81658 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

1Throughout this preamble, the Department’s 

discussion of plan fiduciaries includes named 

fiduciaries under the plan, along with any persons 

that named fiduciaries have designated to carry out 

fiduciary responsibilities as permitted under ERISA 

section 405(c)(1). Similarly, references to proxy 

voting also encompass situations in which a 

fiduciary directly casts a vote in a matter (e.g., 

voting in person at a shareholder meeting) rather 

than by proxy. 

2ERISA section 404(a)(1). See also ERISA section 

403(c)(1) (‘‘[T]he assets of a plan shall never inure 

to the benefit of any employer and shall be held for 

the exclusive purposes of providing benefits to 

participants in the plan and their beneficiaries’’). 

3 Fifth Third Bancorp v. Dudenhoeffer, 573 U.S. 

409, 421 (2014) (the ‘‘benefits’’ to be pursued by 

ERISA fiduciaries as their ‘‘exclusive purpose’’ does 

not include ‘‘nonpecuniary benefits’’) (emphasis in 

original). 

4Pegram v. Herdrich, 530 U.S. 211, 235 (2000) 

(quoting Donovan v. Bierwirth, 680 F.2d 263, 271 

(2d Cir. 1982)). 

5See, e.g., Tibble v. Edison Int’l, 843 F.3d 1187, 

1197 (9th Cir. 2016). 

6Letter to Helmuth Fandl, Chairman of the 

Retirement Board, Avon Products, Inc. 1988 WL 

897696 (Feb. 23, 1988). Only a few commenters on 

the proposal mentioned the Avon Letter, either 

supporting the views taken in the letter as being 

consistent with other professional codes of ethics or 

asserting that the proposed rule reversed the intent 

of the Avon Letter by establishing a presumption 

that voting proxies is a cost to be minimized and 

not an asset to be prudently managed. 

7 59 FR 38860 (July 29, 1994). 

8See 1994 DOL Press Conference, at 2–4, 10, 15– 

16; see also Leslie Wayne, U.S. Prodding 

Companies to Activism on Portfolios, N.Y. Times 

(July 29, 1994), www.nytimes.com/1994/07/29/ 

business/us-prodding-companies-to-activism-onportfolios.html (quoting official stating that the 

Department is ‘‘trying to encourage corporations to 

be activist owners,’’ and that ‘‘such activism is 

consistent with your fiduciary duty and we expect 

it will improve your corporate performance’’). 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

29 CFR Parts 2509 and 2550 

RIN 1210–AB91 

Fiduciary Duties Regarding Proxy 

Voting and Shareholder Rights 

AGENCY: Employee Benefits Security 

Administration, Department of Labor. 

ACTION: Final rule. 

SUMMARY: The Department of Labor 

(Department) is amending the 

‘‘Investment Duties’’ regulation to 

address the application of the prudence 

and exclusive purpose duties under the 

Employee Retirement Income Security 

Act of 1974 (ERISA) to the exercise of 

shareholder rights, including proxy 

voting, the use of written proxy voting 

policies and guidelines, and the 

selection and monitoring of proxy 

advisory firms. This document also 

removes Interpretive Bulletin 2016–01 

from the Code of Federal Regulations as 

it no longer represents the view of the 

Department regarding the proper 

interpretation of ERISA with respect to 

the exercise of shareholder rights by 

fiduciaries of ERISA-covered plans. 

DATES: Effective Date: The final rule is 

effective on January 15, 2021. 

Applicability Dates: See Section 

B.3(vi) of this document and 

§ 2550.404a–1(g) of the final rule for 

compliance dates for § 2550.404a– 

1(e)(2)(ii)(D) and (E), (e)(2)(iv), (e)(4)(ii) 

of the final rule. 

FOR FURTHER INFORMATION CONTACT: 

Jason A. DeWitt, Office of Regulations 

and Interpretations, Employee Benefits 

Security Administration, (202) 693– 

8500. This is not a toll-free number. 

Customer Service Information: 

Individuals interested in obtaining 

information from the Department of 

Labor concerning ERISA and employee 

benefit plans may call the Employee 

Benefits Security Administration 

(EBSA) Toll-Free Hotline, at 1–866– 

444–EBSA (3272) or visit the 

Department of Labor’s website 

(www.dol.gov/agencies/ebsa). 

SUPPLEMENTARY INFORMATION: 

A. Background and Purpose of 

Regulatory Action 

Title I of the Employee Retirement 

Income Security Act of 1974 (ERISA) 

establishes minimum standards for the 

operation of private-sector employee 

benefit plans and includes fiduciary 

responsibility rules governing the 

conduct of plan fiduciaries.1 In 

connection with proxy voting, the 

Department’s longstanding position is 

that the fiduciary act of managing plan 

assets includes the management of 

voting rights (as well as other 

shareholder rights) appurtenant to 

shares of stock. In carrying out these 

duties, ERISA mandates that fiduciaries 

act ‘‘prudently’’ and ‘‘solely in the 

interest’’ and ‘‘for the exclusive 

purpose’’ of providing benefits to 

participants and their beneficiaries.2

This regulatory project was 

undertaken, in part, to confirm that, 

when exercising shareholder rights, 

ERISA plan fiduciaries may not 

subordinate the interests of plan 

participants and beneficiaries in 

receiving financial benefits under a plan 

to non-pecuniary objectives.3 This duty 

of loyalty—a bedrock principle of 

ERISA, with deep roots in the common 

law of trusts—requires those serving as 

fiduciaries to act with a single-minded 

focus on the interests of beneficiaries. 

The duty of prudence prevents a 

fiduciary from choosing an investment 

alternative that is financially less 

beneficial than reasonably available 

alternatives. The Supreme Court has 

described the duty of loyalty as 

requiring that fiduciaries act with an 

‘‘eye single’’ to the interests of 

participants and beneficiaries,4 and 

appellate courts have described ERISA’s 

fiduciary duties as ‘‘the highest known 

to the law.’’ 5 The subject of this 

rulemaking is how these ERISA 

fiduciary duties apply to the exercise of 

shareholder rights by ERISA-covered 

plans, as a result of the Department’s 

belief that confusion exists among some 

fiduciaries and other stakeholders with 

respect to the exercise of shareholder 

rights, perhaps due in part to varied 

statements the Department has made on 

the consideration of non-pecuniary or 

non-financial factors over the years in 

sub-regulatory guidance on these 

activities. 

The Department began interpreting 

the duties of prudence and loyalty and 

issuing sub-regulatory guidance in the 

area of proxy voting and the exercise of 

shareholder rights in the 1980s. The 

Department issued an opinion letter to 

Avon Products, Inc. in 1988 (the Avon 

Letter), in which the Department took 

the position that, while the fiduciary act 

of managing plan assets that are shares 

of corporate stock includes the voting of 

proxies appurtenant to those shares, the 

named fiduciary of a plan has a duty to 

monitor decisions made and actions 

taken by investment managers with 

regard to proxy voting.6

Subsequent to the Avon Letter, the 

Department issued additional guidance 

concerning fiduciary duties in the 

context of exercising shareholder rights. 

In 1994, the Department issued its first 

interpretive bulletin on proxy voting, 

Interpretive Bulletin 94–2 (IB 94–2).7 IB 

94–2 recognized that fiduciaries may 

engage in shareholder activities 

intended to monitor or influence 

corporate management in situations 

where the responsible fiduciary 

concludes that, after taking into account 

the costs involved, there is a reasonable 

expectation that such shareholder 

activities (by the plan alone or together 

with other shareholders) will enhance 

the value of the plan’s investment in the 

corporation. The Department expected 

that increased shareholder engagement 

by pension funds—encouraged by the 

new interpretive bulletin—would 

improve corporate performance and 

help ensure companies treated their 

employees well.8 However, the 

Department also reiterated its view that 

ERISA does not permit fiduciaries, in 

voting proxies or exercising other 

shareholder rights, to subordinate the 


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9 73 FR 61731 (Oct. 17, 2008). 

10 Id. at 61732. 

11 Id. 

12 Id. at 61734. 

13 81 FR 95879 (Dec. 29, 2016). In addition, the 

Department issued a Field Assistance Bulletin to 

provide guidance on IB 2016–01 on April 23, 2018. 

See FAB 2018–01, at www.dol.gov/sites/dolgov/ 

files/ebsa/employers-and-advisers/guidance/fieldassistance-bulletins/2018-01.pdf. 

14 Id. at 95882. 

15See id. at 95881. 

16 85 FR 55219 (Sept. 4, 2020). 

17See, e.g., Barbara Novick, Revised and 

Extended Remarks at Harvard Roundtable on 

Corporate Governance Keynote Address ‘‘The 

Goldilocks Dilemma’’ (Nov. 6, 2019), 

www.blackrock.com/corporate/literature/ 

publication/barbara-novick-remarks-harvardroundtable-corporate-governance-the-goldilocksdilemma-110619.pdf, at 15 (Avon Letter indicated 

‘‘that asset managers should generally vote shares 

as part of their fiduciary duty’’); see Former SEC 

Commissioner Daniel M. Gallagher, Outsized Power 

& Influence: The Role of Proxy Advisers, 

Washington Legal Foundation (Aug. 2014), https:// 

s3.us-east-2.amazonaws.com/washlegal-uploads/ 

upload/legalstudies/workingpaper/GallagherWP8- 

14.pdf, at 3; Business Roundtable Comment Letter 

on SEC Proposed Amendments to Rule 14a-8 (Feb. 

3, 2020), www.sec.gov/comments/s7–22–19/s72219– 

6742505–207780.pdf, at 2–3 (‘‘many institutional 

investors historically interpreted SEC and 

Department of Labor rules and guidance as 

requiring institutional investors to vote every share 

on every matter on a proxy’’) (citing Gallagher); 

Manifest Information Services Ltd, Response to 

ESMA Discussion Paper ‘An Overview of the Proxy 

Advisory Industry: Considerations on Possible 

Policy Options’ (June 2012), www.osc.gov.on.ca/ 

documents/en/Securities-Category2-Comments/ 

com_20120622_25–401_wilsons.pdf, at 37 

(comment letter from European proxy voting agency 

describing DOL proxy guidance as concerning 

‘‘duties of . . . fiduciaries . . . to vote the shares 

in companies held by their pension plans’’); Charles 

M. Nathan, The Future of Institutional Share 

Voting: Three Paradigms (July 23, 2010), https://

corpgov.law.harvard.edu/2010/07/23/the-future-ofinstitutional-share-voting-three-paradigms/ (‘‘the 

current system for voting portfolio securities by 

application of uniform voting policies . . . is 

perceived as successfully addressing the commonly 

understood fiduciary duty of institutional investors 

to vote all of their portfolio securities on all 

matters’’). See also U.S. Department of Labor, 

Transcript of Press Conference on Corporate 

Activist Role in Pension Planning (July 28, 1994), 

at 15–16 (then-Secretary Robert Reich stating that 

IB 94–2 ‘‘makes very clear that . . . pension fund 

managers, trustees, [and] fiduciaries have an 

obligation to vote proxies’’ unless the costs 

‘‘substantially outweigh’’ the benefits) (1994 DOL 

Press Conference). 

18 85 FR 55219 at 55221–22 (Sept. 4, 2020). 

19See id., at 55222. 

20 Kosmas Papadopoulos, The Long View: US 

Proxy Voting Trends on E&S Issues from 2000 to 

2018, Harvard Law School Forum on Corporate 

Governance (Jan. 31, 2019), https://

corpgov.law.harvard.edu/2019/01/31/the-long-viewus-proxy-voting-trends-on-es-issues-from-2000-to2018, (2019 ISS Proxy Voting Trends). 

21See, e.g., Commission Guidance Regarding 

Proxy Voting Responsibilities of Investment 

Continued 

economic interests of participants and 

beneficiaries to unrelated objectives. 

In October 2008, the Department 

replaced IB 94–2 with Interpretive 

Bulletin 2008–02 (IB 2008–02).9 The 

Department’s intent was to update the 

guidance in IB 94–2 and to reflect 

interpretive positions issued by the 

Department after 1994 on shareholder 

engagement and socially-directed proxy 

voting initiatives. IB 2008–02 stated that 

fiduciaries’ responsibility for managing 

proxies includes both deciding to vote 

or not to vote.10 IB 2008–02 further 

stated that the fiduciary duties 

described at ERISA sections 404(a)(1)(A) 

and (B) require that in voting proxies 

the responsible fiduciary shall consider 

only those factors that relate to the 

economic value of the plan’s investment 

and shall not subordinate the interests 

of the participants and beneficiaries in 

their retirement income to unrelated 

objectives. In addition, IB 2008–02 

stated that votes shall only be cast in 

accordance with a plan’s economic 

interests. IB 2008–02 explained that if 

the responsible fiduciary reasonably 

determines that the cost of voting 

(including the cost of research, if 

necessary, to determine how to vote) is 

likely to exceed the expected economic 

benefits of voting, the fiduciary has an 

obligation to refrain from voting.11 The 

Department also reiterated in IB 2008– 

02 that any use of plan assets by a plan 

fiduciary to further political or social 

causes ‘‘that have no connection to 

enhancing the economic value of the 

plan’s investment’’ through proxy 

voting or shareholder activism is a 

violation of ERISA’s exclusive purpose 

and prudence requirements.12

In 2016, the Department issued 

Interpretive Bulletin 2016–01 (IB 2016– 

01), which reinstated the language of IB 

94–2 with certain modifications.13 IB 

2016–01 reiterated and confirmed that 

‘‘in voting proxies, the responsible 

fiduciary [must] consider those factors 

that may affect the value of the plan’s 

investment and not subordinate the 

interests of the participants and 

beneficiaries in their retirement income 

to unrelated objectives.’’ 14 In further 

interpreting ERISA’s duties, the 

Department has stated that it has 

rejected a construction of ERISA that 

would render the statute’s tight limits 

on the use of plan assets illusory and 

that would permit plan fiduciaries to 

expend trust assets to promote myriad 

public policy preferences, including 

through shareholder engagement 

activities, voting proxies, or other 

investment policies.15

On September 4, 2020, the 

Department published in the Federal 

Register a proposed rule to amend the 

‘‘Investment Duties’’ regulation at 29 

CFR 2550.404a-1 (Investment Duties 

regulation) to address the prudence and 

loyalty duties under sections 

404(a)(1)(A) and 404(a)(1)(B) of ERISA 

in the context of proxy voting and other 

exercises of shareholder rights by the 

responsible ERISA plan fiduciaries, the 

use of written proxy voting policies and 

guidelines, and the selection and 

monitoring of proxy advisory firms.16

The Department explained its belief that 

addressing the application of ERISA 

fiduciary obligations with respect to 

exercise of shareholder rights, including 

proxy voting, through notice-andcomment regulatory action under the 

Administrative Procedure Act was 

appropriate and would benefit ERISA 

plan fiduciaries and plan participants. 

This regulatory project also was 

initiated to respond to a number of other 

issues. The Department was concerned, 

for example, that the Avon Letter and 

subsequent sub-regulatory guidance 

from the Department has resulted in a 

misplaced belief among some 

stakeholders that fiduciaries must 

always and in every case vote proxies, 

subject to limited exceptions, in order to 

fulfill their obligations under ERISA.17

Further, the Department was responding 

to significant changes in the way ERISA 

plans invest and changes in the 

investment world more broadly since 

the Department first issued guidance on 

these topics in 1988. Widespread 

shareholder activism and corporate 

takeovers at that time created an intense 

focus on shareholder voting by ERISA 

plans and confusion as to how fiduciary 

standards applied to such voting. 

The Department described in the 

proposal a variety of changes in proxy 

voting policies and behavior, including 

an increase in the percentage of 

individual securities held by, and plan 

assets managed by, institutional 

investors, diminishing the scope of 

proxy voting rights and obligations 

attributable to individual securities held 

by ERISA plans.18 At the same time, 

since the 1980s, the type of investments 

held by ERISA plans has changed, for 

example through the development and 

growth of exchange-traded funds, 

sector-based equity products, hedge 

funds, and passive investments. The 

proportion of ERISA plan assets held in 

alternative investments like hedge, 

private equity, and venture capital 

funds has grown significantly.19 When 

issuing the proposed rule, the 

Department cited evidence that 

investors continue to add to the set of 

factors considered in their review and 

analysis of corporate practices.20

The Department also took note of the 

issues and concerns identified during 

the U.S. Securities and Exchange 

Commission’s (SEC’s) ongoing proxy 

reform initiative.21 Pursuant to the 2019 


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Advisers, 84 FR 47420 (Sept. 10, 2019) (2019 SEC 

Guidance). 

22See Exemptions from the Proxy Rules for Proxy 

Voting Advice, 85 FR 55082 (Sept. 3, 2020) (2020 

SEC Proxy Voting Advice Amendments). 

23See Supplement to Commission Guidance 

Regarding Proxy Voting Responsibilities of 

Investment Advisers, 85 FR 55155 (Sept. 3, 2020) 

(2020 SEC Supplemental Guidance). 

24 85 FR at 55219. 

25 Id., beginning at 55221 and in the proposed 

regulatory impact analysis beginning at 55227. 

26See www.dol.gov/agencies/ebsa/laws-andregulations/rules-and-regulations/public-comments. 

SEC Guidance, where an investment 

adviser has the authority to vote on 

behalf of its client, the investment 

adviser, among other things, must have 

a reasonable understanding of the 

client’s objectives and must make voting 

determinations that are in the best 

interest of the client. Under this 

guidance, for an investment adviser to 

form a reasonable belief that its voting 

determinations are in the best interest of 

the client, the investment adviser 

should conduct an investigation 

reasonably designed to ensure that the 

voting determination is not based on 

materially inaccurate or incomplete 

information. The 2019 SEC Guidance 

also provides that investment advisers 

that retain proxy advisory firms to 

provide voting recommendations or 

voting execution services should 

consider additional steps to evaluate 

whether the voting determinations are 

consistent with the investment adviser’s 

voting policies and procedures, and in 

the client’s best interest before the votes 

are cast. The 2019 SEC Guidance 

provides that investment advisers 

should consider whether the proxy 

advisory firm has the capacity and 

competency to adequately analyze the 

matters for which the investment 

adviser is responsible for voting. The 

2019 SEC Guidance also explains that 

an investment adviser’s decision 

regarding whether to retain a proxy 

advisory firm should also include a 

reasonable review of the proxy advisory 

firm’s policies and procedures regarding 

how it identifies and addresses conflicts 

of interest. Further, as part of the 

investment adviser’s ongoing 

compliance program, the investment 

adviser must, no less frequently than 

annually, review and document the 

adequacy of its voting policies and 

procedures. 

