The Department of Labor has again drawn the wrath of Democratic lawmakers, who on Friday submitted a comment letter strongly criticizing its proposed rule to limit fiduciaries’ ability to use proxy voting, which the commenters say is a key tool to further the financial interests of the workers and retirees they serve.
Senator Patty Murray (D-WA), ranking member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, Senator Sherrod Brown (D-OH), ranking member of the Senate Committee on Banking, Housing, and Urban Affairs, Congressman Bobby Scott (D-VA), chair of the House Education and Labor Committee, and Congresswoman Maxine Waters, chairwoman of the House Committee on Financial Services, led several of their Democratic colleagues in submitting the comment letter, which urged the DOL to withdraw the rule it proposed at the end of August.
“In practice, this proposal does the opposite of protecting retirees—it decreases the value of retirement plans’ investments by discouraging fiduciaries from using a key tool to fight for the financial interests of the workers and retirees they serve,” the letter reads. “Amid its summer regulatory ‘tsunami,’ the Department has once again overlooked its statutory and administrative obligations for rulemaking. This blatant attempt at disenfranchising ERISA-governed plans is ill-advised, unjustified, and unnecessary. Accordingly, we urge the Department to withdraw its proposed rule and refocus its efforts on bolstering sorely needed protections for ERISA plan participants and beneficiaries.”
The letter, addressed to Acting Assistant Secretary of the Department’s Employee Benefits Security Administration Jeanne Klinefelter Wilson, was also signed by Senators Tina Smith (D-MN), Tammy Baldwin (D-WI), Elizabeth Warren (D-MA), Dick Durbin (D-IL), Ron Wyden (D-OR), Maria Cantwell (D-WA), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI), and Mazie Hirono (D-HI).
In the House, it was also signed by Representatives Adam Smith (D-WA), Frederica Wilson (D-FL), Suzan DelBene (D-WA), David Trone (D-MD), Denny Heck (D-WA), Pramila Jayapal (D-WA), and Mark DeSaulnier (D-CA).
The comment period for the EBSA’s proposed rule, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” ends Oct. 5, 2020. There were 228 public comments on the proposed rule listed on the EBSA website as of mid-day Monday.
“The proposed proxy rule would ensure that individuals responsible for the retirement savings of millions of American workers are voting proxies only where it is financially in the interest of the plan to do so. The proposal would provide clarity and further the prudent management of plan assets and resources,” said Secretary of Labor Eugene Scalia, in a Aug. 31, 2020 EBSA statement announcing the proposed rule.
“The proposal would clarify ERISA fiduciary duties for proxy voting and monitoring proxy advisory firms,” Klinefelter Wilson added. “The proposed rule would reduce plan expenses by giving fiduciaries clear directions to refrain from spending workers’ retirement savings to research and vote on matters that are not expected to have an economic impact on the plan.”
Questioning rule’s benefit to participants
The Dems’ comment letter counters that because the DOL is effectively decreasing the value of shares owned by ERISA plans by limiting the rights associated with them, it is unclear how forced proxy abstention could possibly benefit the participants and beneficiaries of these plans.
From the comment letter:
For a fiduciary to vote a proxy, the vote must have an economic impact on the plan, which requires the fiduciary to expend resources to make that determination at the outset, which may result in the use of plan assets to abstain from exercising a right that is associated with share ownership. In fact, the Department suggests that “it would be better for the plan to simply refrain from voting rather than to incur even small costs making this determination.” By this logic, if a fiduciary refrains from making an economic impact determination and it is later determined that the vote, in fact, had such an impact, the fiduciary may be held liable for breaching his or her duties to the plan. This catch-22 makes it entirely unclear what the Department actually expects of fiduciaries to do—except perhaps nothing. The only clarity related to this proposal is its intended outcome—to disenfranchise ERISA plans.
The Democrats go on to say that as drafted, the proposal is unworkable because it is impossible for a fiduciary to understand how to meet such a subjective standard. “We believe, however, that is the intent. A fiduciary will not risk breaching his or her duties to the plan, so the end result will simply be to avoid voting proxies unless a fiduciary takes advantage of a ‘permitted practice’ like supporting management recommendations.”
Another attack on ESG investing?
The commenters also contend the proposal is another thinly veiled attack on ESG investing, saying this—combined with the earlier proposal that ERISA plan fiduciaries may not invest in environmental, social and governance (ESG) vehicles when an underlying investment strategy decreases return or increases risk to achieve non-financial objectives—represent a “convoluted ruse to favor legacy energy companies” rather than allow the free market to make these decisions.
“These anti-environmental, anti-social, and anti-governance stances are driving the Department to redefine ERISA’s fiduciary functions in a way that subordinates the interests of plan participants and beneficiaries to the desires of corporate management and the Trump Administration,” the letter states.
After reviewing the public comments, the DOL will determine whether to move forward with issuing a final rule. It could also be revised (with another subsequent comment period), there could be a request for information, or the proposed rule could be withdrawn.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
