Office of Inspector General—Office of Audit 

EMPLOYEE BENEFITS SECURITY 

ADMINISTRATION 

PROXY-VOTING MAY NOT BE SOLELY FOR THE 

ECONOMIC BENEFIT OF RETIREMENT PLANS 

Date Issued: March 31, 2011 

Report Number: 09-11-001-12-121 
 

U.S. Department of Labor 

Office of Inspector General 

Office of Audit 

BRIEFLY... 

Highlights of Report Number 09-11-001-12-121, to the 

Assistant Secretary for Employee Benefits Security. 

WHY READ THE REPORT 

The private retirement system in the United States involves 

about $6 trillion of investments, including approximately 

$2.3 trillion of corporate stock for about 120 million 

Americans. Owning this corporate stock includes the right 

to vote on corporate issues. How a plan votes on corporate 

issues during company stockholders meetings can affect 

the retirement security of plan participants and 

beneficiaries. 

Since many retirement plans invest in corporate stock, 

proxy-voting is integral to the fiduciary act of managing 

retirement plan investments, and the plan trustee can 

exercise the votes itself or through (i) a named fiduciary 

through instruction of the plan trustee, or (ii) the investment 

manager to which investment authority of the relevant 

asset has been delegated. The Employee Benefits 

Administration (EBSA) requires fiduciaries to vote solely 

for the plan's economic interests and requires named 

fiduciaries periodically to monitor proxy-voting decisions 

made by third parties. 

In 2004, the General Accountability Office (GAO) issued 

an audit report entitled “Pension Plans: Additional 

Transparency and Other Actions Needed in Connection 

with Proxy-voting.” GAO found that ERISA presented legal 

challenges for bringing cases such that it was often difficult 

to obtain evidence that the fiduciary was influenced in his 

or her voting by something other than the sole interests of 

plan participants. Additionally, GAO found DOL had no 

statutory authority to impose a penalty without first 

assessing damages and securing a monetary recovery. In 

part, because of these challenges, GAO pointed out that 

DOL had devoted few resources to enforcing proxy-voting 

by plans. 

WHY OIG CONDUCTED THE AUDIT 

We conducted the audit to determine to what extent 

EBSA had assurances that proxies were voted solely 

for the economic benefit of plan participants and 

beneficiaries. 

READ THE FULL REPORT 

To view the report, including the scope, methodology, and 

full agency response, go to: 

http://www.oig.dol.gov/public/reports/oa/2011/09-11-001-

12-121.pdf 

March 31, 2011 

Proxy-voting May Not be Solely for the 

Economic Benefit of Retirement Plans 

WHAT OIG FOUND 

EBSA does not have adequate assurances that fiduciaries 

or third parties voted proxies solely for the economic 

benefit of plans. EBSA’s proxy-voting requirements do not 

specifically require fiduciaries or investment managers to 

document (1) the monitoring of proxy-voting activities or (2) 

economic rationale for proxy-voting decisions. For the 

calendar year 2009, we found that fiduciaries did not 

document that they monitored proxy-voting decisions for 

90 percent of plans we reviewed, and proxy voters were 

unable to provide documentation to substantiate the 

economic benefit of proxy-voting decisions for 2,455 of 

3,194 (77 percent) proposals, representing votes on 574 

million shares of stock with values totaling $11.6 billion. 

We also noted EBSA has devoted few resources to 

enforcing proxy-voting requirements. While EBSA did 

conduct three proxy-voting projects between 1988 and 

1996, EBSA did not routinely review proxy-voting 

decisions. EBSA lacks the statutory authority to assess 

penalties in cases that did not result in financial losses to 

plans and it is difficult to attribute monetary losses to 

proxy-voting decisions. EBSA also stated court cases have 

shown that fiduciaries may not need to document the 

rationale for their fiduciary decisions. 

Without additional transparency and enhanced 

enforcement activities, concerns about the fiduciary use of 

plan assets to support or pursue proxy proposals for 

personal, social, legislative, regulatory, or public policy 

agendas, which have no clear connection to increasing the 

value of investments used for the payment of benefits or 

plan administrative expenses, may not be properly 

addressed. 

WHAT OIG RECOMMENDED 

We made three recommendations to the Assistant 

Secretary for the Employee Benefits Security: (1) propose 

amending ERISA to give the Secretary of Labor the 

authority to assess monetary penalties against fiduciaries 

for failure to comply with proxy-voting requirements, (2) 

revise proxy-voting requirements in 29 CFR 2509.08-2 to 

require documented support for fiduciary monitoring and 

the economic benefit for proxy-voting decisions, and (3) 

include fiduciary proxy-vote monitoring in enforcement 

investigations to ensure that the economic benefit for 

proxy-voting decisions are appropriately documented. 

The Assistant Secretary for Employee Benefits Security 

did not agree to implement our recommendations. While 

EBSA supported expanding ERISA civil penalties for all 

fiduciary breaches, it did not believe proxy-voting activities 

warranted specific legislative changes, specific 

documentation requirements, or increased enforcement 

activities. 
 