The SEC also adopted regulatory 

amendments that, among other things, 

require proxy advisory firms that are 

engaged in a solicitation to provide 

specified disclosures, adopt written 

policies and procedures reasonably 

designed to ensure that proxy voting 

advice is made available to securities 

issuers, and provide proxy advisory firm 

clients with a mechanism by which the 

clients can reasonably be expected to 

become aware of a securities issuer’s 

views about the proxy voting advice, so 

that the clients can take such views into 

account as they vote proxies.22 The SEC 

issued supplemental guidance to assist 

investment advisers in assessing how to 

consider the additional information that 

may become more readily available to 

them as a result of these amendments, 

including in circumstances when the 

investment adviser uses a proxy 

advisory firm’s electronic vote 

management system that ‘‘prepopulates’’ the adviser’s proxies with 

suggested voting recommendations and/ 

or for voting execution services.23

The proposal on proxy voting and 

shareholder rights provided the 

Department with a vehicle to coordinate 

many of the fiduciary concepts 

concerning investing according to the 

pecuniary interests of plans with the 

rules governing the use of plan 

resources on proxy voting and the 

exercise of other shareholder rights.24 A 

more detailed discussion of the basis for 

the rulemaking and the evidence 

supporting the proposal can be found in 

the preamble to the Department’s 

proposal.25 As discussed throughout 

this preamble, the final rule reflects 

significant modifications to the proposal 

based on the public record and 

commenters’ feedback. The Department 

continues to believe that enhancing the 

effectiveness and efficiency of the proxy 

voting process for ERISA plans is an 

important goal. This process will be 

improved to the extent ERISA plan 

fiduciaries better understand how to 

make informed decisions when 

executing shareholder rights in 

compliance with ERISA’s obligations of 

prudence and loyalty—specifically that 

the execution of such rights must be 

conducted in a manner to ensure that 

plan resources are not inappropriately 

allocated. The Department also believes 

that this rule is necessary to modernize 

standards for ERISA plan fiduciaries in 

this context, for example to recognize 

that proxy voting advice businesses, 

such as proxy advisory firms, now play 

a more significant role in the proxy 

voting process. It is not the 

Department’s intention to judge the 

value of any specific proposal to be 

voted upon, for example, or to take a 

position on the merits of any particular 

topic. Rather, the Department intends 

only to address the standards according 

to which plan fiduciaries must make 

such judgments, a goal that the 

Department believes is more 

appropriately advanced in light of 

revisions made in the final rule. 

The Department invited interested 

persons to submit comments on the 

proposed rule, and in response received 

approximately 300 written comments 

from a variety of parties, including plan 

sponsors and fiduciaries, plan service 

and investment providers (including 

investment managers and proxy voting 

firms), and employee benefit plan and 

participant representatives. The 

Department also received approximately 

6,700 submissions in response to 

petitions. The comments are available 

for review on the ‘‘Public Comments’’ 

page under the ‘‘Laws and Regulations’’ 

tab of the Department’s Employee 

Benefits Security Administration 

website.26

B. Final Rule 

After evaluating the full range of 

public comments and extensive record 

developed on the proposal, the final 

rule as described below amends the 

Investment Duties regulation to address 

the prudence and loyalty duties under 

sections 404(a)(1)(A) and 404(a)(1)(B) of 

ERISA in the context of proxy voting 

and other exercises of shareholder rights 

by responsible ERISA plan fiduciaries. 

The Department anticipates that actions 

taken by the SEC as part of its proxy 

reform initiative may result in changes 

in practices among investment advisers 

and proxy advisory firms that will help 

address some of the Department’s 

concerns about ERISA fiduciaries 

properly discharging their duties with 

respect to proxy voting activities and 

appropriately selecting and overseeing 

proxy advisory firms. However, the 

Department continues to believe that 

notice-and-comment rulemaking in this 

area is appropriate, in part because the 

Department’s existing sub-regulatory 

guidance may have created a perception 

that ERISA fiduciaries must vote proxies 

on every proposal. In the Department’s 

view, a regulation in this area will 

address the misunderstanding that 

exists on the part of some stakeholders 

that ERISA fiduciaries are required to 

vote all proxies and, to the extent that 

proxies are voted, direct fiduciaries to 

act in a manner consistent with the 

economic interests of plans and plan 

participants that does not subordinate 

their interests to any non-pecuniary 

objectives or promote goals unrelated to 

the financial interests of participants 

and beneficiaries. 

Some commenters complained that 

the 30-day comment period was too 

short given the complexity of issues 

involved, the magnitude of such 

changes to the current marketplace 


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27One commenter suggested that the rule may 

especially benefit fiduciaries of small plans, for 

whom the cost and burden of voting all proxies may 

be an impediment to sponsoring a plan. 

28See 85 FR 72846 (Nov. 13, 2020). 

practices related to proxy voting and 

other exercises of shareholder rights, 

and the need to prepare supporting data. 

Many commenters requested an 

extension of the comment period and 

that the Department schedule a public 

hearing on the proposal and allow the 

public record to remain open for posthearing comments from interested 

parties. The Department has considered 

these requests, but has determined that 

it is neither necessary nor appropriate to 

extend the public comment period, hold 

a public hearing, or withdraw or 

republish the proposed regulation. A 

substantial and comprehensive public 

comment record was developed on the 

proposal sufficient to substantiate 

promulgating a final rule. The scope and 

depth of the public record that has been 

developed itself belies arguments that a 

30-day comment period was 

insufficient. In addition, most issues 

relevant to the proposal have been 

analyzed and reviewed by the 

Department and the public in the 

context of three separate Interpretive 

Bulletins issued in 1994, 2008, and 2016 

and the public feedback that resulted. 

Finally, public hearings are not required 

under the Department’s general 

rulemaking authority under section 505 

of ERISA, nor under the Administrative 

Procedure Act’s procedures for 

rulemaking at 5 U.S.C. 553(c). In this 

case, a public hearing is not necessary 

to supplement an already 

comprehensive public record. 

Thus, this final rulemaking follows 

the notice-and-comment process 

required by the Administrative 

Procedure Act, and fulfills the 

Department’s mission to protect, 

educate, and empower retirement 

investors. This rule is considered to be 

an Executive Order (E.O.) 13771 

regulatory action. Details on the 

estimated costs of this rule can be found 

in the final rule’s economic analysis. 

The Department has concluded that the 

additions to the Investment Duties 

regulation and the rule’s improvements 

as compared to the Department’s 

previous sub-regulatory guidance are 

appropriate and warranted. The final 

rule furthers the paramount goal of 

ERISA plans to provide a secure 

retirement for American workers. 

Accordingly, after consideration of the 

written comments received, the 

Department has determined to adopt the 

proposed regulation as modified and set 

forth below. As explained more fully 

below, the final regulation contains 

several important changes from the 

proposal in response to public 

comments. 

1. General Public Comments and 

Adoption of a Principles-Based 

Approach 

In response to the proposed rule, the 

Department received a considerable 

amount of support and opposition from 

interested parties. 

Commenters supporting the rule 

argued that the proposed rule was 

essential because the Department’s 

existing sub-regulatory guidance has 

created a perception that ERISA 

fiduciaries must vote proxies on every 

proposal. This rulemaking, according to 

some commenters, would provide 

certainty to plan fiduciaries and benefit 

ERISA plan participants, by ensuring 

that plan resources will be expended 

only on proxy research and voting 

matters that are necessary to protect the 

economic interests of plan participants. 

Commenters supporting the proposal 

endorsed the Department’s view that 

these rights must be exercised with a 

singular focus in mind—the economic 

interests of ERISA plan participants and 

beneficiaries. They agreed that in a 

rapidly changing investment landscape, 

plan fiduciaries and asset managers 

should not be influenced by nonfinancial interests. For example, some 

commenters explained that it is the duty 

of ERISA fiduciaries to reject attempts to 

advance political or social objectives at 

the expense of investment returns, 

growth, and stability for individuals 

saving for retirement, the very 

population that the Department, through 

ERISA, has been charged to protect. As 

one commenter explained, ERISA 

fiduciary duties are predicated on trust 

law, and trusts must be managed to the 

advantage of formally named 

beneficiaries—in this case plan 

participants and their beneficiaries— 

and not to benefit corporate 

management or vague notions of societal 

good as determined by other parties. 

Some commenters argued that proxy 

advisory firms, which often assist with 

proxy voting, have an outsized 

influence on voting decisions and have 

‘‘taken sides’’ politically and socially. 

A number of commenters agreed in 

general with the Department’s position 

on these issues, and some provided 

additional information substantiating 

the need for, and propriety of, the 

Department’s proposed approach to 

managing proxy voting practices. Some 

further argued that, although exercising 

shareholder rights on the basis of 

environmental, social, or governance 

factors (commonly referred to as ‘‘ESG’’) 

may be welcomed by some private 

investors, proxy rights should be 

exercised only for financial matters that 

will help secure the retirement of plan 

participants in the case of ERISAcovered pension and other retirement 

savings plans because when fiduciaries 

exercise proxy rights for non-financial 

reasons they are more likely to incur 

additional, unnecessary risks for 

investors that may not produce 

corresponding economic value. A few 

commenters supported the Department’s 

assertion that the amount of ESG 

shareholder proposals has increased 

since 1988, as more such proposals are 

being put forward by groups with 

objectives other than increasing 

shareholder returns. While some 

commenters agreed with ESG 

proponents on the importance of 

environmental protections, social and 

political issues, and transparency in 

corporate governance, they nevertheless 

expressed their concern that proxy 

advisory firms, in particular, seem to 

have increasing power to promote these 

goals without the knowledge and 

agreement of a corporation’s ‘‘real’’ 

owners, the shareholders, which 

include ERISA plans. They agreed that 

the Department has appropriately 

undertaken in this rulemaking to 

improve fiduciary oversight of these 

firms. Finally, commenters supporting 

the rule also said that any increased 

costs associated with the rule would be 

manageable, or, according to some 

commenters, that the rule would 

ultimately decrease plan costs and 

compliance burdens.27

Other commenters, however, objected 

to the Department’s proposed 

rulemaking and raised a variety of legal 

and practical concerns. Some 

commenters who objected to the 

proposal requested that the Department 

withdraw the rule entirely, propose a 

different rule that takes a more 

principles-based approach to this 

subject matter, or wait until the 

Department analyzes the impact of its 

rule concerning ‘‘Financial Factors in 

Selecting Plan Investments.’’ 28

Alternatively, they argued that the 

Department should wait until the SEC 

establishes a track record of experience 

with its new proxy advisor and 

shareholder proposal rules, so that the 

Department can better align its guidance 

with the SEC’s rules. Additionally, some 

commenters expressed the view that a 

principles-based approach would be 

consistent with the Investment Advisers 

Act of 1940 (Advisers Act) and the 

SEC’s Rule 206(4)–6 thereunder and 

might help to reduce burdens for 


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29 85 FR 55219, 55230 (Sept. 4, 2020). 

30A number of commenters asserted that the 

proposal was a not-so-thinly-veiled, policy-based 

judgment against the value of ESG shareholder 

proposals. They argued that this judgment is not the 

Department’s to make; rather, it is the role of plan 

fiduciaries to make such judgments, and ESG 

proposals are material to shareholder decisionmaking and an important part of the due diligence 

of fiduciaries in constructing long-term, diversified 

portfolios. The Department disagrees with these 

commenters. This rulemaking project, similar to the 

recently published final rule on ERISA fiduciaries’ 

consideration of financial factors in investment 

decisions, recognizes, rather than ignores, the 

economic literature and fiduciary investment 

experience that show a particular ‘‘E,’’ ‘‘S,’’ or ‘‘G’’ 

consideration may present issues of material 

business risk or opportunities to a specific company 

that its officers and directors need to manage as part 

of the company’s business plan and that qualified 

investment professionals would treat as economic 

considerations under generally accepted investment 

theories. However, the Department recognizes that 

other ‘‘E,’’ ‘‘S,’’ or ‘‘G’’ factors may be nonpecuniary and a fiduciary should not assume that 

combining ESG factors into a single rating, index, 

or score creates an amalgamated factor that is itself 

pecuniary. Rather, this final rule and the financial 

factors rule sought to make clear that, from a 

fiduciary perspective, the relevant question is not 

whether a factor under consideration is ’’ESG,’’ but 

whether it is a pecuniary factor relevant to the 

exercise of a shareholder right or to an evaluation 

of the investment or investment course of action. 

See 85 FR at 72857 (Nov. 13, 2020). 

31One commenter further warned that the rule 

could result in voter suppression, not just 

disenfranchisement, by preventing shareholders 

from reaching a quorum, which the Department 

itself acknowledged in the proposal would result in 

economic detriment to ERISA plans’ holdings. 

Some corporate bylaws, for example, require a 

supermajority for certain votes, which may be 

difficult to achieve if certain shareholders are 

discouraged from voting. 

fiduciaries in reconciling the 

Department’s rule with the SEC’s 

regulatory regime for investment 

advisers. 

Some commenters opposing the 

proposed rule claimed that the 

Department failed to establish that there 

is in fact a problem with fiduciaries’ 

exercise of shareholder rights and 

argued that the proposal, if finalized, 

would upset decades of Departmental 

precedent. These commenters further 

said that the approach taken in the 

proposal represented a burdensome and 

costly solution to a perceived problem 

without ‘‘real life’’ examples of any 

plans or participants and beneficiaries 

that have been harmed. 

The Department does not believe that 

it is necessary to establish specific 

evidence of fiduciary 

misunderstandings or injury to plans or 

to plan participants in order to issue a 

regulation addressing the application of 

ERISA’s fiduciary duties to the exercise 

of shareholder rights. Under the 

Department’s authority to administer 

ERISA, the Department may promulgate 

rules that are preemptive in nature and 

is not required to wait for widespread 

harm to occur. The Department can 

thereby guard against injuries to plans 

and plan participants and beneficiaries 

and ensure prospective protections. 

Regardless, there are several reasons 

for this rulemaking. First, the 

Department is aware that some plan 

fiduciaries and other parties have 

incorporated, or have considered 

incorporating, non-pecuniary factors 

into their proxy voting decisions. 

Further, as documented in the proposal, 

there is a history of statements from 

stakeholders and others evidencing 

misunderstanding of the Department’s 

sub-regulatory guidance.29 Finally, 

commenters on the proposal confirmed 

that fiduciaries may be over-relying on 

proxy advisory firms as a result of such 

confusion, by implementing advisory 

firms’ voting recommendations without 

attention to whether the firms’ policies 

are consistent with the economic 

interests of the plan. This final rule 

confirms that such decisions on proxy 

voting and other exercises of 

shareholder rights must be made 

pursuant to the duties of loyalty and 

prudence mandated by ERISA. 

Some commenters argued that unless 

a number of clarifications and changes 

were made in the final rule, for example 

with respect to documentation and 

other requirements, the rule would be 

costly to implement and its standards 

costly to execute. Some commenters 

opposing the proposed rule argued that, 

not only is the rule unnecessary, but it 

would create new confusion for 

fiduciaries as they implement their 

duties under ERISA. According to these 

commenters, the rule would undermine 

fiduciaries’ ability to act in what they 

believe to be the long-term economic 

interest of their plans’ participants, 

which is a core statutory duty of 

fiduciaries to such participants. A few 

commenters provided an example of a 

potential ‘‘trap’’ that the proposal would 

create for fiduciaries, in that the rule 

would cause fiduciaries to not vote on 

a proposal for fear of violating the rule, 

but then later discover that they should 

in fact have voted on the proposal, 

effectively creating a breach of fiduciary 

duties. They claimed that the proposal 

was an example of ‘‘government 

overreach’’ that could dangerously 

impact the efficiency of the U.S. capital 

markets and the stability of the global 

economy.30 The opposing commenters 

also argued that the proposal, if 

finalized, would disenfranchise ERISA 

plans, and thereby plan participants, as 

investors, by reducing the power and 

value of their shareholder rights, 

including the right to vote proxies.31

Instead, voting power would be 

concentrated in the hands of non-ERISA 

investors, such as hedge funds, foreign 

investors, and other activist investors 

whose motivations may be based on 

short-term profits and non-economic 

factors, as well as in the hands of 

corporate management, as a result of the 

proposal’s provision that, in these 

commenters’ view, includes deference 

to management views. 

Commenters opposing the proposed 

rule stated that, in voting on proposals, 

investors, including ERISA plans, 

generally decide matters that will hold 

management accountable and materially 

impact the long-term economic value of 

corporations. Some commenters argued 

that the proposal failed to recognize the 

potential long-term performance and 

economic impact of shareholder 

proposals on topics such as board 

independence and accountability— 

including opportunities to change a 

company’s board of directors, diversity, 

approval of auditing firms, executive 

compensation policies—from either an 

individual investment or a wider 

portfolio perspective. These 

commenters disagreed with what they 

viewed as the Department’s conclusion 

that ESG shareholder activity generally 

has little bearing on the value of 

corporate shares. Rather, these 

commenters claimed that a growing 

body of evidence demonstrates an 

increasing link between ESG activity, 

including the impact of ESG issues on 

a corporation’s brand and reputation, 

and a corporation’s long-term value. 

According to commenters, ESG factors 

may not appear to be economic on their 

face, yet all are fundamental corporate 

matters that often are critical to how 

companies strategize and manage risk, 

therefore impacting financial outcomes. 

As to proxy advisory firms, commenters 

opposing the rule argued that these 

firms engage in a rigorous process when 

making recommendations about proxy 

voting and that ongoing technological 

advances continue to enhance proxy 

voting transparency and effectiveness. 

