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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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Discretionary plan trustee vs. directed trustee

“What defines a discretionary plan trustee vs. a directed plan trustee?”

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 Kentucky is representative of a common inquiry related to retirement plan trustees.

Highlights of the Discussion

ERISA Section 403(a) (see page 207 of linked information) provides that the assets of a qualified retirement plan must be held in trust by one or more trustees. The trustee will be either named in the plan document or appointed by a person who is a named fiduciary. The appointment of a plan’s trustee(s) is an important fiduciary decision that must be undertaken in a prudent manner by the plan sponsor or retirement plan committee with the proper authority.

Not all trustees, however, have the same authority or discretion to manage or control the assets of a plan. A trustee that has exclusive authority and discretion to manage and control the assets of the plan is a discretionary trustee. A discretionary trustee may be an employee of the company, but, more than likely, this role is outsourced to a third party.

However, a plan can expressly provide that the trustee is subject to the direction of a named fiduciary who is not a trustee. This is a directed trustee. The scope of a directed trustee’s duties is “significantly narrower than the duties generally ascribed to a discretionary trustee …” (Field Assistance Bulletin 2004-03). While a directed trustee is still a plan fiduciary, his or her fiduciary liability is limited, because he or she is required to act upon the direction of another plan fiduciary. The use of a directed trustee is a common plan model in the retirement industry. Many organizations serve as directed trustees.

“Direction” of the trustee is proper only if it is “made in accordance with the terms of the plan” and “not contrary to the Act [ERISA].” Accordingly, when a directed trustee knows or should know that a direction from a named fiduciary of the plan is not made in accordance with the terms of the plan or is contrary to ERISA, the directed trustee should not, consistent with its fiduciary responsibilities, follow the direction.

Conclusion

There are two basic flavors of qualified retirement plan trustee: discretionary and directed. Check the terms of the governing plan document and trust agreement for a particular plan to determine which applies.

 

© Copyright 2019 Retirement Learning Center, all rights reserved