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U.S. Department of Labor – Office of Inspector General 

Table of Contents 

Assistant Inspector General’s Report ......................................................................... 1
 

Results In Brief.............................................................................................................. 2
 

Objective — To what extent does EBSA have assurances that proxies were voted 

solely for the economic benefit of plan participants and 

beneficiaries? ....................................................................................... 4
 

Proxy-voting may not be solely for the economic benefit of retirement 

plans..................................................................................................................... 4
 

Finding 1 — EBSA does not have adequate assurances that proxies were 

voted solely for the economic benefit of retirement plans. ................ 4
 

Recommendations ........................................................................................................ 8
 

Appendices 

Appendix A Background ..................................................................................... 11
 

Appendix B Objective, Scope, Methodology, and Criteria .................................. 13
 

Appendix C Acronyms and Abbreviations .......................................................... 15
 

Appendix D EBSA Response to Draft Report..................................................... 17
 

Appendix E Acknowledgements ......................................................................... 21
 

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Proxy-Voting May Not Be For The Economic Benefit 

Report No. 09-11-001-12-121 
 

 

 

 

 

U.S. Department of Labor – Office of Inspector General 

U.S. Department of Labor Office of Inspector General 

Washington, D.C. 20210 

March 31, 2011 

Assistant Inspector General’s Report 

Phyllis C. Borzi 

Assistant Secretary for 

Employee Benefits Security 

U.S. Department of Labor 

200 Constitution Avenue, NW 

Washington, D.C. 20210 

The private retirement system in the United States involves about $6 trillion of 

investments, including approximately $2.3 trillion of corporate stock for about 120 million 

Americans. The retirement security of plan participants can be affected by how certain 

issues are voted on during company stockholders meetings. 

The Employee Retirement Income Security Act of 1974 (ERISA) is the primary federal 

law governing these retirement plan investments and private sector employee benefit 

plans in general. ERISA assigns the Department of Labor (DOL) primary responsibility 

to enforce the fiduciary provisions of ERISA Title I. DOL administers this responsibility 

through EBSA. 

Owning corporate stock gives a shareholder the right to vote on proposals concerning 

corporate policies and governance. Shareholder voting is the primary means by which 

shareholders can influence the company's operations, its corporate governance, and 

activities of social responsibility that may fall outside of financial considerations. 

Proxy-voting allows shareholders to vote when they cannot attend a shareholder 

meeting. 

Since many retirement plans invest in corporate stock, proxy-voting is integral to the 

fiduciary act of managing retirement plan investments, and can be exercised by (i) the 

plan trustee, (ii) a named fiduciary through instruction of the plan trustee, or (iii) the 

investment manager to which investment authority of the relevant asset has been 

delegated. EBSA requires fiduciaries to vote solely for the plan's economic interests and 

requires named fiduciaries periodically to monitor proxy-voting decisions made by third 

parties. 

We conducted the audit to determine to what extent EBSA had assurances that proxies 

were voted solely for the economic benefit of plan participants and beneficiaries. 

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To accomplish our audit, we reviewed applicable EBSA policies, procedures, and 

enforcement actions for fiscal years 2008 through 2010. We interviewed retirement plan 

fiduciaries, investment managers, EBSA officials, and Securities and Exchange 

Commission (SEC) officials to gain an understanding of the proxy process and voting 

decisions. We reviewed a stratified random sample of 43 retirement plans with common 

stock investments. 

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our 

audit objective. Our objective, scope, methodology, and criteria are detailed in 

Appendix B. 

RESULTS IN BRIEF 

EBSA does not have adequate assurances that fiduciaries or third parties voted proxies 

solely for the economic benefit of plans. EBSA’s proxy-voting requirements do not 

specifically require fiduciaries or investment managers to document (1) the monitoring 

of proxy-voting activities or (2) the economic rationale for proxy-voting decisions. For 

the calendar year 2009, we found that fiduciaries did not document that they monitored 

proxy-voting decisions for 90 percent of plans we reviewed, and proxy voters were 

unable to provide documentation to substantiate the economic benefit of proxy-voting 

decisions for 2,455 of 3,194 proposals (77 percent), representing votes on 574 million 

shares of stock with values totaling $11.6 billion. 

We also noted EBSA has devoted few resources to enforcing proxy-voting 

requirements. While EBSA did conduct three proxy-voting projects between 1988 and 

1996, EBSA did not routinely review proxy vote decisions. According to EBSA, it lacks 

the statutory authority to assess penalties in cases that did not result in financial losses 

to plans as ERISA bases assessed penalties on monetary losses and it is difficult to 

attribute monetary losses to proxy voting decisions. EBSA also stated court cases have 

shown that fiduciaries may not need documentation to support their fiduciary decisions. 

Without additional transparency and enhanced enforcement activities, concerns about 

proxy-voting that has no clear connection to increasing the value of investments may 

not be properly addressed. 

We made three recommendations to the Assistant Secretary for Employee Benefits 

Security: (1) propose amending ERISA to give the Secretary of Labor the authority to 

assess monetary penalties against fiduciaries for failure to comply with proxy-voting 

requirements, (2) revise proxy-voting requirements in 29 CFR 2509.08-2 to require 

documented support for fiduciary monitoring and the economic benefit for proxy-voting 

decisions, and (3) include fiduciary proxy-vote monitoring in enforcement investigations 

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to ensure that the economic benefit for proxy-voting decisions are appropriately 

documented. 