The final rule reflects a number of 

modifications made by the Department 

in response to the public comments. As 

in the proposal, the final rule amends 

the Investment Duties regulation in 

regard to proxy voting and the exercise 

of shareholder rights. The most 

significant adjustment from the proposal 

results from changes to make the final 

rule a more principles-based approach 

in response to commenters. The 

Department is persuaded that the 

complexity involved in a determination 

of economic versus non-economic 

impact would be costly to implement, 

and believes the core structure of the 

proposal that focused on whether a 


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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 81663 

fiduciary has a prudent process for 

proxy voting and other exercises of 

shareholder rights is a more workable 

framework for achieving the objectives 

of the proposal. The final rule carries 

forward from the proposal a provision 

that requires plan fiduciaries, when 

deciding whether to exercise 

shareholder rights and when exercising 

such rights, including the voting of 

proxies, to carry out their duties 

prudently and solely in the interests of 

the plan participants and beneficiaries 

and for the exclusive purpose of 

providing benefits to participants and 

beneficiaries and defraying the 

reasonable expenses of administering 

the plan. Also similar to the proposal, 

but with some modifications in 

response to public comments, the final 

rule includes a list of principles that 

fiduciaries must comply with when 

making decisions on exercising 

shareholder rights, including proxy 

voting, in order to meet their prudence 

and loyalty duties under ERISA section 

404(a)(1)(A) and (B), including duties to 

act solely in accordance with the 

economic interest of the plan and its 

participants and beneficiaries and not 

subordinate the interests of the 

participants and beneficiaries in their 

retirement income or financial benefits 

under the plan to any non-pecuniary 

objective, or promote non-pecuniary 

benefits or goals unrelated to the 

financial interests of the plan’s 

participants and beneficiaries. Finally, 

the final rule includes specific language 

to make clear that plan fiduciaries do 

not have an obligation to vote all 

proxies, as well as a safe harbor 

provision, modified from the proposal, 

pursuant to which plan fiduciaries may 

adopt proxy voting policies and 

parameters prudently designed to serve 

the plan’s economic interest that 

provide optional means for satisfying 

their fiduciary responsibilities regarding 

determining whether to vote under 

ERISA sections 404(a)(1)(A) and 

404(a)(1)(B). 

2. Elimination of Paragraphs (e)(3)(i) 

and (ii) From the Proposal 

The principles-based approach 

adopted in the final rule is reflected by 

the Department’s elimination of 

paragraphs (e)(3)(i) and (ii) from the 

proposal. Paragraph (e)(3)(i) of the 

proposal provided that a plan fiduciary 

must vote any proxy where the fiduciary 

prudently determined that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved 

(including the cost of research, if 

necessary, to determine how to vote). 

Paragraph (e)(3)(ii) of the proposal 

provided that a plan fiduciary must not 

vote any proxy unless the fiduciary 

prudently determined that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved. 

The Department received a number of 

comments suggesting removal of the 

requirements in paragraphs (e)(3)(i) and 

(ii). Commenters criticized these 

provisions of the proposal as requiring 

a fiduciary to undertake an economic 

impact analysis in advance of each issue 

that is the subject of a proxy vote in 

order to even consider voting. A 

commenter further noted that a 

fiduciary may not discover until after 

the analysis is performed that the cost 

involved in determining whether to vote 

outweighs the economic benefit to the 

plan. Another commenter characterized 

this as a ‘‘high risk compliance 

dilemma’’ that could not be resolved 

without expending funds on analysis 

and documentation, without knowing in 

advance whether the expenditure is 

allowable. Commenters further 

indicated that the proposal was unclear 

as to how to establish whether an 

economic basis would be strong enough 

to justify voting and that it can be 

difficult, if not impossible, to ascertain 

whether a matter will have a future 

economic impact. Commenters further 

stated that the criteria enumerated in 

paragraph (e)(2)(ii) of the proposal for 

determining the economic impact of a 

proxy vote were too narrow, which 

could result in potentially negative 

consequences to plans because 

paragraph (e)(3)(ii) of the proposal could 

prohibit fiduciaries from engaging in 

activities that would mitigate risk. For 

instance, a commenter stated that, in its 

experience, once an evaluation of a 

proxy matter has been done, a situation 

with ‘‘no economic impact’’ is more of 

a theoretical possibility than a reality. 

According to this commenter, either its 

research will show that the matter being 

voted on will strengthen the company if 

implemented, or that it will not. The 

commenter further explained that, at a 

base level, a matter that would 

strengthen or otherwise improve a 

company is likely to result in an 

economic benefit in connection with a 

plan’s investment when considered in 

the long-term. If a matter would not 

result in a net positive to the company, 

the commenter believes a fiduciary 

should vote against the proposal, not 

decline to vote. The commenter 

cautioned that prohibiting fiduciaries 

from voting in circumstances where 

they otherwise would vote against a 

matter may have the unintended 

consequence of allowing more frivolous 

proxy matters to be approved, resulting 

in decreased corporate accountability. 

Commenters also raised practical issues 

with respect to an obligation to not vote. 

Some explained that failing to vote can 

have the effect of a ‘‘no’’ vote or a ‘‘yes’’ 

vote, depending on the circumstances. 

Another commenter stated that modern 

proxy voting processes do not allow a 

holder of securities subject to the proxy 

to vote on some but not all proposals. 

Other commenters, however, 

supported paragraph (e)(3)(ii) of the 

proposal. They viewed the provision as 

an important clarification that plan 

fiduciaries are not required to vote all 

proxies, which could reduce diversion 

of plan resources by restricting voting 

activity only to those issues that offer an 

economic benefit to the plan. 

The Department has decided not to 

include the requirements in paragraphs 

(e)(3)(i) and (ii) of the proposal in the 

final rule at this time. The Department 

recognizes the concerns expressed by 

commenters regarding potentially 

increased costs and liability exposure, 

as well as the difficulty in some 

circumstances of determining whether a 

matter would have an economic impact 

and the possibility that a fiduciary 

might prudently determine that there 

are risks to plan investments that could 

result from not voting even when the 

matter being voted upon itself would 

not have an economic impact. Instead, 

the Department has provided a specific 

provision in the final rule stating that 

plan fiduciaries are not required to vote 

all proxies. 

3. Section-by-Section Overview of Final 

Rule 

(i) Paragraph (e)(1) 

Paragraph (e)(1) of the final rule, like 

the proposal, provides that the fiduciary 

duty to manage plan assets that are 

shares of stock includes the 

management of shareholder rights 

appurtenant to the shares, such as the 

right to vote proxies. Commenters raised 

a number of issues with respect to the 

general scope of fiduciaries’ 

responsibilities and obligations under 

the rule as set forth in paragraph (e)(1) 

of the proposal. 

Several commenters supported the 

Department’s goal of making clear that 

plan fiduciaries are not obligated to vote 

all proxies, and suggested the rule could 

be improved by including that clear 

statement in the regulatory text in 

paragraph (e)(1). The Department was 

clear in the preamble to the proposed 


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32See 59 FR 38860, 38864 (July 29, 1994) 

(discussing activities to monitor or influence 

management by variety of means including by 

exercise of legal rights of a shareholder). 33 85 FR 55219, 55234 (Sept. 4, 2020). 

rule that one objective of the proposal 

was to correct a misunderstanding 

among some fiduciaries and other 

stakeholders that ERISA requires every 

proxy to be voted. Thus, the Department 

agrees that it would be appropriate to 

include an explicit statement to that 

effect in the final rule. The Department, 

however, believes that the statement fits 

better in paragraph (e)(2) (regarding the 

principles that must be considered in 

deciding whether to exercise 

shareholder rights) and has added a 

statement to paragraph (e)(2)(ii) that the 

ERISA fiduciary duty to manage proxy 

voting and other shareholder rights does 

not require the voting of every proxy or 

the exercise of every shareholder right. 

A commenter suggested that the rule 

should focus only on proxy voting, 

including the decision of whether to 

exercise voting rights, but should not 

extend to ‘‘other shareholder rights.’’ 

This commenter explained that other 

shareholder rights, such as inspecting 

an issuer’s corporate record books and 

participating in corporate actions taken 

by the issuer, are substantively separate 

and distinct from proxy voting. Also, 

decisions on corporate actions such as 

stock splits, tender offers, exchange 

offers on bond issues, and mergers and 

acquisitions generally are not governed 

by proxy voting policies or undertaken 

with advice from proxy voting advisors. 

On this basis, the commenter 

recommended removing other 

shareholder rights from the rule. The 

Department is not persuaded to make 

the suggested change. The exercise of 

shareholder rights has been part of the 

Department’s prior guidance since the 

first Interpretive Bulletin in 1994.32 The 

Department believes that the exercise of 

shareholder rights to monitor or 

influence management, which may 

occur in lieu of, or in connection with, 

formal proxy proposals is just as much 

an issue of fiduciary management of the 

investment asset as proxy voting and 

accordingly should be covered by the 

final rule. 

Commenters also requested 

clarifications related to plan 

investments in SEC-registered 

investment companies, such as mutual 

funds. Several commenters noted that 

the preamble to the proposal suggested 

that the rule would not apply to a 

mutual fund’s exercise of shareholder 

rights with respect to the stock it holds, 

and requested that the Department 

provide confirmation. As previously 

explained, ERISA does not govern the 

management of the portfolio internal to 

an investment fund registered with the 

SEC, including such fund’s exercise of 

its shareholder rights appurtenant to the 

portfolio of stocks it holds.33

Accordingly, the final rule would not 

apply to such a fund’s exercise of 

shareholder rights. 

A commenter requested further 

clarification that the Department does 

not intend that plan fiduciaries apply 

the standards of the rule in reviewing, 

analyzing, or making a judgment on the 

proxy voting practices of the mutual 

funds in which the plan invests. This 

commenter explained that SECregistered funds have the scale, internal 

expertise, and experience to analyze and 

vote proxies. According to the 

commenter, they also publicly report 

their proxy votes to the SEC, and must 

describe in their registration statements 

the policies and procedures that they 

use to determine how to vote proxies for 

their portfolio of securities. In the 

commenter’s view, placing an obligation 

on plan fiduciaries to review and make 

judgments on the proxy voting practices 

of mutual funds in which they invest 

will substantially increase the 

administrative burden and costs for 

plans that invest in mutual funds. In 

contrast, another commenter suggested 

that the final rule should require 

fiduciaries to investigate a mutual 

fund’s objectives in shareholder voting 

and engagement with portfolio 

companies and determine that the 

objectives are consistent with ERISA’s 

loyalty requirement prior to deciding to 

invest in the fund or considering it as 

an option for participants. The 

commenter noted that since the 

issuance of the Avon Letter, plans 

increasingly invest in mutual funds or 

exchange-traded funds (ETFs) with 

stock voting authority residing in the 

funds. This commenter argued that 

nothing in the Avon Letter or 

subsequent guidance from the 

Department suggested that ERISA 

absolves a plan investment fiduciary of 

any fiduciary duty associated with the 

shareholder voting of shares that it owns 

indirectly through its share ownership 

in mutual funds and ETFs. 

In response to these comments, the 

Department notes that the issue raised 

by these commenters is beyond the 

scope of this rulemaking. Rather, 

fiduciary responsibilities with respect to 

investment decisions are addressed in 

the other provisions of the Investment 

Duties regulation, as recently amended. 

Paragraph (c)(1) provides that, in 

general, a fiduciary’s evaluation of an 

investment or investment course of 

action must be based only on pecuniary 

factors and that a fiduciary may not 

subordinate the interests of participants 

and beneficiaries in their retirement 

income or financial benefits under the 

plan to other objectives and may not 

sacrifice investment return or take on 

additional investment risk to promote 

non-pecuniary benefits or goals. 

Furthermore, the weight given to any 

pecuniary factor by a fiduciary should 

appropriately reflect a prudent 

assessment of its impact on risk and 

return. Whether a particular fund’s 

proxy voting activities would constitute 

a pecuniary factor and, if so, how much 

weight it should be given in an 

investment decision, are factual 

questions that should be resolved by the 

responsible fiduciary based on 

surrounding circumstances. 

Some commenters requested 

clarification of whether the rule applies 

to plan fiduciaries in the exercise of 

shareholder rights with respect to 

mutual funds and ETFs (which are 

sometimes organized as corporate or 

similar entities) when the fund itself 

seeks a vote of its shareholders on fund 

matters. According to commenters, for a 

variety of reasons, SEC-registered funds 

often face more challenges than 

operating companies to achieve a 

quorum and obtain approval of their 

proxy matters. The commenters 

explained that this is due to major 

differences in shareholder bases (funds 

have more diffuse and retail-oriented 

shareholder bases), proxy voting 

behavior of those bases (institutional 

investors comprise a larger percentage 

of operating companies’ shareholder 

bases and are far more likely to vote), 

legal obligations, and organizational 

differences. 

Furthermore, according to 

commenters, funds also can have 

difficulty even identifying and reaching 

their shareholders when they invest 

through intermediaries, which severely 

limits a fund’s ability to communicate 

with its shareholders to encourage 

voting. These factors contribute 

significantly to the costs and efforts 

required to seek and obtain necessary 

shareholder approvals for fund matters. 

Funds, and therefore fund shareholders, 

often bear the proxy costs associated 

with proxy campaigns, including costs 

associated with follow-up solicitations. 

According to a commenter, the SEC 

has recognized these issues in recent 

years. The commenter, as well as others, 

expressed concern that the rule could 

create further difficulty for funds in 

carrying out their proxy campaigns and 

potentially result in imposing 

unnecessary costs on funds, particularly 

in connection with funds’ ability to 


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34 Id. at 55234. 

35 Id. at 55226. 36 85 FR 72846, (Nov. 13, 2020). 

37The Department is not suggesting that a 

fiduciary must perform its own economic analysis, 

or incur expenses to obtain an analysis, to 

determine whether the proposal will economically 

benefit the corporation and its shareholders. For 

example, a fiduciary could prudently consider a 

credible economic analysis provided by the 

shareholder proponent. 

achieve a timely quorum at their own 

shareholder meetings. Another 

commenter indicated that ERISA plan 

investors receive a variety of proxies 

that must be evaluated, not only in 

connection with shares of common 

stock held by the plan, but also from 

SEC-registered funds as well as bank 

collective trust funds and other 

collective funds in which plans invest. 

The commenter stated that the regulated 

community needs to be able to clearly 

identify those proxies that are subject to 

the rule and those that are not. The 

commenter requested that the rule itself 

provide that plan investments in such 

securities are not subject to the 

requirements of the rule. 

In the proposal, the Department 

recognized that the proposed rule could 

impact the ability to achieve a quorum 

at shareholder meetings of funds.34 The 

Department believes that the changes 

made to the final rule significantly 

eliminate any provisions of the proposal 

that might impede achieving a quorum 

for shareholder meetings, including 

those held by funds. Under the 

proposal, a fiduciary would have not 

been able to vote unless the fiduciary 

prudently concluded that the matter 

being voted upon would have an 

economic impact on the plan. The 

burden of determining whether a 

fiduciary must, or must not, vote under 

the proposal was likely to result in 

fiduciaries opting to refrain from voting 

under one of the permitted practices 

described in the proposal. The 

Department’s removal of the ‘‘vote/not 

vote’’ determination from the final rule 

should eliminate any concerns with 

potential liability on a fiduciary 

associated with making an incorrect 

decision as to whether or not to cast a 

proxy vote. The safe harbors in the final 

rule are also sufficiently flexible to 

permit a fiduciary to adopt voting 

policies that would permit proxy voting 

for fund shares while refraining from 

voting other types of shares. Moreover, 

the Department continues to believe, as 

stated in the preamble to the proposal, 

that fiduciary proxy voting policies may 

consider the economic detriment to a 

plan’s investment that might result from 

direct and indirect costs incurred 

related to delaying a shareholders’ 

meeting.35

(ii) Paragraph (e)(2) 

Paragraph (e)(2) of the proposal set 

forth the general responsibilities with 

respect to the exercise of shareholder 

rights under the regulation, and stated 

that when deciding whether to exercise 

shareholder rights and when exercising 

such rights, including the voting of 

proxies, fiduciaries must carry out their 

duties prudently and solely in the 

interests of the participants and 

beneficiaries and for the exclusive 

purpose of providing benefits to 

participants and beneficiaries and 

defraying the reasonable expenses of 

administering the plan pursuant to 

ERISA sections 403 and 404. 

Paragraph (e)(2)(i) 

A commenter noted that paragraph 

(e)(2)(i) of the proposal referenced 

ERISA sections 403 and 404, and 

because those two separate sections 

each carry separate responsibilities, 

suggested that each be designated as a 

separate clause in the final regulation 

because a fiduciary could breach or 

fulfill one but not the other. The 

Department recognizes the separate 

responsibilities under sections 403 and 

404 of ERISA, but has decided to 

remove the reference to section 403 for 

paragraph (e)(2)(i) of the final rule. As 

explained in connection with recently 

adopted amendments to the Investment 

Duties regulation, the Department 

believes it is important that the 

regulation focus on section 404 of 

ERISA.36 Although similar, and 

although actions taken in compliance 

with section 404 would likely satisfy 

similar obligations under section 403, 

the text of ERISA section 403 is not 

identical to ERISA section 404(a)(1)(A), 

and the Department is wary of possible 

inferences that compliance with the 

provisions of the final rule would also 

necessarily satisfy all the provisions of 

ERISA section 403. The Department also 

believes explicit reference to ERISA 

section 404 is not necessary because 

paragraph (e) is part of 29 CFR 

2550.404a–1. As a result, paragraph 

(e)(2)(i) of the final rule provides that 

when deciding whether to exercise 

shareholder rights and when exercising 

such rights, including the voting of 

proxies, fiduciaries must carry out their 

duties prudently and solely in the 

interests of the participants and 

beneficiaries and for the exclusive 

purpose of providing benefits to 

participants and beneficiaries and 

defraying the reasonable expenses of 

administering the plan. 

Activities that are intended to monitor 

or influence the management of 

corporations in which the plan owns 

stock can be consistent with a 

fiduciary’s obligations under ERISA, if 

the responsible fiduciary concludes that 

such activities (by the plan alone or 

together with other shareholders) are 

appropriate after applying the 

considerations set forth in the final rule. 

