan assets in the best interest of plan participants. However, if the trustee is a directed trustee (i.e., subject to the direction of a named fiduciary), then the named fiduciary would retain the responsibility for the voting of proxies.

The plan document may specify that an ERISA 3(38) investment manager is responsible for directing investments, including the responsibility for proxy voting. 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 plan’s investment manager has exclusive responsibility for voting proxies. However, if the plan document or investment management agreement expressly precludes the investment manager from voting proxies, the plan’s discretionary trustee has exclusive responsibility for voting proxies.

IB 2016-01 is clear that the investment policy statement for the plan should include a statement of the plan’s proxy voting policy. An IPS is a written statement that provides fiduciaries responsible for plan investments with guidelines or general instructions on investment management decisions.

Conclusion

For guidance on the individual or entity responsible for the voting of proxies for securities held in a 401(k) plan—turn to the governing plan documents. Proxy voting is a fiduciary responsibility. The authority for proxy voting should be addressed in the plan document and the procedure outlined in the plan’s IPS.

[1] A way for shareholders to vote on matters affecting a company without having to personally attend the meeting.

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