In response, the Assistant Secretary for Employee Benefits Security stated that EBSA 

would support expanding ERISA civil penalties for all fiduciary breaches, including proxy 

voting violations, but would not support an amendment to ERISA specifically for proxyvoting. EBSA also did not believe imposing an administrative burden and expense on 

plans by requiring more documentation was justified. In addition, they did not feel there 

was a basis for uniquely singling out fiduciary proxy voting activities for a special 

documentation rule that does not apply to other fiduciary actions. The Assistant 

Secretary’s entire response is contained in Appendix D. 

While the extent to which the lack of authority to assess penalties extends beyond 

proxy-voting is beyond our audit scope, we accept EBSA’s position. However, EBSA did 

not state what actions it was taking to resolve the issue in either proxy-voting alone or in 

overall ERISA enforcement. Corrective action to resolve the larger issue, including 

proxy-voting, would resolve the specific proxy-voting issue as well. 

We do not agree that there would be an undue administrative burden on plans. The 

Interpretive Bulletin requires plan fiduciaries to determine the economic benefit to the 

plan on proxy-voting. EBSA states fiduciaries are making these determinations; we are 

recommending these determinations be documented. EBSA states that when a 

manager’s rationale on a vote for recurring issues is to follow a uniform internal policy 

the manager would only need to document the reasons for any vote which goes against 

the policy. For records we reviewed related to proxy-voting issues not covered by 

internal policies, the rationale for proxy-voting decisions, when documented, generally 

included a brief explanation directly in the proxy-voting record. Such a practice shows it 

would take minimal time to document the rationale for proxy-voting decisions. 

Furthermore, EBSA proxy-voting regulations state fiduciaries must be prepared to 

articulate the economic benefit of proxy-vote decisions. We find it difficult to understand 

how plan fiduciaries can properly monitor proxy-voting activities by accepting verbal 

explanations of decisions made up to a year earlier, or what can be done if persons 

responsible for proxy-voting are no longer available to provide verbal explanations on 

proxy-votes. 

The OIG maintains that without additional transparency and enhanced enforcement 

activities, EBSA cannot have adequate assurance that fiduciaries vote proxies solely for 

the economic benefit of plans. 

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RESULTS AND FINDING 

Objective — To what extent does EBSA have assurances that proxies were voted 

solely for the economic benefit of plan participants and 

beneficiaries? 

 Proxy-voting may not be solely for the economic benefit of retirement plans. 

Finding 1 — EBSA does not have adequate assurances that proxies were voted 

solely for the economic benefit of retirement plans. 

EBSA does not have adequate assurances that fiduciaries or third parties voted proxies 

solely for the economic benefit of plans, and their proxy-voting requirements do not 

specifically require fiduciaries or investment managers to document (1) the monitoring 

of proxy-voting activities or (2) the economic rationale for proxy-voting decisions. 

Documentation Not Required for Monitoring and Economic Benefit of Proxyvoting Decisions 

EBSA’s proxy-voting requirements in 29 CFR 2509.08-2 require whoever is voting 

proxies (generally named fiduciaries and investment managers) to consider only those 

factors that relate to the economic value of the plan's investment and not subordinate 

the interests of the participants and beneficiaries to unrelated objectives. According to 

the regulations, any objectives or considerations, or social effects unrelated to the plan's 

economic interests cannot be considered. In addition, the named fiduciary of a plan 

appointing an investment manager or other party to vote proxies must periodically 

monitor the activities with respect to the decisions made and actions taken by the 

investment manager regarding proxy-voting decisions. Fiduciaries must be prepared to 

articulate a clear basis for concluding that a proxy-vote is more likely than not to 

enhance the economic value of the plan’s investment. 

The regulations further state that compliance with the duty to monitor necessitates 

proper documentation of the activities that are subject to monitoring. Thus, the 

investment manager or other responsible fiduciary would be required to maintain 

accurate records as to proxy-voting decisions. However, the regulations do not 

specifically state the fiduciaries or investment managers must document the economic 

benefit in proxy-voting decisions. Neither do the regulations specifically require 

fiduciaries to document the monitoring of proxy-voting decisions. 

However, in its 1992 proxy-voting project report, EBSA stated that votes affecting the 

value of the stock must be documented along with the reasons for the particular vote or 

abstention. In its 1996 proxy-voting project report, EBSA stated that to facilitate client 

plans' monitoring of proxy voting, an investment manager should maintain, and make 

available for client review, records regarding votes cast and the rationale for each vote. 

The rationale for a manager's vote may be to follow a uniform internal policy for each 

recurring issue, and document the reasons for any vote which goes against the policy, 

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or the manager if it has no internal policy as to voting uniformly on recurring issues, will 

document the rationale on each specific vote. However, EBSA did not include specific 

documentation requirements in its regulations. 

According to EBSA and the Office of the Solicitor of Labor, fiduciary court cases have 

shown that, absent specific requirements, and depending on the facts and 

circumstances, fiduciaries may not have to document the rationale for their fiduciary 

decisions. Specifically, in Henry v. Champlain Enterprises Inc., the court found that the 

focus was not whether a fiduciary took adequate notes during its investigation, but 

whether the fiduciary acted with the prudence required of a fiduciary. 