However, the use of plan assets by 

fiduciaries to further policy-related or 

political issues, including ESG issues, 

through proxy resolutions would violate 

the prudence and exclusive purpose 

requirements of ERISA sections 

404(a)(1)(A) and (B) and the final rule 

unless such activities are undertaken 

solely in accordance with the economic 

interests of the plan and its participants 

and beneficiaries. The mere fact that 

plans are shareholders in the 

corporations in which they invest does 

not itself provide a rationale for a 

fiduciary to spend plan assets to pursue, 

support, or oppose such proxy 

proposals. Moreover, the use of plan 

assets by fiduciaries to further policy or 

political issues through proxy 

resolutions that are not likely to 

enhance the economic value of the 

investment in a corporation would, in 

the view of the Department, violate the 

prudence and exclusive purpose 

requirements of ERISA sections 

404(a)(1)(A) and (B) as well as the final 

rule. For example, with respect to 

proposals submitted by shareholders 

that request a corporation to incur costs, 

either directly or indirectly, without the 

proposal including a demonstrable 

expected economic return to the 

corporation, a fiduciary may, depending 

on the facts and circumstances, be 

obligated under ERISA and the final 

rule to vote against such proposals in 

order to protect the financial interests of 

the plan’s participants and 

beneficiaries.37 Similarly, in the 

Department’s view, it would not be 

appropriate for plan fiduciaries, 

including appointed investment 

managers, to incur expenses to engage 

in direct negotiations with the board or 

management of publicly held companies 

with respect to which the plan is just 

one of many investors. Nor generally 

should plan fiduciaries fund advocacy, 

press, or mailing campaigns on 

shareholder resolutions, call special 

shareholder meetings, or initiate or 

actively sponsor proxy fights on 

environmental or social issues relating 

to such companies, unless the 

responsible plan fiduciary concludes 

that such activities (alone or together 

with other shareholders) are appropriate 


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38Although the provision in the proposal also 

made reference to ‘‘purposes of the plan,’’ the 

language is not carried forward in the final 

provision as the Department believes it is 

unnecessary because the purposes of a plan would 

be encompassed by the financial interests of plan 

participants and beneficiaries. 

after applying the considerations set 

forth in the final rule.38

Paragraph (e)(2)(ii) 

Paragraph (e)(2)(ii) of the proposal set 

forth specific standards for fiduciaries to 

meet when deciding whether to exercise 

shareholder rights and when exercising 

shareholder rights. The requirements in 

paragraph (e)(2)(ii) of the proposal also 

served as the basis for a fiduciary’s 

determination of whether a matter being 

voted upon would have an economic 

impact on a plan for purposes of 

compliance with paragraph (e)(3) of the 

proposal. Many commenters focused 

specifically on paragraphs (e)(2)(ii)(A) 

and (B) of the proposal, which required, 

in relevant part, that fiduciaries (A) 

consider only factors that they 

prudently determine will affect the 

economic value of the plan’s investment 

based on a determination of risk and 

return over an appropriate investment 

horizon consistent with the plan’s 

investment objectives and the funding 

policy of the plan, and (B) consider the 

likely impact on the investment 

performance of the plan based on such 

factors as the size of the plan’s holdings 

in the issuer relative to the total 

investment assets of the plan, the plan’s 

percentage ownership of the issuer, and 

the costs involved. 

Some commenters argued that the 

specificity of the proposal did not 

comport with what they asserted was a 

congressional intent that eschewed a 

prescriptive approach to ERISA’s duties 

of loyalty and prudence, or with the 

Department’s own Investment Duties 

regulation. Commenters also noted the 

potential burdens that paragraph 

(e)(2)(ii) of the proposal would place on 

plan fiduciaries to evaluate and justify 

decisions for potentially large numbers 

of proxy proposals and to monitor an 

investment manager’s or proxy advisory 

firm’s voting policy for consistency with 

the regulation, which could result in 

increased costs that would ultimately be 

borne by plan participants. Commenters 

also stated that the provision’s 

requirement to take into account planspecific factors did not adequately 

recognize that investment managers do 

not have information on plan holdings 

they do not directly manage. 

Commenters further indicated that, with 

a focus on individual plans as opposed 

to investment managers responsible for 

pools of plan assets, paragraph 

(e)(2)(ii)(B) of the proposal failed to 

consider situations when several ERISA 

plans, particularly those with aligned 

objectives and liabilities, may together 

hold a significant stake in a company. 

In such cases, voting together could 

impact the investment and, as a result, 

each investor’s portfolio. They argued 

that the proposal, in contrast, 

potentially would result in proxies 

being un-voted if each ‘‘slice’’ of the 

aggregate is too insignificant. 

A commenter further suggested that 

an economic impact test, as described in 

the proposal, was ill-suited to the 

purpose and role of proxy voting. 

According to the commenter, many of 

the items on which corporate law 

permits shareholders to have a say—for 

example, the election of directors or 

ratification of auditors—are to mitigate 

risk and assure prophylactic measures 

are in place to avoid threats to their 

share of capital over the long term. The 

commenter questioned how a fiduciary 

would determine that voting against a 

company-proposed director for election 

to the board who was clearly 

unqualified and incompetent would 

have an economic impact on the plan. 

Another commenter explained that 

some votes, such as those supporting 

good corporate governance practices 

(e.g., election of outside directors) may 

not have an immediate measurable 

economic effect, but still be in the 

interest of plan investors. Another 

commenter opined that a short-term 

economic impact will be easier to prove 

or disprove in terms of share price or 

other similarly rudimentary indicators, 

but questioned whether the rule should 

encourage fiduciaries to think only in 

terms of short-term economic gains. In 

this regard, several commenters 

requested that the Department confirm 

that a fiduciary may take into 

consideration the long-term nature of a 

plan’s investment horizon. A 

commenter also suggested that the 

Department expand the criteria for 

voting to include issuer risk-based 

factors that ‘‘promote long-term growth 

and maximize return on ERISA plan 

assets.’’ Another commenter explained 

that proposals that encourage greater 

disclosure can result in enhancing 

shareholder value or serve in a 

prophylactic manner to prevent actions 

that might serve to diminish 

shareholder value. A commenter also 

criticized the proposal as focusing on 

the impact on individual plan 

investments. Commenters explained 

that modern portfolio theory focuses on 

the role that an investment plays in the 

context of an overall portfolio rather 

than on a stand-alone basis, and 

expressed the view that the roles that 

proxy voting and shareholder voices 

play in current portfolio risk 

management practices should be 

evaluated in the context of the long-term 

and portfolio-wide strategy, with 

consideration of the aggregate effects of 

shareholder votes and voices. 

After considering these comments, the 

Department has modified paragraph 

(e)(2)(ii)(A) and (B). An important goal 

in proposing the rule was to ensure that 

in making proxy voting decisions, 

fiduciaries act for the exclusive purpose 

of financially benefitting plan 

participants and not subordinating the 

interests of the plan and its participants 

to goals and objectives unrelated to their 

financial interests. Recent amendments 

to the Investment Duties regulation, 

which applies generally to fiduciary 

decisions on investments and 

investment courses of action, were 

adopted for much the same purpose. 

Paragraph (e)(2)(ii)(A) of the final rule 

requires that, when deciding whether to 

exercise shareholder rights and when 

exercising shareholder rights, a 

fiduciary must act solely in accordance 

with the economic interest of the plan 

and its participants and beneficiaries. 

The proposed requirement to prudently 

determine whether the economic value 

of the plan’s investment will be affected 

based on a determination of risk and 

return over an appropriate investment 

horizon has not been included in the 

final rule in order to address commenter 

concerns that the impact of proxy voting 

may not be readily quantifiable and to 

reduce potential compliance costs. In 

the Department’s view, the final rule 

provides sufficient flexibility for 

fiduciaries to consider longer-term 

consequences and potential economic 

impacts. Further, removal of the 

references to a plan’s investment 

objectives and funding policy responds 

to concerns that investment managers 

responsible for only a portion of the 

plan assets may have limited access and 

visibility into those objectives and 

funding policies and such 

considerations may unnecessarily 

increase compliance costs without a 

commensurate benefit for the plan or its 

participants. 

The Department, however, cautions 

fiduciaries from applying an overly 

expansive view as to what constitutes 

an economic interest for purposes of 

paragraph (e)(2)(ii)(A) of the final rule. 

As previously discussed, the costs 

incurred by a corporation to delay a 

shareholder meeting due to lack of a 

quorum is an example of a factor that 

can be appropriately considered as 

affecting the economic interest of the 

plan. However, vague or speculative 


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notions that proxy voting may promote 

a theoretical benefit to the global 

economy that might redound, outside 

the plan, to the benefit of plan 

participants would not be considered an 

economic interest under the final rule. 

Paragraph (e)(2)(ii)(B) of the proposal 

required consideration of the likely 

impact on the investment performance 

of the plan based on such factors as the 

size of the plan’s holdings in the issuer 

relative to the total investment assets of 

the plan, and the plan’s percentage 

ownership of the issuer. Similar to the 

changes made to paragraph (e)(2)(ii)(A) 

of the final rule, the Department has 

removed this language to address 

concerns that where portions of the 

portfolio are managed by different 

investment managers, a specific 

manager may not know the plan’s 

overall aggregate exposure to a single 

issuer. Accordingly, paragraph 

(e)(2)(ii)(B) of the final rule has been 

revised only to require a fiduciary 

consider the impact of any costs 

involved. However, in the Department’s 

view, where the plan’s overall aggregate 

exposure to a single issuer is known, the 

relative size of an investment within a 

plan’s overall portfolio and the plan’s 

percentage ownership of the issuer, may 

still be relevant considerations in 

appropriate cases in deciding whether 

to vote or exercise other shareholder 

rights. 

Several commenters requested further 

guidance or examples of costs that a 

fiduciary would be required to consider. 

In the view of the Department, for 

purposes of paragraph (e)(2)(ii)(B) of the 

final rule, the types of relevant costs 

would depend on the particular facts 

and circumstances. Such costs could 

include direct costs to the plan, 

including expenditures for organizing 

proxy materials; analyzing portfolio 

companies and the matters to be voted 

on; determining how the votes should 

be cast; and submitting proxy votes to 

be counted. If a plan can reduce the 

management or advisory fees it pays by 

reducing the number of proxies it votes 

on matters that have no economic 

consequence for the plan that also is a 

relevant cost consideration. In some 

cases, voting proxies may involve outof-the-ordinary costs or unusual 

requirements, such as may be the case 

of voting proxies on shares of certain 

foreign corporations. Opportunity costs 

in connection with proxy voting could 

also be relevant, such as foregone 

earnings from recalling securities on 

loan or if, as a condition of submitting 

a proxy vote, the plan will be prohibited 

from selling the underlying shares until 

after the shareholder meeting. 

Paragraph (e)(2)(ii)(C) of the proposal 

provided that a fiduciary must not 

subordinate the interests of the 

participants and beneficiaries in their 

retirement income or financial benefits 

under the plan to any non-pecuniary 

objective, or sacrifice investment return 

or take on additional investment risk to 

promote goals unrelated to these 

financial interests of the plan’s 

participants and beneficiaries or the 

purposes of the plan. A commenter took 

issue with this requirement, suggesting 

that it was inconsistent with some client 

expectations, as well as stewardship 

codes outside the United States that do 

not limit significant votes to economic 

impact to the portfolio. The Department 

disagrees and notes that the provision 

reflects the fundamental fiduciary duty 

of loyalty as set forth in ERISA section 

404(a)(1)(A). The Department has 

modified the final rule in order to avoid 

suggesting that a fiduciary may exercise 

proxy voting and other shareholder 

rights with the goal of advancing nonpecuniary goals unrelated to the 

financial interests of the plan’s 

participants and beneficiaries so long as 

it does not result in increased costs to 

the plan or a decrease in value of the 

investment. Thus, paragraph (e)(2)(ii)(C) 

of the final rule states that a fiduciary 

must not subordinate the interests of the 

participants and beneficiaries in their 

retirement income or financial benefits 

under the plan to any non-pecuniary 

objective, or promote non-pecuniary 

benefits or goals unrelated to these 

financial interests of the plan’s 

participants and beneficiaries. 

Paragraph (e)(2)(ii)(D) of the proposal 

provided that a fiduciary must 

investigate material facts that form the 

basis for any particular proxy vote or 

other exercise of shareholder rights. The 

provision further stated that the 

fiduciary may not adopt a practice of 

following the recommendations of a 

proxy advisory firm or other service 

provider without appropriate 

supervision and a determination that 

the service provider’s proxy voting 

guidelines are consistent with the 

economic interests of the plan and its 

participants and beneficiaries, as 

defined in paragraph (e)(2)(ii)(A) of the 

proposal. 

A commenter suggested the 

provision’s requirement to investigate 

material facts was overly broad, and 

explained that there may be instances 

when routine or recurring proxy votes, 

such as annual proxy votes on the same 

subject, may not require a separate and 

distinct investigation in order for a 

fiduciary to make a prudent 

determination. A commenter indicated 

that paragraph (e)(2)(ii)(D) is overly 

burdensome, and that issues are 

addressed in paragraphs (e)(2)(ii)(F) and 

(e)(2)(iii) (relating to selection of service 

providers and delegation to investment 

managers). The commenter 

recommended deletion of the provision. 

On the other hand, another 

commenter suggested that the 

Department go further with the 

fiduciary requirement to investigate 

material facts by explicitly referencing 

review of the issuer response statements 

required by recently-adopted SEC proxy 

solicitation rules. The commenter 

indicated these filings may include 

significant, material information that 

could impact a voting decision 

(including decisions about whether to 

vote and how to vote) that by definition 

would not be considered by the proxy 

advisory firm in drafting its 

recommendation. Additionally, 

according to the commenter, recent SEC 

guidance on the proxy voting 

responsibilities of investment advisers 

encourages investment advisers to have 

policies and procedures in place to 

consider the information available to 

them about proxy advisory firms 

themselves under the SEC’s new proxy 

solicitation rules (e.g., disclosures of 

proxy advisory firm conflicts of 

interests) as well as any information that 

comes to light after they have received 

a proxy advisory firm’s voting 

recommendations (e.g., additional 

soliciting material setting forth an 

issuer’s views on a recommendation). 

The supplemental guidance further 

states that, under certain circumstances, 

an investment adviser would likely 

need to consider such additional 

information from an issuer prior to 

exercising voting authority in order to 

demonstrate that it is voting in its 

client’s best interest, and that it should 

disclose how its policies and procedures 

address the use of automated voting in 

cases where it becomes aware before the 

submission deadline for proxies that an 

issuer intends to file or has filed 

additional soliciting materials regarding 

a matter to be voted upon. 

Several commenters raised a number 

of concerns in connection with 

paragraph (e)(2)(ii)(D) of the proposal 

about proxy advisory firms, including 

conflicts of interest resulting from 

business relationships with companies 

that are the subject of proxy 

recommendations, a ‘‘one-size-fits-all’’ 

approach to corporate governance that 

does not take into account differences in 

companies’ business models, a lack of 

transparency in the process by which 

proxy advisory firm recommendations 

are developed, errors in proxy advisory 

firm reports and recommendations, 

proxy advisory firms’ resistance to 


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81668 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

39 2020 SEC Supplemental Guidance, 85 FR at 

55155–57. Fiduciaries may retain proxy advisory 

firms and other service providers, subject to any 

applicable requirements of paragraphs (e)(2)(ii)(F) 

and (e)(2)(iii) and (iv), as part of satisfying the 

fiduciaries’ obligations to evaluate material facts. 

40 85 FR at 55224. The SEC 2019 Guidance for 

Investment Advisers similarly cautioned that a 

higher degree of analysis ‘‘may be necessary or 

appropriate’’ for certain types of matters, including 

corporate events such as mergers and acquisitions, 

or matters that are ‘‘highly contested or 

controversial.’’ Commission Guidance Regarding 

Proxy Voting Responsibilities of Investment 

Advisers, 84 FR 47420, 47423–24 (Sept. 10, 2019). 

Release Nos. IA–5325; IC–33605, available at 

www.govinfo.gov/content/pkg/FR-2019–09-10/pdf/ 

2019-18342.pdf. 

41See Dep’t of Labor Office of Inspector Gen. 

Report No. 09–11–001–12–121 (March 31, 2011). 

The commenter cited the EBSA response to OIG 

conclusion that EBSA does not have adequate 

assurances that fiduciaries or third parties voted 

proxies solely for the economic benefit of plans. 

engaging in a dialogue with issuers to 

correct errors and misunderstandings, 

automatic submission of votes for 

clients, cutting plan managers out of the 

decision-making process, and depriving 

issuers of a chance to correct the record 

or provide the market with additional 

information. 

After considering the comments, the 

Department is modifying paragraph 

(e)(2)(ii)(D) by requiring a fiduciary to 

evaluate, rather than investigate, 

material facts. This change is to remove 

any implication that plan fiduciaries 

would be expected to conduct their own 

investigation of material facts, which 

was not intended by the Department. 

Instead, the intent of this provision was 

to ensure that in making informed proxy 

voting decisions, fiduciaries should 

consider information material to a 

matter that is known or that is available 

to and reasonably should be known by 

the fiduciary. In this regard, the 

Department notes that, as described by 

the commenter above, as a result of 

recent SEC actions, clients of proxy 

advisory firms may become aware of 

additional information from an issuer 

which is the subject of a voting 

recommendation.39 An ERISA fiduciary 

would be expected to consider the 

relevance of such additional 

information if material. Paragraph 

(e)(2)(ii)(D) of the final rule thus 

provides that a fiduciary must evaluate 

material facts that form the basis for any 

particular proxy vote or other exercise 

of shareholder rights. 

Some commenters also suggested that 

the Department strengthen the rule by 

including specific regulatory text that 

generally disallows ‘‘robovoting,’’ a term 

some commenters describe as automatic 

voting mechanisms relying on proxy 

advisors. A commenter questioned 

whether robovoting is consistent with 

ERISA’s stringent standards. Another 

commenter suggested that robovoting is 

an abridgment of fiduciary 

responsibility. Some commenters also 

suggested that the Department should 

prohibit robovoting for significant, 

contested, and controversial proxy 

votes. Commenters also suggested that 

the Department consider placing 

conditions on the use of robovoting, 

such as allowing robovoting only if a 

company that is the subject of a proxy 

advisory firm’s recommendations has 

not submitted a response to the 

recommendation. 

The Department intended that the 

provisions in paragraph (e)(2)(ii)(D) of 

the proposal address the sort of 

concerns raised by these comments and 

provide appropriate guidelines for 

ERISA fiduciaries. The provision in the 

proposal stated, in relevant part, that a 

fiduciary may not adopt a practice of 

following the recommendations of a 

proxy advisory firm or other service 

provider without appropriate 

supervision and a determination that 

the service provider’s proxy voting 

guidelines are consistent with the 

economic interests of the plan and its 

participants and beneficiaries as defined 

in paragraph (e)(2)(ii)(A) of the 

proposal. The Department does not 

dispute that proxy advisory firms can 

play a role in providing information to 

fiduciaries and economizing investors’ 

ability to exercise shareholder rights 

and proxy voting. However, public 

comments submitted in connection with 

the proposal, and recent SEC actions in 

this area described above, highlight 

aspects of the proxy advisory firms’ 

recommendations and services that can 

be problematic in a variety of ways. For 

example, the Department acknowledges 

some commenters noted that many 

ERISA plans rely on proxy advisory 

firms’ pre-population and automatic 

submission mechanisms for proxy votes, 

which can provide a cost-effective way 

to exercise their shareholder voting 

rights in cases where the proxy advisor 

has processes which assure that its 

voting recommendations conform to the 

obligations that plan managers hold as 

fiduciaries. However, adopting such a 

practice for all proxy votes effectively 

outsources their fiduciary decisionmaking authority. Rather, as the 

Department noted in the preamble to the 

proposed rule, ‘‘certain proposals may 

require a more detailed or particularized 

voting analysis.’’ 40

In light of other changes in paragraph 

(e)(2) intended to adopt a more 

principles-based approach in the final 

rule, the Department has concluded that 

it would be better to address these proxy 

advisory firm issues in a separate 

paragraph in the final rule, which is 

described under paragraph (e)(2)(iv). 

Paragraph (e)(2)(ii)(E) of the proposal 

required a fiduciary to maintain records 

on proxy voting activities and other 

exercises of shareholder rights, 

including records that demonstrate the 

basis for particular proxy votes and 

exercises of shareholder rights. 

Recognizing that ERISA’s prudence 

obligation carries with it a requirement 

to maintain records and document 

fiduciaries’ decisions, most commenters 

did not seriously object to the proposal’s 

general obligation to maintain records 

on proxy voting activities and other 

exercises of shareholder rights. 

Commenters did, however, express 

concern that the proposal included 

particularized recordkeeping mandates 

that were both unnecessary and costly. 

One commenter suggested an alternative 

that fiduciaries must make prudent 

efforts to maintain accurate records that 

include proxy voting activities and, 

where authority is delegated, require the 

same of that person. Other commenters 

complained that the requirement to 

maintain specific records demonstrating 

the basis for particular votes was 

unnecessary and costly. Some 

commenters observed that such a level 

of recordkeeping would exceed that 

required for other potentially more 

impactful investment decisions. 

Another noted that the provision 

appeared to require a level of 

recordkeeping greater than described in 

current guidance, and complained that 

the Department did not adequately 

explain the reason for this change. The 

commenter noted that the Department 

stated in 2011 that there was no basis to 

impose more onerous documentation 

requirements that treat proxy voting 

differently from other fiduciary 

activities.41 Some commenters 

requested general clarification on the 

types of documents that would be 

necessary to demonstrate the basis for a 

vote. A commenter suggested a specific 

clarification that proxy voting activity 

that is consistent with an applicable 

proxy voting policy does not require 

additional explanation or 

documentation. Further, as discussed 

below, commenters expressed concern 

that the requirement in paragraph 

(e)(2)(ii)(E) of the proposal to maintain 

documents demonstrating the basis for 

particular votes, as well as a similar 

requirement in paragraph (e)(2)(iii) of 

the proposal (relating to delegation of 

responsibilities to investment 

managers), suggested that the proposal 

would create new and heightened 

monitoring obligations for fiduciaries 


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42See infra note 43 and accompanying text. 

that delegate responsibilities to 

investment managers. 

It has long been the view of the 

Department that compliance with the 

duty to monitor necessitates proper 

documentation of the activities that are 

subject to monitoring. However, the 

Department agrees that a less 

prescriptive approach to recordkeeping 

obligations is appropriate. The 

Department is retaining the general 

recordkeeping requirement, but is 

removing the requirement to maintain 

documents that would be necessary to 

demonstrate the basis for a vote to avoid 

any inferences related to responsibilities 

in monitoring investment managers, 

which are addressed in paragraph 

(e)(2)(iii) of the final rule. Thus, 

paragraph (e)(2)(ii)(E) of the final rule 

requires fiduciaries to maintain records 

on proxy voting activities and other 

exercises of shareholder rights. In 

general, the 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 the plan’s 

investment. For fiduciaries that are SECregistered investment advisers, the 

Department intends that the 

recordkeeping obligations under 

paragraph (e)(2)(ii)(E) be applied in a 

manner that aligns to similar proxy 

voting recordkeeping obligations under 

the Advisers Act.42

Paragraph (e)(2)(ii)(F) of the proposal 

required that fiduciaries exercise 

prudence and diligence in the selection 

and monitoring of persons, if any, 

selected to advise or otherwise assist 

with exercises of shareholder rights, 

such as providing research and analysis, 

recommendations regarding proxy 

votes, administrative services with 

voting proxies, and recordkeeping and 

reporting services. 

Various commenters supported the 

Department’s effort to better regulate 

proxy advisory firms and the proxy 

advisory process and suggested 

additional steps the Department should 

take in a final rule. Some suggested 

mandating disclosure of fees paid by 

investment managers to proxy voting 

advisors, prohibiting proxy advisory 

firms from consulting with companies 

when they also make recommendations 

on voting issues for that company, and 

establishing a baseline disclosure 

standard to which all proxy voting 

advice businesses must adhere. Others 

suggested placing specific conditions on 

a fiduciary’s ability to rely on a proxy 

advisory firm’s voting recommendation, 

such as requiring the proxy advisory 

firm to demonstrate that it had 

researched and analyzed evidence that 

would support a conclusion contrary to 

the proxy advisory firm’s conclusion. A 

commenter suggested that the 

Department should make more specific 

reference to proxy advisory firm conflict 

of interest disclosures required by the 

recently amended SEC proxy 

solicitation rules. According to the 

commenter, the SEC rules require that 

proxy advisory firms provide specific, 

prominent disclosures of their conflicts 

of interest and of any policies and 

procedures designed to mitigate said 

conflicts. Additionally, these 

disclosures must be specific to the 

company on which the proxy advisory 

firm is issuing a report. The commenter 

recommended that the fiduciaries 

should be required to review a proxy 

advisory firm’s conflicts disclosure, and 

that the Department should caution 

ERISA fiduciaries against relying on a 

proxy advisory firm’s recommendations 

if the disclosures reveal a conflict with 

respect to an issuer that calls into 

question the firm’s ability to provide 

objective advice. Another commenter 

suggested that the Department should 

wait until implementation of the SEC’s 

new regulations to determine if any 

further action is necessary, and that the 

Department’s approach to regulating 

fiduciary use of proxy advisory firms 

should align with the approach taken by 

the SEC so that SEC-registered 

investment advisers are subject to a 

consistent standard regarding their use 

of proxy advisory firms. On the other 

hand, some commenters criticized the 

Department’s focus on proxy advisory 

firms as being based on unsupported 

allegations of proxy advisory firm 

critics, without the Department either 

substantiating those criticisms or noting 

the self-interest of the persons making 

those allegations. 

After considering the public 

comments, the Department is adopting 

paragraph (e)(2)(ii)(F) in the final rule 

unmodified. It provides that fiduciaries 

must exercise prudence and diligence in 

the selection and monitoring of persons, 

if any, selected to advise or otherwise 

assist with exercises of shareholder 

rights, such as providing research and 

analysis, recommendations regarding 

proxy votes, administrative services 

with voting proxies, and recordkeeping 

and reporting services. The provision is 

essentially a restatement of the general 

fiduciary obligations that apply to the 

selection and monitoring of plan service 

providers, articulated in the context of 

fiduciary and other service providers 

that advise or assist with exercises of 

shareholder rights. Thus, as a general 

matter, fiduciaries will be expected to 

assess the qualifications of the provider, 

the quality of services offered, and the 

reasonableness of fees charged in light 

of the services provided. The process 

also must avoid self-dealing, conflicts of 

interest or other improper influence. In 

considering any proxy recommendation, 

fiduciaries should assure that they are 

fully informed of potential conflicts of 

proxy advisory firms and the steps such 

firms have taken to address them. 

Furthermore, to the extent applicable, 

fiduciaries will be expected to review 

the proxy voting policies and/or proxy 

voting guidelines and the implementing 

activities of the person being selected. If 

a fiduciary determines that the 

recommendations and other activities of 

such person are not being carried out in 

a manner consistent with those policies 

and/or guidelines, then the fiduciary 

will be expected to take appropriate 

action in response. 

A commenter suggested deleting the 

list of services related to proxy voting. 

The commenter explained that the list is 

incomplete, and that codifying it might 

create confusion as to the types of 

services that may be necessary or 

appropriate for a particular voting 

activity. The Department does not 

believe it necessary to modify the 

provision as it is clear that the provision 

is not attempting to limit in any way the 

types of services that a plan or plan 

fiduciary may utilize in connection with 

exercising shareholder rights. Also, 

although the Department agrees that it 

would be important for a fiduciary to 

consider the proxy advisory conflict of 

interest disclosure required under 

recent SEC guidance, and that a 

fiduciary should consider whether 

potential conflicts may affect the quality 

of services to be provided, the 

Department does not believe it 

appropriate to expressly require review 

of such disclosure in paragraph 

(e)(2)(ii)(F) of the final rule because the 

provision could become outdated as 

disclosure obligations change over time. 

Rather, the Department believes that a 

general principles-based provision is 

adequate and would require ERISA 

fiduciaries to review disclosures of 

conflicts of interest required by SEC 

rules or guidance. 

Paragraph (e)(2)(iii) 

Paragraph (e)(2)(iii) of the proposal 

required that, where the authority to 

vote proxies or exercise shareholder 

rights has been delegated to an 

investment manager pursuant to ERISA 

section 403(a)(2), or a proxy voting firm 

or other person performs advisory 

services as to the voting of proxies, a 

responsible plan fiduciary must require 


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43SEC Rule 204–2, 17 CFR 275.204–2; see also 

SEC Rule 206(4)–6(b) and (c), 17 CFR 275.206(4)– 

6(b) and (c) (relating to certain disclosures about 

proxy voting by an investment adviser that must be 

provided to, or may be requested by, a client of the 

investment adviser). 

such investment manager or proxy 

advisory firm to document the rationale 

for proxy voting decisions or 

recommendations sufficient to 

demonstrate that the decision or 

recommendation was based on the 

expected economic benefit to the plan, 

and that the decision or 

recommendation was based solely on 

the interests of participants and 

beneficiaries in obtaining financial 

benefits under the plan. The preamble 

explained that the proposal required 

fiduciaries to require documentation of 

the rationale for proxy-voting decisions 

so that fiduciaries can periodically 

monitor those decisions. 

Commenters expressed concern that 

paragraph (e)(2)(iii) of the proposal 

appeared to require a delegating 

fiduciary to, in effect, peer over the 

shoulder of an investment manager and 

supervise each voting decision to 

confirm the voting decision was made 

based on the economic impact on the 

plan. Commenters noted that such a 

monitoring obligation for proxy voting 

would be higher than for other fiduciary 

activities, and would be inconsistent 

with ERISA’s general rules and prior 

Department guidance related to 

delegation of fiduciary responsibilities. 

Commenters asked for clarification that 

fiduciaries would not be required to 

monitor every proxy vote or secondguess other fiduciaries’ specific proxy 

voting decisions, unless the fiduciary 

knows or should know the designated 

fiduciary is violating ERISA with their 

proxy voting procedures. 

Another commenter recommended 

removal of the requirement that a 

fiduciary require its investment 

managers and proxy advisory firms to 

document each voting decision along 

with the rationale for each decision, 

indicating that it would create 

unmanageable liability risk for 

fiduciaries by suggesting an obligation 

to review every voting decision made. 

Commenters indicated that the 

documentation requirement would be 

costly for investment managers, 

believing they would need to justify and 

communicate their decisions regarding 

the benefit of each proxy agenda item to 

each plan client. Another commenter 

suggested industry practice is that, 

when votes are exercised in accordance 

with approved proxy voting guidelines 

generally, only votes contrary to 

approved guidelines warrant specific 

documentation. Other commenters, 

however, believed documentation 

would be beneficial in protecting plan 

interests and suggested that further 

access to information and analyses from 

proxy advisory firms would help plan 

fiduciaries understand how the advisory 

firms developed their recommendations. 

The Department did not intend to 

create a higher standard for a fiduciary’s 

monitoring of an investment manager’s 

proxy voting activities than would 

ordinarily apply under ERISA with 

respect to the monitoring of any other 

fiduciary or fiduciary activity. Thus, the 

Department has revised the provision in 

the final rule to eliminate the 

requirement for documentation of the 

rationale for proxy voting decisions, and 

instead replaced it with a more general 

monitoring obligation. Specifically, 

paragraph (e)(2)(iii) of the final rule 

provides that where the authority to 

vote proxies or exercise shareholder 

rights has been delegated to an 

investment manager pursuant to ERISA 

section 403(a)(2), a proxy voting firm or 

other person who performs advisory 

services as to the voting of proxies, a 

responsible plan fiduciary shall 

prudently monitor the proxy voting 

activities of such investment manager or 

proxy advisory firm and determine 

whether such activities are consistent 

with paragraphs (e)(2)(i)–(ii) and (e)(3) 

of the final rule. The Department notes 

that while the provision does not 

contain a specific documentation 

requirement, an SEC rule requires 

investment advisers registered with the 

SEC under the Advisers Act to maintain 

a record of each proxy vote cast on 

behalf of a client, retain documents 

created by the adviser that were material 

to a decision on how to vote or that 

memorialize the basis for that decision, 

and to maintain each written client 

request for information on how the 

adviser voted proxies on behalf of the 

client and any written response by the 

investment adviser to any (written or 

oral) client request for information on 

how the adviser voted proxies on behalf 

of the requesting client.43 These 

requirements may be helpful to 

responsible plan fiduciaries in fulfilling 

monitoring requirements under 

paragraph (e)(2)(iii). 

Commenters also raised concerns 

about the statement in the preamble to 

the proposal that suggested uniform 

proxy policies may sometimes 

jeopardize responsible plan fiduciaries’ 

satisfaction of their duties under ERISA 

as suggesting that ERISA plans should 

require investment managers to use 

customized policies. A commenter 

explained that currently investment 

managers with voting discretion may 

vote consistently across client accounts 

as appropriate (i.e., on those proposals 

for which objectives of the accounts are 

consistent and divergent economic 

interests or client-specific preferences 

are not present). Similarly, another 

commenter indicated that many 

investment advisers registered with the 

SEC use consistent proxy voting policies 

across client accounts, including 

accounts held by ERISA plans and 

pooled investment vehicles, because 

they believe those policies are in the 

best interest of clients. 

Some commenters believed that 

developing customized policies for 

particular ERISA plans or collective 

investment vehicles used by ERISA 

plans would increase costs for plans and 

investment managers without 

incremental benefit to participants and 

beneficiaries. A commenter noted that 

investment managers might need to run 

a parallel voting process for ERISA and 

non-ERISA assets, which would create 

additional administrative burden and 

costs. A commenter also asserted that 

due to increased risk, some managers 

might move in the direction of not 

undertaking voting responsibilities, 

which would then require plans to make 

their own assessments and invariably 

result in increased costs. 

A commenter suggested that the 

proposal’s approach to regulating 

fiduciary use of proxy advisory firms 

should align with the approach taken by 

the SEC so that SEC-registered 

investment advisers are subject to a 

consistent standard regarding their use 

of proxy advisory firms. A commenter 

noted similar concerns in the context of 

proxy advisory services, indicating that 

paragraph (e)(2)(iii) implied that proxy 

advisors must tailor their rationale for 

every recommendation to each specific 

plan (and its participants) whose asset 

manager uses its research. A commenter 

believed such a requirement would be 

unnecessarily plan specific and 

unworkable. The commenter explained 

that proxy advisory firms support their 

clients, such as asset managers to 

retirement plans, by providing 

recommendations based on their chosen 

proxy voting policy, which is usually a 

custom policy the asset manager has 

selected to serve the interest of its client 

(e.g., a retirement plan and its 

participants). According to the 

commenter, the client’s decisions as to 

what its policy should be and how it 

should vote are at the sole discretion of 

the asset manager. 

With respect to uniform proxy 

policies being utilized by investment 

managers, it was not the Department’s 

intention to suggest that plans must 

require investment managers to vote 


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according to custom policies. Rather, 

the Department’s statement reflected a 

general concern that responsible 

fiduciaries might be accepting 

investment managers’ proxy voting 

policies without sufficient review as to 

whether those policies comply with 

ERISA and, if so, whether the 

investment managers were complying 

with those policies. The Department 

believes that the revisions to the 

recordkeeping requirement in the final 

rule described above appropriately 

address that issue. 

Paragraph (e)(2)(iv) 

In light of other changes in paragraph 

(e)(2) intended to adopt a more 

principles-based approach in the final 

rule, some provisions related to proxy 

advisory firms that were in paragraph 

(e)(2)(ii)(D) of the proposal have been 

moved to a new paragraph (e)(2)(iv) in 

the final rule. Specifically, paragraph 

(e)(2)(ii)(D) of the proposal stated that 

the fiduciary may not adopt a practice 

of following the recommendations of a 

proxy advisory firm or other service 

provider without appropriate 

supervision and a determination that 

the service provider’s proxy voting 

guidelines are consistent with the 

economic interests of the plan and its 

participants and beneficiaries as defined 

in paragraph (e)(2)(ii)(A) of the 

proposal. 

Paragraph (e)(2)(iv) of the final rule 

generally includes the same fiduciary 

obligations with respect to the use of 

proxy advisory firms and other service 

providers that were described in 

paragraph (e)(2)(ii)(D) of the proposal, 

with some modifications to strengthen 

the oversight obligations of fiduciaries 

who retain proxy advisory firms or other 

service providers. In response to the 

public comments that cited fiduciary 

practices that carry a high risk of 

noncompliance with ERISA, paragraph 

(e)(2)(iv) of the final rule has been 

modified so that a fiduciary that chooses 

to follow the recommendations of a 

proxy advisory firm or other service 

provider must determine that the firm or 

service provider’s proxy voting 

guidelines are consistent with the five 

factors set forth in paragraph 

(e)(2)(ii)(A)–(E) of the final rule, rather 

than only paragraph (e)(2)(ii)(A). 

Because paragraph (e)(2)(ii)(F) of the 

final rule covers the exercise of 

prudence and diligence in the selection 

and monitoring of proxy advisory firms 

and other service providers, it would 

not generally be applicable to the proxy 

voting guidelines of a proxy advisory 

firm or other service provider. 

Paragraph (e)(2)(iv) of the final rule 

removes the appropriate supervision 

requirement since that requirement 

duplicates the monitoring obligations 

set forth in paragraph (e)(2)(ii)(F) of the 

final rule. A fiduciary that retains a 

proxy advisory firm or other service 

provider, however, remains subject to 

the prudence and diligence obligations 

described in paragraph (e)(2)(ii)(F) 

regarding the selection of that person 

and, if the fiduciary adopts a practice of 

following the recommendations of that 

person, the fiduciary is subject to the 

additional requirements of paragraph 

(e)(2)(iv) of the final rule. 