As a result, fiduciaries and investment managers are not documenting the monitoring of 

proxy-voting activities or the economic rationale of proxy-voting decisions. Specifically, 

for the 2009 plan year we found that fiduciaries were unable to substantiate that they 

monitored proxy-voting decisions for 90 percent of sampled plans. Furthermore, we 

examined proxy-voting in 43 plans for calendar year 2009 and only 4 plans had 

evidence that they had specifically monitored the proxy-voting activities of the plan. The 

remaining 39 plans could not provide documented support that they had monitored 

proxy-voting activities. 

The lack of documentation of fiduciary monitoring over proxy-voting decisions is an 

ongoing concern. EBSA previously identified the lack of fiduciary monitoring in its proxyvoting study in 1996. The study found that additional improvement was needed in the 

plans’ monitoring of investment managers to ensure that proxies are voted in 

accordance with stated policies. According to EBSA, most plans they reviewed did not 

monitor proxy-voting by their investment managers; EBSA stated only about 35 percent 

appeared to have performed substantive monitoring of investment managers. 

In addition, for 2009 we found that proxy voters did not document the economic benefit 

of proxy-voting decisions for 2,455 (77 percent) of 3,194 proposals representing votes 

on 574 million shares of stock with values totaling $11.6 billion. The following examples 

illustrate where fiduciaries did not document the economic benefit of proxy-voting 

decisions and the economic benefit is not apparent: 

•	 A retirement plan fiduciary voted proxies in support of a proposal to implement a 

policy prohibiting grossing-up wages to pay for anticipated income taxes for 

executives on specific benefits. The fiduciary exercised the voting rights of 3.3 

million shares of Honeywell, Inc. common stock valued at $100 million. The 

documented rationale by the proposal’s opponents stated that the grossing-up of 

wages was needed to attract and retain highly qualified executives with the 

leadership skills and experience necessary to drive results and change across a 

global organization and build long-term shareowner value. In contrast, the 

fiduciary did not document the economic benefit to the plan of the vote to support 

the proposal. 

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•	 A retirement plan fiduciary voted proxies to support 101 proxy proposals to 

approve related-party transactions. The fiduciary exercised the voting rights of 

234,950 shares of OAO Gazprom foreign stock valued at approximately $5.9 

million to approve the related-party transactions. The fiduciary did not document 

the perceived economic benefit of the vote to support the proposals approving 

related-party transactions. 

•	 A retirement plan fiduciary voted proxies to authorize Royal Dutch Shell, a 

foreign company, and its subsidiaries to donate to political organizations up to 

GBP£200,000 (about $320,500 U.S.) and to incur political expenditures up to 

GBP£200,000. The fiduciary exercised the voting rights of 2800 shares common 

stock valued at approximately $140,000. The fiduciary did not document the 

economic benefit of the vote to support the proposals. 

•	 A retirement plan fiduciary voted proxies in support of a proposal to implement a 

comprehensive human rights policy. The fiduciary exercised the voting rights of 

700 shares of Nucor Corporation common stock valued at $21,280. The voting 

record stated, “ISS recommends voting for the proposal due to the lack of a 

comprehensive human rights policy based on internationally accepted norms.” 

The economic benefit in these proposals is not apparent and neither the investment 

managers nor fiduciaries could provide documented economic rationale for the proxyvoting decisions. 

As a result, it is questionable whether the fiduciary or investment manager making the 

proxy-voting decision complied with EBSA requirements to consider only the economic 

benefits to the plan when making proxy-voting decisions. It is also questionable whether 

fiduciaries who allow investment managers to make proxy-voting decisions are actually 

performing adequate monitoring of proxy-voting. 

Few Proxy-Voting Enforcement Resources and the Lack of Authority to Assess 

Penalties 

We also noted EBSA has devoted few resources to enforcing proxy-voting 

requirements. While EBSA did conduct three proxy-voting projects between 1988 and 

1996, EBSA did not routinely review proxy vote decisions. According to EBSA, it lacks 

the statutory authority to assess penalties in cases that did not result in identifiable 

financial harm to the plan because ERISA bases assessed penalties on monetary 

losses and it is difficult to attribute monetary losses to proxy-voting decisions. EBSA 

also stated court cases have shown that fiduciaries may not need documentation to 

support their fiduciary decisions. 

EBSA officials stated they believed that there is an overall compliance in proxy-voting 

activities. Furthermore, they stated that EBSA has a strategic enforcement plan, and 

based on this plan and its limited statutory authority and resources, they place their 

resources in areas that will result in identifying ERISA violations that EBSA can correct. 

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However, ERISA limits EBSA’s enforcement authority in this area. ERISA ties 

enforcement actions to monetary losses and it is difficult, if not impossible, to attribute 

monetary losses to proxy-voting decisions. Specifically, under ERISA, EBSA assesses 

penalties based on monetary damages or the restoration of plan assets. This penalty is 

equal to 20 percent of the “applicable recovery amount,” or any settlement agreed upon 

by the Secretary or ordered by a court to be paid. 

However, the applicable recovery amount cannot be determined if damages cannot be 

valued. According to EBSA, it is difficult to link a single proxy vote to damages to the 

plan participants. 