(iii) Paragraph (e)(3) 

Paragraphs (e)(3)(i) and (ii) of the 

proposal, which would have required 

fiduciaries in certain circumstances to 

vote or not to vote proxies, were 

removed from the final rule, as 

discussed above. Paragraph (e)(3)(iii) of 

the proposal expressly acknowledged 

the appropriateness of ERISA 

fiduciaries’ adoption of proxy voting 

policies to help them more costeffectively comply with their obligations 

under the proposal. Paragraph (e)(3)(iii) 

of the proposal provided for adoption of 

general proxy voting policies or 

procedures and provided three 

examples of policies that could be 

utilized by fiduciaries (sometimes 

referred to as ‘‘permitted practices’’) in 

paragraphs (e)(3)(iii)(A)–(C) of the 

proposal. The proposed permitted 

practices included conditions intended 

to require a fiduciary to make prudencebased judgments about the policies. 

The Department received a number of 

general comments on paragraph 

(e)(3)(iii) of the proposal. Several 

commenters supported use of proxy 

voting policies to help fiduciaries 

reduce costs and compliance burdens, 

but suggested that the scope of relief for 

fiduciaries under paragraph (e)(3)(iii) of 

the proposal was unclear, noting that 

clear ‘‘safe harbor’’ relief was not 

afforded by the proposal. Commenters 

also asked about the extent to which 

fiduciaries following permitted 

practices would still be required to 

comply with particular provisions of the 

proposal that seemed more directed as 

evaluations of individual votes, e.g., 

some of the recordkeeping provisions in 

the proposal. Commenters 

recommended that the permitted 

practices should be made clear safe 

harbors indicating that fiduciaries are 

deemed to satisfy their prudence and 

loyalty obligations under ERISA. 

Commenters argued that without such 

treatment the permitted practices would 

not offer effective options for easing 

compliance burdens and associated 

costs as intended by the Department. 

Commenters also requested 

confirmation that plan fiduciaries have 

flexibility to adopt proxy voting policies 

in addition to the specific examples 

described in the rule. Other commenters 

did not support paragraph (e)(3)(iii) of 

the proposal, asserting that the proposal 

would effectively compel ERISA plans 

to adopt one of the permitted practices 

by imposing the proposal’s burdensome 

cost-benefit analysis requirements. 

The Department has decided to retain, 

with modifications, the framework for 

adoption of proxy voting policies as set 

forth in paragraph (e)(3)(iii) of the 

proposal as paragraph (e)(3)(i) of the 

final rule. The provision in the final rule 

has been modified to more clearly 

provide safe harbor relief. The safe 

harbors apply to a fiduciary’s duties of 

loyalty and prudence with respect to 

decisions on whether to vote, but do not 

apply to decisions on how to vote. Thus, 

a fiduciary will not breach its fiduciary 

responsibilities under sections 

404(a)(1)(A) and 404(a)(1)(B) of ERISA 

with respect to decisions on whether to 

vote, provided such policies are 

developed in accordance with a 

fiduciary’s obligations under ERISA as 

set forth in the applicable provisions of 

paragraphs (e)(2)(i) and (ii) of the final 

rule. Because the compliance burdens 

under the rule should be significantly 

reduced by other changes from the 

proposal described elsewhere (e.g., the 

principles-based approaches and 

elimination of proposed paragraphs 

(e)(3)(i) and (ii)), the Department does 

not believe that fiduciaries will be 

compelled to adopt the proxy voting 

policies described in paragraph (e)(3)(i) 

of the final rule but rather will use 

them, as the Department intended, to 

provide cost-effective options for 

exercising shareholder rights in 

compliance with their fiduciary 

obligations under ERISA. 

Thus, paragraph (e)(3)(i) of the final 

rule provides that in deciding whether 

to vote a proxy pursuant to paragraphs 

(e)(2)(i) and (ii) of the final rule, 

fiduciaries to plans may adopt proxy 

voting policies under which voting 

authority shall be exercised pursuant to 

specific parameters prudently designed 

to serve the plan’s economic interest. 

The final rule further provides that 

paragraphs (e)(3)(i)(A) and (B) set forth 

optional means for satisfying the 

fiduciary responsibilities under section 

404(a)(1)(B) of ERISA, provided such 

policies are developed in accordance 

with a fiduciary’s prudence obligations 

under ERISA as set forth in the 

applicable provisions of paragraphs 

(e)(2)(i) and (ii) of the final rule. These 

safe harbors are intended to be applied 

flexibly rather than in a binary ‘‘all or 

none’’ manner, and may be used either 


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44The final rule uses the term ‘‘material effect’’ 

rather than ‘‘significant impact.’’ No substantive 

change is intended by the revision as the 

Department believes that ‘‘significant impact’’ is 

generally equivalent to ‘‘material effect’’ in this 

context. Use of the term materiality is intended to 

align the terminology consistent with the rest of the 

Investment Duties regulation. The Department 

believes that fiduciaries and investment managers 

are generally familiar with the concept of 

materiality from its use in connection with both 

ERISA and the Federal securities laws. 

independently or in conjunction with 

each other. The safe harbors are thus a 

means of establishing general proxy 

voting practices that allow plans to 

efficiently operationalize and manage 

shareholder rights consistent with the 

applicable fiduciary principles in 

paragraphs (e)(2)(i) and (ii). Paragraph 

(e)(3)(i) also makes clear that paragraphs 

(e)(3)(i)(A) and (B) are not intended to 

set forth an exclusive list of the policies 

that plans could adopt that would 

satisfy their responsibilities under the 

fiduciary principles in paragraphs 

(e)(2)(i) and (ii). 

Paragraph (e)(3)(i)(A) sets forth the 

first of two safe harbor policies 

contained in the final rule. It describes 

a policy that voting resources will focus 

only on particular types of proposals 

that the fiduciary has prudently 

determined are substantially related to 

the issuer’s business activities or are 

expected to have material effect on the 

value of the investment. The provision 

is substantively similar to the permitted 

practice described in paragraph 

(e)(3)(iii)(B) of the proposal. However, 

the proposed provision listed types of 

proposals that a fiduciary might 

prudently consider focusing voting 

resources on: Proposals relating to 

corporate events (mergers and 

acquisitions transactions, dissolutions, 

conversions, or consolidations), 

corporate repurchases of shares 

(buybacks), issuances of additional 

securities with dilutive effects on 

shareholders, or contested elections for 

directors. Commenters expressed 

concern that the Department did not 

provide any economic analysis for why 

matters listed in proposed paragraph 

(e)(3)(iii)(B) would be more material to 

shareholders than other issues, and 

argued that voting on a variety of issues 

not included in that list would be in the 

interest of ERISA plans. For example, a 

commenter pointed out that mutual 

fund proposals, which may present 

difficulties for these funds in achieving 

quorum as compared to solicitations 

made by corporate issuers, and votes to 

approve auditors were not included in 

the list but could be considered material 

to investors. 

The list of matters included in the 

proposal was not intended as an 

exhaustive list of particular matters that 

merit consideration by fiduciaries. Nor 

was it intended to limit a fiduciary’s 

flexibility to prudently consider other 

matters. The Department continues to 

believe that the listed issues are 

examples of matters that generally 

would be expected to have an economic 

impact on the value of the investment. 

Nonetheless, to avoid the potential for 

such a misperception, the Department is 

not including the list in paragraph 

(e)(3)(i)(A) of the final rule. 

The final provision slightly revises 

the language used to describe the 

fiduciary’s prudence determination to 

reflect a pecuniary-based analysis. The 

final rule also broadly references the 

value of the investment rather than the 

plan’s investment to make it clear that 

the evaluation could be at the 

investment manager level dealing with 

a pool of investor’s assets or at the 

individual plan level. Paragraph 

(e)(3)(i)(A) of the final rule thus 

describes a policy that voting resources 

will focus only on particular types of 

proposals the fiduciary has prudently 

determined are substantially related to 

the issuer’s business activities or are 

expected to have a material effect on the 

value of the investment.44

Paragraph (e)(3)(i)(B) of the final rule 

sets forth the second safe harbor policy 

and is based on paragraph (e)(3)(iii)(C) 

of the proposal. The proposal provided 

that a fiduciary could adopt a policy of 

refraining from voting on proposals or 

particular types of proposals when the 

plan’s holding of the issuer relative to 

the plan’s total investment assets is 

below quantitative thresholds that the 

fiduciary prudently determines, 

considering its percentage ownership of 

the issuer and other relevant factors, is 

sufficiently small that the matter being 

voted upon is unlikely to have a 

material impact on the investment 

performance of the plan’s portfolio (or 

investment performance of assets under 

management in the case of an 

investment manager). The proposal 

indicated that the Department was 

considering a specific quantitative 

upper limit for the threshold (i.e., a cap) 

under paragraph (e)(3)(iii)(C), and 

solicited comments on setting this 

upper limit, including whether a 

maximum cap should be defined and, if 

so, what factors should be considered in 

setting a cap. In particular, the 

Department solicited comments on 

whether a five percent cap would be 

appropriate, or some other percent level 

of plan assets. 

A commenter expressed the view that 

the permitted practice described in 

paragraph (e)(3)(iii)(C) to refrain from 

proxy voting would violate the 

requirement in ERISA section 

404(a)(1)(B) that plan fiduciaries act 

‘‘with the care, skill, prudence, and 

diligence under the circumstances then 

prevailing [as] a prudent man acting in 

a like capacity and familiar with such 

matters.’’ According to the commenter, 

the overwhelming majority of prudent 

experts—i.e., the expert professionals 

who make up the investment 

management community—have 

determined that proxy voting is in their 

clients’ interests. Another commenter 

disagreed with the Department’s 

statement that voting shares of plan 

holdings that comprise a small portion 

of total plan assets rarely advances 

plans’ economic interests. The 

commenter indicated that, depending 

on the size of a plan, even small relative 

positions can have a large dollar value. 

Commenters also expressed concerns 

about potential negative unintended 

consequences of widespread adoption of 

the permitted practice. According to a 

commenter, if the majority of a plan’s 

investments in portfolio companies fell 

within the parameters described in the 

permitted practice, this could leave the 

majority of the plan’s portfolio unvoted, which in the aggregate would 

expose the plan investor to material risk 

even if the risk associated with each 

individual company was small. 

Additionally, according to commenters, 

non-voting by small plan investors 

could result in concentrating proxy 

votes in the hands of other investors 

whose interests might not align with the 

long-term interests of ERISA plans. 

Furthermore, non-voting by plans could 

result in companies with substantial 

portions of un-voted shares, and could 

also result in quorum requirements 

going unmet. 

With respect to the Department’s 

request for input on whether a percent 

cap would be appropriate, commenters 

generally opposed such a provision and 

suggested that the Department avoid 

specifying a percentage cap on the 

portion of the plan’s portfolio that must 

be represented by an issuer for proxy 

votes to be considered. 

The Department is not persuaded that 

the type of policy described in 

paragraph (e)(3)(iii)(C) of the proposal 

should be excluded from the final rule’s 

safe harbor provision. The provision 

was designed to provide a fiduciary 

with flexibility to prudently tailor a 

quantitative threshold for a plan’s 

portfolio, below which the outcome of 

the vote is unlikely to have a material 

impact on the performance of the plan’s 

portfolio or, in situations where only a 

portion of the portfolio is being 

managed by an investment manager, the 

performance of the plan assets under 


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45The proposal referred to ‘‘the outcome of the 

vote,’’ rather than ‘‘the matter being voted upon.’’ 

This final rule uses ‘‘the matter being voted upon’’ 

to make it clear that whether the fiduciary’s voting 

power could sway the vote one way or the other is 

not relevant to application of the safe harbor. 

Rather, the point is that the plan’s holding would 

be sufficiently small that any outcome of the vote 

(and any consequent changes to the value of the 

underlying asset) would have no material effect on 

the investment performance of the plan. 

management. The Department believes 

that providing such an option in the 

final rule may be helpful to plans in 

reducing costs. The Department further 

believes that it can be prudent for a 

fiduciary to refrain from expending plan 

resources to vote on matters pertaining 

to a holding that makes up an 

immaterial portion because a fiduciary 

may prudently expect that voting on 

such matters will not have a material 

effect on performance. With respect to 

setting a cap, the Department does not 

believe it received sufficient 

information from comments to establish 

an upper limit in the final rule. 

Paragraph (e)(3)(i)(B) of the final rule 

thus describes as the second safe harbor 

a policy of refraining from voting on 

proposals or particular types of 

proposals when holding in a single 

issuer relative to the plan’s total 

investment assets, or the portion of a 

plan’s assets being managed by an 

investment manager, is below a 

quantitative threshold that the fiduciary 

prudently determines, considering its 

percentage ownership of the issuer and 

other relevant factors, is sufficiently 

small that the matter being voted upon 

is not expected to have a material effect 

on the investment performance.45 The 

final rule does not require a specific 

performance period for determining 

whether a material effect exists; 

fiduciaries must therefore prudently 

decide an appropriate performance 

period for use in its proxy voting 

policies under this safe harbor. 

The Department notes that paragraph 

(e)(3)(iii)(A) of the proposal is not being 

incorporated in the final rule. Paragraph 

(e)(3)(iii)(A) of the proposal described a 

policy of voting proxies in accordance 

with the voting recommendations of a 

corporation’s management on proposals 

or types of proposals that the fiduciary 

prudently determined would be 

unlikely to have a significant impact on 

the value of the plan’s investment, 

subject to any conditions determined by 

the fiduciary as requiring additional 

analysis because the matter being voted 

upon concerns a matter that may 

present heightened management 

conflicts of interest or is likely to have 

a significant economic impact on the 

value of the plan’s investment. 

Commenters expressed the view that 

this permitted practice would be 

unprecedented, indicating that the 

Department has never previously 

indicated that a fiduciary may assume 

that another person is acting in the best 

interest of the plan. Rather, according to 

a commenter, the Department’s 

consistent position is that a fiduciary 

must prudently select and monitor both 

fiduciary and non-fiduciary service 

providers. The commenter questioned 

this provision’s consistency with other 

provisions of the proposal, noting that 

under other provisions of the proposal 

plan fiduciaries would be required to 

increase their due diligence on proxy 

advisory firms consistent with prudence 

and loyalty obligations, but this 

permitted practice would allow them to 

follow corporate directors in deciding 

what is in the best interest of the 

fiduciaries’ plan participants without 

undertaking similar due diligence. 

A commenter specifically noted that 

proxy advisory firms that are registered 

with the SEC under the Advisers Act 

owe their clients fiduciary duties of care 

and loyalty and suggested that if the 

permitted practice for management 

recommendations under paragraph 

(e)(3)(iii)(A) was adopted, then the 

Department should create a permitted 

practice for fiduciaries to rely on such 

firms. Commenters also questioned the 

safeguards offered by a permitted 

practice that relies on fiduciary duties 

that officers and directors owe to a 

corporation based on state corporate 

laws. A commenter stated that such a 

standard is lower that the fiduciary 

standard of care under ERISA. The 

commenter further stated that Delaware 

corporate law authorizes companies to 

waive director liability for breaches of 

the duty of care, and that corporate 

conflicts of interest with the company 

may also be waived upon approval of 

non-interested directors. Another 

commenter criticized reliance on 

fiduciary duties under state corporate 

law by noting that the law imposes 

these duties because management’s 

interests can and do differ from those of 

the company’s shareholders, and state 

corporate law requires shareholder votes 

precisely because managers’ fiduciary 

duties alone are not adequate to align 

management’s and shareholders’ 

interests. 

The Department notes that some of 

the commenters may have misread 

paragraph (e)(3)(iii)(A) as establishing 

unconditional blanket reliance on 

management recommendations. The 

proposal expressly limited reliance on 

management recommendations to 

proposals or types of proposals that the 

fiduciary had prudently determined 

would be unlikely to have a significant 

impact on the value of the plan’s 

investment. Nonetheless, based on 

concerns expressed by commenters, and 

on the Department’s separate decision to 

remove the requirement not to vote in 

certain situations, the Department 

decided to not adopt this permitted 

practice in the final rule’s safe harbor 

provisions. 

Commenters also provided several 

suggestions for additional permitted 

practices, none of which the Department 

has adopted. Several recommended a 

policy based on a determination that 

voting would not result in material 

additional costs to the plan. There is no 

need to include this permitted practice 

(or safe harbor) because the final rule 

does not have an express prohibition on 

voting based on the balance of economic 

effect and costs. Other commenters 

suggested permitted practices for 

following prudently designed and 

applied proxy voting guidelines. The 

Department does not believe it is 

necessary or appropriate to include such 

a safe harbor. Paragraph (e)(3)(i) already 

states that fiduciaries may adopt proxy 

voting policies providing that the 

authority to vote a proxy shall be 

exercised pursuant to specific 

parameters prudently designed to serve 

the plan’s economic interest. Another 

commenter suggested that if the rule 

retains a permitted practice that permits 

a fiduciary to follow management 

recommendations, then the Department 

should add a permitted practice that 

permits following recommendations of 

the proxy advisory firm if the adviser 

owes a fiduciary duty to its clients. The 

Department has not retained the 

permitted practice regarding following 

management recommendations and 

believes that proxy advisory firms are 

adequately addressed in other 

provisions of the final rule. 

Paragraph (e)(3)(ii) of the final rule 

relates to the review of proxy voting 

policies adopted under paragraph 

(e)(3)(i). The corresponding provision at 

paragraph (e)(3)(iv) of the proposal, 

applicable to the proposal’s permitted 

practices, required plan fiduciaries to 

review any proxy voting policies 

adopted pursuant to paragraph (e)(3)(iii) 

of the proposal at least once every two 

years. The Department explained that 

the proposed requirement was 

appropriate to ensure a plan’s proxy 

voting policies remain prudent given 

ongoing changes in financial markets 

and the investment world, but solicited 

comments on whether some other 

maximum interval for review would be 

appropriate. 

Commenters suggested that a two-year 

requirement would be unnecessary and 

recommended removal. Commenters 


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expressed the view that review of 

permitted practices should be based on 

facts and circumstances and left to the 

fiduciary to decide. A commenter also 

expressed concern that a specific review 

requirement in the rule could create 

potential liability for fiduciaries in their 

ongoing monitoring of other plan 

policies, such as investment policy 

statements, fiduciary charters, plan 

expenses and other policies, or in 

connection with the frequency of 

requests for proposals. 