Based on these facts, if a fiduciary votes for example in favor of a human rights policy 

because of personal feelings, regardless of any economic impact on the plans, it is 

impossible to project what impact this has on the plan’s investment. Therefore, 

enforcing the requirement to consider only the plans economic benefits is difficult at 

best. 

Moreover, the fact that fiduciaries do not have to document the economic benefits and 

effects of proxy-voting decisions may further complicate proving that the fiduciary was 

influenced by something other than plan’s economic interest. This difficulty is shown by 

the fact that DOL has never litigated an ERISA violation concerning a proxy-voting 

decision. Furthermore, EBSA has not assessed a penalty or removed a fiduciary 

because of a proxy-voting decision. 

In comparison, the SEC can impose a penalty without first assessing and then securing 

monetary damages. Section 203 of the Investor Advisors Act of 1940 gives the SEC 

authority to assess penalties ranging from $5,000 to $500,000 per each act that violates 

any provision of the Securities Act of 1933, the Securities Exchange Act of 1934, or the 

Investment Company Act of 1940. 

The use of this authority can be effective. For example, on May 7, 2009, the SEC issued 

an order imposing remedial sanctions and a cease-and-desist order to an investment 

management company regarding proxy-voting. The SEC found that an investment 

management company, after receiving complaints from some of its union-affiliated 

clients about pro-management proxy votes, had implemented a third-party proxy-voting 

service provider's guidelines that exactly followed the AFL-CIO proxy-voting 

recommendations. The investment management company then voted all of its clients' 

securities in accordance with these guidelines, regardless of whether the clients were 

union-affiliated. The investment management company had selected the guidelines at a 

time when it was participating in the annual AFL-CIO Key Votes Survey that ranked 

investment advisers based on their adherence to the AFL-CIO recommendations on 

certain votes. 

In contrast, while EBSA did conduct three proxy-voting projects between 1988 and 

1996, EBSA does not routinely review proxy vote decisions with the exception of ESOP 

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investigations. From FYs 2008 through 2009, EBSA opened 476 ESOP investigations, 

17 of which included proxy-voting reviews. However, none of these investigations 

resulted in violations with identifiable monetary damages because of a fiduciary voting 

proxies. 

Conclusion 

Without specific requirements to document monitoring and the economic rationale for 

proxy-voting decisions, EBSA does not have adequate assurances that proxies were 

voted solely for the economic benefit of plan participants and beneficiaries. Fiduciaries 

have hundreds of millions of proxy-voting rights representing trillions of dollars of 

retirement plan assets under management. Without additional transparency and 

enhanced enforcement activities, concerns about the fiduciary use of plan assets to 

support or pursue proxy proposals for personal, social, legislative, regulatory, or public 

policy agendas, which have no clear connection to increasing the value of investments 

used for the payment of benefits or plan administrative expenses, may not be properly 

addressed. This increases the potential risk to participants and beneficiaries who are 

invested in plans to accrue retirement income. 

RECOMMENDATIONS 

We recommend that the Assistant Secretary for Employee Benefits Security 

Administration: 

(1) Propose amending ERISA to give the Secretary of Labor the authority to assess 

monetary penalties against fiduciaries for failure to comply with proxy-voting 

requirements; 

(2) Revise proxy-voting requirements in 29 CFR 2509.08-2 to require documented 

support for fiduciary monitoring and the economic benefit for proxy-voting decisions; 

and 

(3) Include fiduciary proxy vote monitoring in enforcement investigations to ensure that 

the economic benefit for proxy-voting decisions are appropriately documented. 

We appreciate the cooperation and courtesies that EBSA personnel extended to the 

Office of Inspector General during this audit. OIG personnel who made major 

contributions to this report are listed in Appendix E. 

Elliot P. Lewis 

Assistant Inspector General for Audit 

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Appendices 

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Appendix A 

Background 

The private retirement system in the United States involves about $6 trillion of 

investments, including approximately $2.3 trillion of corporate stock for about 120 million 

Americans. Owning this corporate stock includes the right to vote on corporate issues. 

How a plan votes on corporate issues during company stockholders meetings can affect 

the retirement security of plan participants and beneficiaries. 

The ERISA is the primary federal law governing these retirement plan investments and 

private sector employee benefit plans in general. ERISA assigns the Department of 

Labor primary responsibility to enforce the fiduciary provisions of ERISA Title I. DOL 

administers this responsibility through EBSA. 

Owning corporate stock gives a shareholder the right to vote on proposals concerning 

corporate policies and governance. Shareholder voting is the primary means by which 

shareholders can influence the company's operations, its corporate governance, and 

even activities of social responsibility that may fall outside of financial considerations. 

Proxy-voting allows shareholders to vote when they cannot attend a shareholder 

meeting. 

Under DOL regulations, the fiduciary act of managing plan assets that are shares of 

corporate stock includes the management of voting rights attached to those shares of 

stock. EBSA’s regulations 29 CFR Part 2509.08-2 on proxy-voting requires fiduciaries to 

vote solely for the plan's economic interests. When deciding how to vote proxies, 

fiduciaries must consider only those factors that relate to the economic value of the 

plan's investment and cannot subordinate the economic interests of the participants and 

beneficiaries to unrelated objectives. Objectives, considerations, and economic effects 

unrelated to the plan's economic interests cannot be considered. 