After considering comments, the 

Department has decided to remove the 

specific two-year requirement and 

provide a general requirement for 

periodic review of policies. The 

Department understands that general 

industry practice is to review 

investment policy statements 

approximately every two years and 

expects that fiduciaries will review 

proxy voting policies with roughly the 

same frequency. Nevertheless, the 

Department is persuaded that it is 

unnecessary to set an exact deadline 

and that doing so could create liability 

based on a technical temporal violation 

of the rule. As a result, paragraph 

(e)(3)(ii) of the final rule provides that 

plan fiduciaries shall periodically 

review proxy voting policies adopted 

pursuant to paragraph (e)(3)(i) of the 

final rule. 

Paragraph (e)(3)(iii) of the final rule 

relates to the effect of proxy voting 

policies adopted under the final rule’s 

safe harbor provision. It is based on 

paragraph (e)(3)(v) of the proposal, 

which provided that no policies 

adopted under paragraph (e)(3)(iii) of 

the proposal would have precluded, or 

imposed liability for, submitting a proxy 

vote when the fiduciary prudently 

determines that the matter being voted 

upon would have an economic impact 

on the plan after taking into account the 

costs involved, or for refraining from 

voting when the fiduciary prudently 

determines that the matter being voted 

upon would not have an economic 

impact on the plan after taking into 

account the costs involved. 

A commenter indicated that 

paragraph (e)(3)(v) of the proposal was 

not sufficient to provide safe harbor 

relief for fiduciaries following permitted 

practices under the proposal. Another 

commenter expressed the view that the 

provision was not broad enough and 

should expressly permit fiduciaries to 

consider any prudent alternative 

courses of action for any particular 

proxy issue that may otherwise fall 

within the description of a permitted 

practice. 

The Department believes that 

paragraph (e)(3)(i) of the final rule 

provides sufficient clarity with respect 

to the Department’s intended safe 

harbor treatment of proxy voting 

policies adopted under paragraph (e)(3) 

of the final rule. The Department also 

believes that the principles-based 

approach in the final rule provides 

sufficient flexibility for fiduciaries to 

exercise prudent judgment in making 

proxy voting determinations. Changes 

have been made to paragraph (e)(3)(iii) 

of the final rule to reflect this 

principles-based approach. 

Paragraph (e)(3)(iii) of the final rule 

provides that no proxy voting policies 

adopted pursuant to paragraph (e)(3)(i) 

of this section shall preclude, or impose 

liability for, submitting a proxy vote 

when the fiduciary prudently 

determines that the matter being voted 

upon is expected to have a material 

effect on the value of the investment or 

the investment performance of the 

plan’s portfolio (or investment 

performance of assets under 

management in the case of an 

investment manager) after taking into 

account the costs involved, or refraining 

from voting when the fiduciary 

prudently determines that the matter 

being voted upon is not expected to 

have such a material effect after taking 

into account the costs involved. In light 

of the potentially large number of 

individual proxy votes that may need to 

be considered on an annual basis, the 

safe harbor provisions are intended to 

apply and operationalize the fiduciary 

principles described in the final rule for 

a particular plan in a cost-efficient 

manner and provide an alternative to 

retaining a proxy advisory firm to 

provide advice on each vote. Paragraph 

(e)(3)(iii) of the final rule shields a 

fiduciary from liability to the extent that 

the fiduciary deviates from policies 

adopted pursuant to the safe harbors 

based on the fiduciary’s conclusion that 

a different approach in a particular case 

is in the economic interests of the plan 

considering the specific facts and 

circumstances. 

(iv) Paragraph (e)(4) 

Paragraphs (e)(4)(i) and (ii) of the final 

rule, like the proposal, reflect 

longstanding interpretive positions 

published in the Department’s prior 

Interpretive Bulletins. Paragraph 

(e)(4)(i)(A) of the proposal stated that 

the responsibility for exercising 

shareholder rights lies exclusively with 

the plan trustee, except to the extent 

that either (1) the trustee is subject to 

the directions of a named fiduciary 

pursuant to ERISA section 403(a)(1), or 

(2) the power to manage, acquire, or 

dispose of the relevant assets has been 

delegated by a named fiduciary to one 

or more investment managers pursuant 

to ERISA section 403(a)(2). Paragraph 

(e)(4)(i)(B) of the proposal provided that 

where the authority to manage plan 

assets has been delegated to an 

investment manager pursuant to ERISA 

section 403(a)(2), the investment 

manager has exclusive authority to vote 

proxies or exercise other shareholder 

rights appurtenant to such plan assets, 

except to the extent the plan or trust 

document or investment management 

agreement expressly provides that the 

responsible named fiduciary has 

reserved to itself (or to another named 

fiduciary so authorized by the plan 

document) the right to direct a plan 

trustee regarding the exercise or 

management of some or all of such 

shareholder rights. 

A commenter indicated that 

paragraph (e)(4)(i) of the proposal was 

unclear as to trustee responsibilities 

with respect to voting directed by plan 

participants pursuant to plan 

provisions. As discussed below, a new 

paragraph (e)(5) was added to the final 

rule to address ‘‘pass-through’’ or 

‘‘participant-directed’’ voting. Paragraph 

(e)(4)(i)(A) in the final rule is unchanged 

from the proposal, with a correction of 

a typographical error. Paragraph 

(e)(4)(i)(B) in the final rule is unchanged 

from the proposal. 

Paragraph (e)(4)(ii) of the proposal 

described obligations of an investment 

manager of a pooled investment vehicle 

that holds assets of more than one 

employee benefit plan. It stated that an 

investment manager of a pooled 

investment vehicle that holds assets of 

more than one employee benefit plan 

may be subject to an investment policy 

statement that conflicts with the policy 

of another plan. It also provided that 

compliance with ERISA section 

404(a)(1)(D) requires the investment 

manager to reconcile, insofar as 

possible, the conflicting policies 

(assuming compliance with each policy 

would be consistent with ERISA section 

404(a)(1)(D)). In the case of proxy 

voting, to the extent permitted by 

applicable law, the investment manager 

must vote (or abstain from voting) the 

relevant proxies to reflect such policies 

in proportion to each plan’s economic 

interest in the pooled investment 

vehicle. Such an investment manager 

may, however, develop an investment 

policy statement consistent with Title I 

of ERISA and the Investment Duties 

regulation, and require participating 

plans to accept the investment 

manager’s investment policy, including 

any proxy voting policy, before they are 

allowed to invest. In such cases, a 

fiduciary must assess whether the 

investment manager’s investment policy 


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46Specifically, IB 2016–01 stated: ‘‘An 

investment manager of a pooled investment vehicle 

that holds assets of more than one employee benefit 

plan may be subject to a proxy voting policy of one 

plan that conflicts with the proxy voting policy of 

another plan. Compliance with ERISA section 

404(a)(1)(D) would require the investment manager 

to reconcile, insofar as possible, the conflicting 

policies (assuming compliance with each policy 

would be consistent with ERISA section 

404(a)(1)(D)) and, if necessary and to the extent 

permitted by applicable law, vote the relevant 

proxies to reflect such policies in proportion to 

each plan’s interest in the pooled investment 

vehicle. If, however, the investment manager 

determines that compliance with conflicting voting 

policies would violate ERISA section 404(a)(1)(D) in 

a particular instance, for example, by being 

imprudent or not solely in the interest of plan 

participants, the investment manager would be 

required to ignore the voting policy that would 

violate ERISA section 404(a)(1)(D) in that instance. 

Such an investment manager may, however, require 

participating investors to accept the investment 

manager’s own investment policy statement, 

including any statement of proxy voting policy, 

before they are allowed to invest. As with 

investment policies originating from named 

fiduciaries, a policy initiated by an investment 

manager and adopted by the participating plans 

would be regarded as an instrument governing the 

participating plans, and the investment manager’s 

compliance with such a policy would be governed 

by ERISA section 404(a)(1)(D).’’ 

47See 59 FR 38860, 38863 (July 29, 1994) 

(‘‘Nothing in ERISA, however, prevents such an 

investment manager from maintaining a single 

investment policy, including a proxy voting policy, 

and requiring all participating investors to give 

their asse[n]t to such policy as a condition of 

investing.’’). 

statement and proxy voting policy are 

consistent with Title I of ERISA and the 

Investment Duties regulation before 

deciding to retain the investment 

manager. 

Commenters indicated that the 

proposal’s requirement to reconcile 

conflicting policies of investing plans 

and engage in proportionate voting to 

reflect conflicting policies would be 

highly burdensome for investment 

managers. A commenter noted that it is 

sometimes not possible to instruct a 

single client’s holding within the fund 

differently than other clients, as ‘‘splitvoting’’ is not permitted practice in 

certain markets or custodian banks. 

Commenters also indicated that 

paragraph (e)(4)(ii) of the proposal did 

not reflect current industry standard 

practice that investment in a plan asset 

vehicle is generally conditioned on 

acceptance of the investment objectives, 

guidelines, and policies that apply to 

the vehicle. Some commenters 

recommended deletion of the proposed 

requirement to reconcile conflicting 

policies of ERISA plans. Other 

commenters suggested deleting 

paragraph (e)(4)(ii) of the proposal 

entirely. 

Commenters requested that the 

language in paragraph (e)(4)(ii) of the 

proposal addressing a plan’s acceptance 

of an investment manager’s proxy voting 

policy be modified to clarify that the 

investment manager’s investment policy 

statement or proxy voting policy must 

be consistent with Title I of ERISA, but 

are not required to be consistent with 

the proposed rule. Commenters 

indicated that investment managers 

would have difficulties performing the 

plan-specific evaluations required by 

the proposal. These issues are discussed 

more generally above. A commenter also 

indicated that even if the rule were to 

allow elimination of the plan-specific 

evaluation, the task to make changes to 

an investment manager’s policies would 

still be enormous. According to the 

commenter, the trust’s proxy voting 

guidelines would likely require 

revision, and once revised, would need 

to be presented, explained, and 

accepted by each participating plan, 

including non-ERISA plans not subject 

to the rule. Similarly another 

commenter suggested that the subtle 

differences between paragraph (e)(4)(ii) 

of the proposal and the analogous 

provision in IB 2016–01 might cause an 

investment manager, in order to protect 

all of its clients, to adopt a revised 

investment policy statement that it 

would require participating plans to 

accept, and that the process would 

involve both drafting that policy and 

obtaining consent from investing plans. 

The Department is not persuaded to 

remove paragraph (e)(4)(ii) from the 

final rule or change the language 

regarding reconciliation of conflicting 

policies of investing plans or 

proportionate voting. Similar guidance 

has been consistently part of the 

Department’s prior Interpretive 

Bulletins in this area. As to the 

requirement that policies must be 

consistent with Title I of ERISA and the 

final rule and difficulties associated 

with plan specific evaluations, the 

Department believes that changes in 

paragraph (e)(2)(i) and (ii) of the final 

rule should address commenters’ 

concerns. With respect to the 

commenter’s identification of subtle 

differences between paragraph (e)(4)(ii) 

of the proposal and the relevant portion 

of IB 2016–01, the Department 

acknowledges that the language is not 

identical.46 However, the Department 

did not intend the language changes to 

fundamentally alter that guidance. Like 

IB 2016–01, paragraph (e)(4)(ii) 

recognizes that there may be 

circumstances under which an 

investment manager of a pooled 

investment vehicle that holds assets of 

more than one plan may be subject to 

conflicting policies of investing plans, 

but that the manager may avoid 

conflicting policies by requiring 

investors to accept the investment 

manager’s policies before they are 

allowed to invest.47 However, paragraph 

(e)(4)(ii) adds language that describes 

the associated obligations of plan 

fiduciaries in making the decision to 

accept the investment manager’s 

policies. Commenters did not question 

whether an ERISA fiduciary should 

assess an investment manager’s 

investment policy statement for 

consistency with ERISA prior to 

accepting it. To the extent that the 

commenter’s concerns about differences 

from the relevant portion of IB 2016–01 

relate to the requirement that the 

manager’s policies must be consistent 

with the final rule, the Department 

believes changes in paragraph (e)(2)(i) of 

the final rule, as described above, 

should address this concern. As a result, 

paragraph (e)(4)(ii) of the final rule is 

being adopted substantially as 

proposed. 

(v) Paragraph (e)(5) 

A number of commenters indicated 

that the proposal did not specifically 

address proxy rights passed through to 

plan participants. A commenter 

explained that participants may invest 

in publicly-traded companies, as well as 

mutual funds and other securities, 

through a self-directed brokerage 

window offered by their plans. 

According to the commenter, selfdirected brokerage windows involve the 

broker passing voting rights through to 

the participants. Further, participantdirected plans, such as those structured 

to meet ERISA section 404(c) and 

related regulations, sometimes allow 

participants to invest in company stock 

and pass through voting to them. 

According to the commenter, many 

ERISA-covered plans have been drafted 

to explicitly provide that plan 

participants are deemed to be ‘‘named 

fiduciaries’’ when they vote securities 

held by their plan accounts. 

Commenters argued that the structure 

and provisions of the proposed 

regulation did not account for such 

‘‘pass-through’’ or ‘‘participantdirected’’ voting activity, and requested 

that the Department expressly exclude 

such voting activity from the rule or 

provide clarification as to application of 

the proposed rule’s requirements in the 

context of pass-through of voting rights, 

including the responsibilities of trustees 

in connection with the actual votes of 

participants and whether participants 

when exercising their proxy voting 

rights would be treated as fiduciaries 

under the rule. 

The Department agrees that the 

proposal was not intended to address 


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48See Letter from Deputy Assistant Secretary 

Lebowitz to Thobin Elrod (Feb. 23, 1989); Letter 

from Assistant Secretary Berg to Ian Lanoff (Sept. 

28, 1995). 

49One commenter argued that the rule is a ‘‘major 

rule’’ under the Congressional Review Act and thus 

may not be effective earlier than 60 days after 

publication in the Federal Register. As discussed in 

the Regulatory Impact Analysis below, the Office of 

Management and Budget has determined this rule 

is not a ‘‘major rule’’ for Congressional Review Act 

purposes and is therefore not subject to the delayed 

60-day effective date. 

50Commenters pointed out that plan sponsors 

and other fiduciaries would need to review, amend, 

and possibly renegotiate existing contracts with 

investment managers, proxy advisory firms, and 

other service and investment providers. Some 

commenters also expressed more specific concerns, 

for example, that, with respect to pooled investment 

vehicles, it may be necessary to obtain approval of 

revised investment policy statements from 

participating plans, which would be difficult to 

obtain in only 30 days. 

51The final rule includes a technical language 

change in paragraph (g) to conform paragraph (g) to 

Federal Register drafting conventions regarding the 

use of ‘‘effective date’’ versus ‘‘applicability date’’ 

terminology. 

52 85 FR at 72872. 

the sort of pass-through voting that the 

commenters described. Accordingly, the 

final rule includes an express provision 

in new paragraph (e)(5) stating that the 

final rule does not apply to voting, 

tender, and similar rights with respect 

to such securities that are passed 

through pursuant to the terms of an 

individual account plan to participants 

and beneficiaries with accounts holding 

such securities. That should not be read 

as an indication that plan trustees and 

other plan fiduciaries do not have 

fiduciary obligations with respect to 

such practices. Prior Department 

guidance recognized that in certain 

circumstances a trustee may follow the 

instructions of participants in an 

eligible individual account plan that 

expressly states that a trustee is subject 

to the direction of plan participants 

with respect to certain decisions 

regarding the management of their 

account. In such a case, under section 

403(a)(1) of ERISA, the trustee must 

follow the direction of participants if 

those directions are proper, made in 

accordance with plan terms, and not 

contrary to ERISA.48 Plan trustees and 

other fiduciaries would continue to 

have to comply with ERISA’s prudence 

and loyalty provisions with respect to 

the pass through of votes to plan 

participants and beneficiaries, and can 

continue to rely on the Department’s 

prior guidance with respect to such 

participant-directed voting, including 

29 CFR 2550.404c-1 implementing 

ERISA section 404(c)(1) to participantdirected pass through voting. 

(vi) Paragraphs (g) and (h) 

Paragraph (g) provides the 

applicability dates for the final rule. 

Under paragraph (g), the final rule will 

be applicable thirty days after the date 

this final rule is published in the 

Federal Register.49 One commenter 

requested clarity with respect to 

whether the proposed applicability date 

applied only to paragraph (e) or to the 

entirety of § 2550.404a–1. Paragraphs 

(g)(1) and (g)(3) of the final rule state 

that the applicability date for paragraph 

(e) is thirty days after the date this final 

rule is published in the Federal Register 

and shall apply to exercises of 

shareholder rights after such date. A 

number of commenters on the proposal 

stated that the proposed 30-day effective 

date period would not accommodate the 

essential and lengthy transition 

processes that would be necessary for 

plan fiduciaries to fully comply with the 

rule.50 These commenters requested 

extensions up to 12 or 18 months after 

publication of a final rule. Alternatively, 

or in addition to extending the 

applicability date, commenters 

requested that if the Department retains 

the 30-day provision, that the final rule 

include guidance that would permit 

affected parties a more reasonable 

amount of time to comply with the rule. 

Commenters proffered a variety of 

suggestions that would help plan 

fiduciaries and others manage this new 

process, including a different 

applicability date, a transition rule, a 

grandfather rule for existing voting 

arrangements, and a temporary nonenforcement policy. 

The Department is not extending the 

applicability date, particularly given the 

benefits this final rule affords to 

participants and beneficiaries. 

Furthermore, the Department believes 

that the final rule does not represent so 

significant a change from existing 

guidance that fiduciaries can reasonably 

claim impossibility in timely 

implementing most of its requirements. 

However, the Department agrees that for 

certain portions of the final rule, a later 

applicability date will address concerns 

of some commenters with respect to 

their ability to comply with the rule 

within the 30-day effective period. 