Furthermore, the named fiduciary appointing an investment manager must periodically 

monitor the activities with respect to the decisions made and actions taken by the 

investment manager with regard to proxy-voting decisions. The proxy-voting records 

must enable the named fiduciary to review not only the investment manager's voting 

procedure with respect to plan-owned stock, but also to review the actions taken in 

individual proxy-voting situations. 

In issuing the regulations, EBSA expressed strong concern regarding shareholder 

activism and the use of plan assets to promote particular legislative, regulatory, or 

public policy positions that have no connection to the payment of benefits or plan 

administrative expenses. The Department rejected a construction of ERISA that would 

permit plan fiduciaries to expend ERISA trust assets to promote myriad public policy 

preferences, and believes that these principles apply with equal force to a plan 

fiduciary’s support or pursuit of a proxy proposal. Fiduciaries must be prepared to 

articulate a clear basis for concluding that a proxy-vote is more likely than not to 

enhance the economic value of the plan’s investment. 

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In 1986 the Senate Subcommittee on Oversight of Government Management, 

conducted an inquiry on DOL’s enforcement of ERISA. One factor that led to the inquiry 

was ERISA does not specify what the fiduciary responsibility is regarding proxy-voting, 

causing many fiduciaries to be unclear about their responsibility to vote proxies and 

maintain voting guidelines. 

Between 1988 and 1996, EBSA conducted three proxy-voting projects and found, 

among other things, that additional improvement was needed in plans’ monitoring of 

investment managers to ensure that proxies were voted in accordance with stated 

policies. 

In 2004, the General Accountability Office issued an audit report entitled “Pension 

Plans: Additional Transparency and Other Actions Needed in Connection with Proxyvoting.” GAO found that DOL has never found a violation that resulted in monetary 

damages, and as a result, it has never assessed a penalty or removed a fiduciary as a 

result of a proxy-voting investigation. DOL’s enforcement of proxy-voting requirements 

has been limited for several reasons. First, participant complaints about voting conflicts 

are infrequent, at least in part, because votes cast by a plan fiduciary or proxy voter 

generally are not disclosed; therefore, participants and others are not likely to have 

information they need to raise questions regarding whether a vote has been cast solely 

in their interest. Second, for DOL, the ERISA presents legal challenges for bringing 

cases such that it is often difficult to obtain evidence that the fiduciary was influenced in 

his or her voting by something other than the sole interests of plan participants. Finally, 

even if such evidence existed, monetary damages are difficult to value and fines are 

difficult to impose. Additionally, DOL has no statutory authority to impose a penalty 

without first assessing damages and securing a monetary recovery. In part, because of 

these challenges, DOL has devoted few resources to enforcing proxy-voting by plans. 

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Appendix B 

Objective, Scope, Methodology, and Criteria 

Objective 

The objective of this audit was to determine to what extent EBSA has assurances that 

proxies were voted solely for the economic benefit of plan participants and beneficiaries. 

Scope 

Our scope included EBSA policies, procedures, and enforcement actions pertaining to 

proxy-voting activities for fiscal years 2008 and 2010. Additionally, we reviewed all prior 

EBSA proxy-voting studies. We obtained and reviewed fiduciaries voting records and 

proxy policies from selected retirement plans for the year ended December 31, 2009. 

We conducted fieldwork at EBSA headquarters in Washington D.C. 

We conducted this performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions based on our 

audit objective. 

Methodology 

We interviewed retirement plan fiduciaries, officials at EBSA, the Office of the Solicitor 

of Labor, the SEC, and GAO to gain an understanding of the proxy-voting process, 

oversight, and enforcement, and related issues. We also met with representatives of 

business and labor to discuss their views on proxy-voting. Additionally, we reviewed all 

prior EBSA proxy-voting studies. 

To determine whether fiduciaries were able to demonstrate an economic benefit for 

proxy-voting decisions, we selected and reviewed a stratified random sample of 43 out 

of 4,992 retirement plans with corporate common stock investments, including employer 

related securities, of $20 million or greater for plan year 2007, the most complete form 

5500 filing year available during our audit. The 43 sampled plans and 4,992 retirement 

plans had end-of-year common stock values of $222 billion and $2.5 trillion respectively. 

We reviewed supporting documentation for plan monitoring and the voting records for 

3,194 corporate proposals, both management and shareholder initiated. We contacted 

plan fiduciaries and investment managers to determine the economic rationale for 

voting decisions on these proposals. 

We randomly selected two investment managers per plan to review voting records and 

supporting documentation. For sampled plans with only one investment manager, we 

selected that investment manager. For each investment manager selected we reviewed 

all proxy proposals sponsored by shareholders. Wherever voting records did not identify 

shareholder proposals, we utilized internet websites and the proxy statements filed with 

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13 Report No. 09-11-001-12-121 
 

 

U.S. Department of Labor – Office of Inspector General 

the SEC. In order to be more conservative and have a higher level of confidence, the 

results of these tests were not extrapolated to the universe. 

In planning and performing our audit, we considered the Employment Benefit Security 

Administration’s internal controls that were relevant to our audit objective. We confirmed 

our understanding of these controls through interviews, obtaining, and reviewing proxy 

studies, policies, procedures, and enforcement actions. Our consideration of internal 

controls relevant to our audit objective would not necessarily disclose all matters that 

might be significant deficiencies. Because of inherent limitations in internal controls, 

misstatements or noncompliance may nevertheless occur and not be detected. 

To achieve the audit’s objective, we relied on computer-processed data from ERISA 

Filing Acceptance System II (EFAST2) Form 5500 Series plan filings. We assessed the 

reliability of this data by (1) performing analytical tests of data elements, (2) interviewing 

EBSA officials knowledgeable about EFAST2 data and system controls, (3) reviewing 

OIG and GAO reports on EFAST2 system, and (4) tracing selected data elements to 

plan documents. Based on these tests and assessments, we concluded the data was 

sufficiently reliable to be used in meeting the audit’s objective. 

Criteria 

We used the following criteria to accomplish our audit: 

•	 29 CFR Part 2509.08-2- Interpretive Bulletin Relating to Exercise of Shareholder 

Rights 

•	 EBSA Advisory Opinion 2007-07A 

•	 SEC Final Rule - Proxy-voting by Investment Advisers IA-2106 

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U.S. Department of Labor – Office of Inspector General 

Appendix C 

Acronyms and Abbreviations 

DOL Department of Labor 

EBSA Employee Benefits Security Administration 

ESOP Employee Stock Option Plan 

ERISA Employee Retirement Income Security Act of 1974 

GAO Government Accountability Office 

OIG Office of Inspector General 

SEC Securities and Exchange Commission 

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U.S. Department of Labor 

MAR 1 9 1011 

MEMORANDUM FOR: 

FROM: 

SUBJECT: 

Assistant Secretary for 

Empioyae Benefits Security Administration 

Washington. D.C. 20210 

ELLIOT P. LEWIS 

Assistant Inspector General for Audit 

PHYLLIS C. BORZI ;\,v;, t~.' Assistant Secretary for EmplOyee B~~er.ts Security 

EBSA Response to orG Perfonnance Audit 

Draft Audit Report Number 09·11·001-12·121 

Thank you for the opportunity to comment on the recommendations in your above referenced 

Perfonnanee Audit Report on ERISA regulation of proxy voting by employee benefit plan 

investors and EBSA's related enforcement activities. 

The Employee Benefits Security Administration (EBSA) is responsible for the administration 

and enforcement of the civil and criminal provisions of Title I of the Employee Retirement 

Income Security Act of 1974 (ERISA) and related criminal statutes. EBSA oversees 

approximately 718,000 private retirement plans, 2.6 million health plans, and similar numbers of 

other welfare benefit plans, such as those providing life or disability insurance. The employee 

benefit plans under our jurisdiction hold approximately $6.5 trillion in assets and cover 

approximately 150 million participants and beneficiaries. 

Your audit focused on EBSA's proxy voting guidance described in Interpretive Bulletin 29 CFR 

2509.08·2, and your objective was to detennine whether EBSA has assurances that proxies were 

voted solely for the economic benefit of plan participants and beneficiaries. 

The Department has long recognized the importance of the role of employee benefit plan 

investors in corporate governance and proxy voting. EBSA has periodically conducted 

enforcement studies and issued guidance on ERISA's requirements, including recently updating 

and reissuing an interpretative bulletin that applies ERISA's fiduciary rules to proxy voting 

decisions. More recently. we published a proposal to amend our regulation defining persons who 

become fiduciaries by reason of providing investment advice for a fee. This proposal specifies 

that making recommendations as to the management of securities is a fiduciary act. 

The Interpretive Bulletin makes it clear that the fiduciary act ot'managing plan assets that are 

shares of corporate stock includes the management of voting rights appurtenant to those shares of 

stock and that fiduciaries must carry out their duties relating to voting proxies prudently and 

solely in accordance with the economic interest of the plan. Nothing in our guidance was meant 

to discourage fiduciaries from exercising full shareholder right. when it is in the plan's economic 

interest to do so. For example, plan fiduciary shareholders must vote proxies on proposals to 

change a company's state of incorporation because of the possible affect on shareholder rights to 

participate in corporate decision-making, which could, in tum. affect the value of the plan's 

investment. Similarly. plan fiduciaries should independently evaluate proposals regarding 

U.S. Department of Labor – Office of Inspector General 

Appendix D 

EBSA Response to Draft Report 

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17 Report No. 09-11-001-12-121 
 

 

executive compensation and "golden parachute" arrangements because ofthe reasonable 

expectation that such proposals will economically impact the value of the company. 

Guidelines for the Department's investigators specifically include steps for reviewing a plan's 

proxy voting practices. Such reviews. however, have: uncovered few, if any, violations In this 

regard. we believe the guidance EBSA has provided over the years has become well understood. 

OIG's RECOMMENDATIONS 

Recommendation 1: Propose amending ERISA to give the Secretary of Labor the 

authority to assess monetary penalties against fiduciaries for failure to comply with proxyvoting requirements. 

The Department strongly believes that ERISA should be amended to provide more effective 

remedies and expanded civil penalties for fiduciary breaches. Thus, while we would support 

expanding ERISA civil penalties for all fiduciary breaches, including proxy voting violations, we 

do not believe it makes sense to propose the type of narrow amendment you recommend. Based 

upon our enforcement experience, we do not believe proxy voting is the area most in need of 

expanded remedies for plans, and their participants and beneficiaries, or of more effective 

deterrents for fiduciary misconduct. In many contexts, plan fiduciaries can breach their 

obligations. cause a direct and demonstrable loss to plan participants, and yet face no potential 

liability for the losses under ERISA. Tbe OIG's recommendation fails to explain why it would 

be appropriate to seek a remedy for proxy voting violations, while neglecting categories of 

violations that clearly injure plan participants, but have no remedy. 

We note that ERISA § 502(1) provides for a civil penalty (1) against a fiduciary who breaches a 

fiduciary duty under, or commits a violation of, Part 4 ofritle I of ERISA or (2) against any 

other person who knowingly participates in such a breach or violation. This penalty is equal to 

20 percent of the amount recovcred under any senlement agreed upon by the Secretary or 

ordered by a court to be paid in a judicial proceeding instituted by the Secretary. In general, the 

Secretary cannot obtain a recovery amount, in the first place, unless she can prove that a breach 

caused losses to the plan. In this regard, it is typically difficult to make such a showing in the 

context of proxy votes .. Most often, the plan's ownership interest is insufficient to have an 

impact on the proxy vote. Even where that is not the case, numerous economic variables may 

have an impact on the short- and long-tenn value of stock. 

R~ommendation 2. Revise proxy voting requirements in 29 CFR 2509.08-2 (tbe 

Interpretative Bulletin) to require documented support for fiduc:iary monitoring and the 

economic benefit for proxy-voting dec:isions. 

ERISA does not specifically require that every fiduciary decision or act, including proxy 

voting decisions, be documented. Rather, the recordkeeping requirements described in the 

Interpretative Bulletin are derived from the general fiduciary duties of prudence and loyally 

under section 404 of ERISA. In our view, the Inlerpretative Bulletin takes an appropriate facts 

and circumstances approach as to documentation of proxy voting decisions. According to the 

Interpretative Bulletin, compliance with the duty 10 monitor necessitates proper documentation 

2 

U.S. Department of Labor – Office of Inspector General 

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18 Report No. 09-11-001-12-121 
 

 

sufficient to enable the named fiduciary to review not only the investment manager's voting 

procedures with respect to plan-owned stock, but also to review the actions taken in individual 

proxy voting situations. The Interpretive Bulletin recognizes that thc extent of the 

documentation needed to satisfy the monitoring obligation will depend on individual 

circumstances, including the subject of the proxy voting and its potential economic impact on 

tbe plan's investment. For example, as to fiduciary monitoring, various types of plan 

documentation of its ongoing operations may be sufficicnt to show appropriate monitoring of 

proxy voting decisions. Similarly, the rationale for a managcr's vote may be to follow a 

unifonn internal policy for recurring issues, and simply to document the reasons for any vote 

whlch gocs against the policy. 

Under section 505 of ERISA, EBSA has the authority to prescribe regulations necessary or 

appropriate to carry out the provisions of Title I of ERISA. In light of our enforcement and 

regulatory experience with proxy voting decisions, we do not believe we have a public record at 

this time that would justify the administrative burden and expenses that would be imposed on 

plans by a more expansive rccordkeeping requirement than that described in the Interpretive 

Bulletin. Nor do we have a basis for uniquely singling out fiduciary proxy voting activities for a 

special documentation rule that does not apply to other fiduciary actions. 

Recommendation 3. Include fiduciary proxy vote monitoring in enforcement investigations 

to ensure that the economic benefit for proxy-voting decisions a re appropriately 

documented. 

EBSA currently investigates the monitoring of proxy voting decisions. EBSA conducted three 

proxy-voting projects between 1988 and 1996. As a result of these projects, the Department 

included a review of proxy voting in its investment management and ESOP investigative guides. 

EBSA investigations include a review of proxy voting when it is appropriate to do so. However, 

when such reviews have taken place, few, if any, violations relating to the voting of proxies have 

been uncovered. None of these cases resulted in violations with identifiable monetary damagcs 

as a result of a fiduciary's proxy voting decision. EBSA has found procedural violations in 

connection with proxy voting in the past, and obtained corrective action for these violations. 

In addition, investigations may include a review of all monitoring of service providers by plan 

trustees or named fiduciaries. EBSA's current investigative procedures concerning monitoring 

are consistent with our statements in Recommendation 2 regarding documented support for 

fiduciary monitoring. 

We appreciate the opportunity to provide our comments to the dmll report and hope that they 

will be helpful to you in developing a final document. 

3 

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Appendix E 

Acknowledgements 

Key contributors to this report were Ralph McClane (Audit Director), Jason Jelen, 

Marisela Sookraj, Richard Donna, Steve Chiang, Naomi Byberg, Angela Stewart, 

Katherine Mitomi, Wilma Perez, Cassie Galang, and Mary Lou Casazza. 

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TO REPORT FRAUD, WASTE, OR ABUSE, PLEASE CONTACT: 

Online: http://www.oig.dol.gov/hotlineform.htm 

Email: hotline@oig.dol.gov 

Telephone: 1-800-347-3756 

202-693-6999 

Fax: 202-693-7020 

Address: Office of Inspector General 

U.S. Department of Labor 

200 Constitution Avenue, N.W. 

 Room S-5506 

Washington, D.C. 20210