Paragraph (g)(3) grants fiduciaries until 

January 31, 2022, to comply with the 

requirements of paragraphs (e)(2)(ii)(D) 

and (E), (e)(2)(iv), and (e)(4)(ii) of the 

final rule. This delay gives fiduciaries 

additional time in making any 

modifications with respect to their use 

of proxy advisory firms and other 

service providers and for reviewing any 

proxy voting policies of pooled 

investment vehicles by investment 

managers. However, fiduciaries that are 

investment advisers registered with the 

SEC must comply with the 30-day 

effective date with respect to paragraphs 

(e)(2)(ii)(D) and (E) as such provisions 

are intended to be aligned with existing 

obligations under the Advisers Act, 

including Rules 204–2 and 206(4)-6 

thereunder and the 2019 SEC Guidance 

and 2020 SEC Supplemental 

Guidance.51

Finally, paragraph (h) of the final rule, 

as proposed, continues to provide that 

should a court of competent jurisdiction 

hold any provision of the rule invalid, 

such action will not affect any other 

provision. Including a severability 

clause describes the Department’s intent 

that any legal infirmity found with part 

of the final rule should not affect any 

other part of the rule. The exact same 

paragraph is included in the final rule 

on Financial Factors in Selecting Plan 

Investments. 

4. Interpretive Bulletin 2016–01 (IB 

2016–01) and Field Assistance Bulletin 

2018–01 (FAB 2018–01) 

The final rule also withdraws IB 

2016–01 and removes it from the Code 

of Federal Regulations. Accordingly, as 

of publication of the final rule, IB 2016– 

01 may no longer be relied upon as 

reflecting the Department’s 

interpretation of the application of 

ERISA’s fiduciary responsibility 

provisions to the exercise of shareholder 

rights and written statements of 

investment policy, including proxy 

voting policies or guidelines. 

FAB 2018–01 concerned both ‘‘ESG 

Investment Considerations’’ and 

‘‘Shareholder Engagement Activities.’’ 

The portion of FAB 2018–01 under the 

heading of ‘‘ESG Investment 

Considerations’’ was superseded by the 

Department’s final rule on ‘‘Financial 

Factors in Selecting Plan 

Investments.’’ 52 Similarly, the portion 

of FAB 2018–01 under the heading 

‘‘Shareholder Engagement Activities’’ 

will be superseded by this final rule and 

this accompanying preamble. Since that 

discussion is the sole remaining 

substantive portion of FAB 2018–01, as 

of the effective date of the final rule, 

FAB 2018–01 will no longer be 

considered current guidance issued by 

the Department. 

C. Miscellaneous Issues 

Constitutional Issues 

A number of commenters raised 

concerns that the proposal, or specific 

provisions of the proposal, may be 

inconsistent with certain rights afforded 

shareholders by the First and Fifth 

Amendments in the Constitution’s Bill 

of Rights. The Department disagrees 


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53U.S. Const., amend. I. 

54See Cent. Hudson Gas & Elec. Corp. v. Pub. 

Serv. Comm’n of New York, 447 U.S. 557, 564 

(1980). Commenters generally argued that Central 

Hudson’s commercial speech test would apply. 

55Clark v. Community for Creative NonViolence, 

468 U.S. 288, 293 (1984). 

56Church of the Lukumi Babalu Aye v. City of 

Hialeah, 508 U.S. 520, 531 (1993) (‘‘In addressing 

the constitutional protection for free exercise of 

religion, our cases establish the general proposition 

that [a law that is neutral and of general 

applicability need not be justified by a compelling 

governmental interest even if the law has the 

incidental effect of burdening a particular religious 

practice.], Employment Div., Dept. of Human 

Resources of Ore. v. Smith, 495 U.S. 872 (1990)’’). 

57 Fraternal Order of Police of Newark v. City of 

Newark, 170 F.3d 359, 360 (3d Cir. 1999) (‘‘Because 

the Department makes exemptions from its policy 

for secular reasons and has not offered any 

substantial justification for refusing to provide 

similar treatment for officers who are required to 

wear beards for religious reasons, we conclude that 

the Department’s policy violates the First 

Amendment’’). 

58See Fraternal Order of Police of Newark, 170 

F.3d at 360; Smith, 495 U.S. at 878–79. 

59See 29 U.S.C. 1002(33). 

with these constitutional arguments 

and, further, believes that the lack of 

merit of those arguments is even more 

pronounced in light of modifications to 

the proposed rule adopted in the final 

rule. Rather, the final rule is designed to 

help these ERISA fiduciaries meet 

statutory standards, in particular the 

requirement that ERISA fiduciaries must 

carry out their duties relating to the 

exercise of shareholder rights prudently 

and solely for the economic benefit of 

plan participants and beneficiaries. The 

Department’s view of the scope of 

factors to be considered by an ERISA 

fiduciary when managing plans assets 

was articulated as recently as 2014 by 

the Supreme Court in Fifth Third 

Bancorp v. Dudenhoeffer, 573 U.S. 409, 

421 (2014) (the ‘‘benefits’’ to be pursued 

by ERISA fiduciaries as their ‘‘exclusive 

purpose’’ do not include ‘‘nonpecuniary 

benefits’’). 

First Amendment Free Speech and 

Exercise of Religion 

Some commenters asserted that the 

proposal may violate the First 

Amendment’s protection of free speech. 

The decision to vote shares or engage in 

shareholder activism is, they argued, a 

form of speech, and they claimed that 

the Department established strict 

conditions and costly burdens on the 

established mechanism by which 

shareholders (and therefore their 

representatives) are able to 

communicate their interests and provide 

for companies to take (or refrain from 

taking) certain actions. They also argued 

that the proposal was targeted at 

preventing support of ESG-related 

initiatives and, by increasing the costs 

associated with determining whether it 

is acceptable to vote, would force 

fiduciaries to use a permitted practice 

either to not support those initiatives or 

to vote with corporate management; 

thus, the commenters concluded that 

the proposal was both a content- and 

viewpoint-based restriction. The 

proposal, according to these 

commenters, could mandate that assets 

are managed in a manner that is 

inconsistent with the values and 

interests of ERISA investors. Similarly, 

a few commenters claimed that the 

proposal also may violate the First 

Amendment’s protections for freedom of 

religion, because it would curtail the 

rights of religious organizations to vote 

in accordance with their beliefs. 

The First Amendment bars the 

government from abridging freedom of 

speech or the right to assemble 

peaceably and from prohibiting the free 

exercise of religion.53 The right of free 

speech protects the open expression of 

ideas without fear of government 

reprisal. Some commenters stated that 

the right to vote a proxy consistent with 

the participants’ and beneficiaries’ 

values is protected speech, and argued 

that the proposed rule’s requirements 

would unconstitutionally limit this 

right. 

These commenters relied 

predominantly on the premise that the 

proposal effectively would force 

fiduciaries either to not vote or to vote 

with management. As one commenter 

argued, the proposal would ‘‘impose 

unique and burdensome restrictions on 

shareholder activities that may be 

contrary to the interests of a favored 

group, while removing those restrictions 

when the expressive activity favors the 

preferred group.’’ However, the 

Department in this final rule has 

removed the provisions that these 

commenters argued would create a fait 

accompli, allegedly stifling fiduciaries’ 

speech-through-proxy-vote. Because of 

those changes, these arguments are 

moot. 

To the extent commenters would still 

argue that the final rule might run afoul 

of the Free Speech Clause, this 

argument is overbroad and inconsistent 

with Supreme Court precedent. ERISA 

requires fiduciaries to manage plan 

assets for the ‘‘exclusive purpose’’ of 

providing benefits and defraying 

expenses. Even if voting by a 

shareholder speaking for herself could 

be speech, as some commenters argued, 

proxy voting by a plan, which holds its 

shares in trust for its participants and 

beneficiaries, should appropriately and 

correctly be considered conduct. 

Consistent with Dudenhoeffer, fiduciary 

plan asset management activity must 

focus exclusively on providing 

‘‘benefits.’’ That term refers to financial 

benefits (such as retirement income), 

and not to non-pecuniary goals. The 

final rule’s provisions require that any 

proxy decision serves those financial 

benefits of participants and 

beneficiaries, a duty derived directly 

from the ERISA statute. 

To the extent proxy voting by a plan 

is speech, ERISA’s requirements and the 

final rule’s standards of diligence and 

consideration of cost plainly satisfy the 

independent scrutiny that is required 

for regulations of commercial speech.54

Moreover, the final rule is content- and 

viewpoint-neutral. The final rule does 

not require fiduciaries to say (or refrain 

from saying) anything in particular or 

take (or refrain from taking) any 

particular position, nor does it require 

fiduciaries to take action only on certain 

topics. The final rule instead requires 

that fiduciaries exercise authority over 

their proxies with the same loyalty and 

prudence applicable to all other aspects 

of their management of plan assets. And 

any restriction to express beliefs 

imposed by the rule still leaves open 

ample alternative channels to freely 

express those same beliefs.55

The Department also does not agree 

that the final rule violates the First 

Amendment’s Free Exercise clause. The 

final rule is a neutral rule of general 

applicability and does not target any 

religious view.56 The final rule’s 

provisions aim solely to ensure that 

fiduciaries base proxy decisions of any 

kind exclusively on the financial 

benefits of participants and 

beneficiaries, as required by ERISA.57

The impact on religion, if any, would be 

incidental and not violate the First 

Amendment.58 Moreover, pursuant to 

ERISA section 4(b)(2), church plans, as 

defined in ERISA section 3(33), are not 

subject to ERISA and this regulation.59

Fifth Amendment Takings 

A few commenters raised a different 

Constitutional concern—that the 

proposal may violate the Fifth 

Amendment’s ‘‘takings’’ clause. 

Characterizing the right to vote a proxy 

as a plan asset, these commenters argue 

that the proposed rule would require 

ERISA plans to use their votes in a 

specific way, or relinquish them. The 

proposed rule’s requirements, the 

commenters posited, are so burdensome 

as to prevent fiduciaries from fully 

exercising their voting rights. 

The Department disagrees that the 

provisions of the final rule violate the 

Takings Clause. The Fifth Amendment 

prohibits the government from taking 


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60U.S. Const. amend. V. 

61 Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 

(2005). 

62Ruckelshaus v. Monsanto Co., 467 U.S. 986, 

1000–01, 1005 (1984). 

63 Id. at 1005 (quoting PruneYard Shopping Ctr. 

v. Robins, 447 U.S. 74, 832 (1980)). 

64Avon Letter, supra note 6. 

65Penn Central Transp. Co. v. City of New York, 

438 U.S. 104, 127 (1978) (finding historical 

preservation law not a taking in part because it 

permitted owner to obtain a reasonable return on 

its investment.). 

66See, e.g., Ruckelshaus, 467 U.S. at 1007 (1984) 

(noting that expectations are necessarily adjusted in 

areas that ‘‘ha[ve] long been the source of public 

concern and the subject of government regulation’’); 

Franklin Mem’l Hosp. v. Harvey, 575 F.3d 121, 128 

(1st Cir. 2009) (holding that a claimant’s 

investment-backed expectations were ‘‘tempered by 

the fact that it operate[d] in the highly regulated 

hospital industry’’). 

67See Executive Order 13891, 84 FR 55235 (Oct. 

15, 2019), promoting notice-and-comment 

rulemaking for guidance. 

private property for public use without 

just compensation.60 A ‘‘regulatory 

taking’’ is one in which a government 

regulation is ‘‘so onerous that its effect 

is tantamount to a direct appropriation 

or ouster.’’ 61 The Government action 

must (1) affect a property interest and 

(2) go ‘‘too far’’ in so doing (i.e., amount 

to a deprivation of all or most economic 

use or a permanent physical invasion of 

property).62 How far is too far depends 

upon several factors, including ‘‘the 

character of the governmental action, its 

economic impact, and its interference 

with reasonable investment-backed 

expectations.’’ 63

At the outset, the Takings Clause 

applies only when ‘‘property’’ is 

‘‘taken.’’ The Department has stated that 

the act of voting proxy shares is a 

fiduciary act of managing plan assets.64

The Department is not aware of any 

judicial authority that has addressed 

whether a shareholder right appurtenant 

to a share of stock, as opposed to the 

share of stock itself, is ‘‘property’’ for 

purposes of the Takings Clause and 

whether the ‘‘taking’’ analysis would 

involve an evaluation of the regulation’s 

impact on the overall value of the stock. 

Nonetheless, even if the right to vote a 

proxy itself constitutes a 

constitutionally-protected property 

interest, neither the proposal nor this 

final rule ‘‘takes’’ that right or the 

underlying shares. Instead, the rule fully 

preserves the right to vote proxies in the 

economic interests of the plan. It is 

designed to protect, not diminish, 

participants’ and beneficiaries’ interests 

in their retirement benefits and the 

plan’s economic interests by ensuring 

proxy votes do not subordinate those 

interests to non-pecuniary factors. The 

fiduciary maintains discretion to vote or 

not vote consistent with these interests. 

Given the Department’s longstanding 

position that the plan’s pecuniary 

interests guide the exercise of 

shareholder rights, there is no 

reasonable expectation that plans can 

make proxy voting decisions based on 

anything but plans’ pecuniary 

interests.65 Further, both plans and 

securities are already subject to 

extensive regulation under state and 

federal law.66 Finally, the rule does not 

‘‘take’’ property for public use, such as 

for public safety or historical 

preservation, but instead places 

parameters around proxy voting 

conduct that would fall outside of the 

prudence and loyalty duties found in 

the ERISA statute itself. 

Administrative Procedure Act 

A few commenters suggested that the 

Department’s proposal was arbitrary and 

capricious and, more specifically, failed 

to comply with the Administrative 

Procedure Act. Also, although not 

necessarily framed in terms of the 

Department’s compliance with the 

Administrative Procedure Act, a number 

of commenters asserted that the 

Department lacked sufficient 

evidentiary support for proposing the 

rule. For example, commenters pointed 

out that the Department suggested an 

increase in shareholder proposals as 

justification for the rule, which they 

argued is not relevant to whether 

fiduciaries are confused about their 

fiduciary obligations with respect to 

proxy voting, and that the Department 

did not cite to any enforcement action 

or other evidence that ERISA plan 

participants have been harmed or that 

ERISA plan fiduciaries are actually 

confused about their responsibilities. 

Other commenters disagreed and 

believed that the Department 

established sufficient evidence to 

support its proposal—for example, 

evidence that politically charged 

shareholder proposals result in the 

incursion of sometimes significant costs 

but do not demonstrably enhance 

shareholder value—and that the 

Department, therefore, is correct to limit 

voting on such proposals. Commenters 

supporting the rule also discussed 

evidence that proxy advisory firms, 

which exert massive amounts of 

influence over public companies, have 

well-documented deficiencies, 

including conflicts of interest, errors, 

and a lack of transparency. 

Some commenters also argued that 

the proposal was a significant departure 

from prior Departmental guidance on 

shareholder rights without sufficiently 

establishing the existence of a problem 

to be solved, or otherwise providing a 

reason why the rule otherwise is 

necessary. Commenters also argued that 

no further clarification of the existing 

Interpretive Bulletin and Field 

Assistance Bulletin regarding 

fiduciaries’ ERISA obligations with 

respect to proxy voting is necessary. 

With respect to the arguments of 

commenters concerning the 

Administrative Procedure Act, the 

Department believes that there are 

sufficient reasons to justify the 

promulgation of this final rule, 

including the lack of precision and 

consistency in the marketplace with 

respect to ERISA fiduciary obligations 

with respect to exercises of shareholder 

rights, shortcomings in the rigor of the 

prudence and loyalty analysis by some 

fiduciaries and other market 

participants, and perceived variation in 

some aspects of the Department’s past 

guidance. Further, the iterative 

Interpretive Bulletins since 1994, 

followed by the Field Assistance 

Bulletin issued in 2018, and the number 

of advisory opinions and information 

letters historically issued on this topic 

demonstrate the need for notice and 

comment guidance issued under the 

Administrative Procedure Act.67 The 

Department does not believe that there 

needs to be specific evidence of 

fiduciary misbehavior or demonstrated 

injury to plans and plan participants in 

order to issue a regulation addressing 

the application of ERISA’s fiduciary 

duties to the exercise of shareholder 

rights, including proxy voting, the use 

of written proxy voting policies and 

guidelines, and the selection and 

monitoring of proxy advisory firms. 

The need for this regulation was also 

demonstrated by the disagreements 

among commenters on fundamental 

aspects of the proposal, which itself 

confirmed that a lack of clarity in fact 

exists and that ERISA fiduciaries and 

other market stakeholders would benefit 

from the Department’s guidance in this 

final rule, as well as the confusion 

regarding the scope of fiduciaries’ duties 

with respect to proxy voting and 

shareholder rights evidenced by the 

number of statements by stakeholders 

and others expressing a belief that 

fiduciaries are required by ERISA to 

always vote proxies. Moreover, under 

the Department’s authority to 

administer ERISA, the Department may 

promulgate rules that are preemptive in 

nature and is not required to wait for 

widespread harm to occur. The 

Department can take steps to ensure that 

plans and plan participants and 

beneficiaries are protected prospectively 

and has the ability to issue regulations 


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68 In pursuing its consultations with other 

regulators, the Department aimed to avoid conflict 

with other federal laws and minimize duplicative 

provisions between ERISA and federal securities 

laws. However, the governing statutes do not permit 

the Department to make obligations under ERISA 

identical in all respects to duties under federal 

securities laws. 

to ensure that fiduciaries follow their 

statutory duties and mitigate the 

possibility of future violations. 

The Department also believes that 

proceeding through notice-andcomment rulemaking rather than 

promulgating further interpretive 

guidance has other benefits, including 

the benefit of public input and the 

greater stability of codified rules. 

Proceeding in this manner is also 

consistent with the principles of 

Executive Order 13891 and the 

Department’s recently issued PRO Good 

Guidance rule, which emphasize the 

importance of public participation, fair 

notice, and compliance with the 

Administrative Procedure Act. 

Tension With State Corporate Law 

Some commenters argued that the 

proposal, if finalized, would undermine 

state corporate laws, which reflect the 

inherent value of shareholder voting, 

threaten good corporate governance, and 

impede shareholders’ voting rights. The 

Department is, according to these 

commenters, overstepping its authority 

and substituting its opinion for that of 

shareholders, the owners of 

corporations, as to what is important for 

corporate management and business 

affairs. Shareholders’ exercise of voting 

rights is a critical ‘‘check’’ on the 

principal-agent conflict that arises from 

the separation of ownership and 

management in modern corporate law. 

Other commenters asserted that, in 

addition to potentially conflicting with 

corporate law, the Department’s rule 

may conflict with corporations’ and 

institutional investors’ existing policies 

for shareholder voting, policies that 

have evolved over time, in response to 

real economic and financial 

developments, to enhance the efficiency 

and efficacy of the shareholder voting 

process. 

The Department disagrees with 

commenters that this rulemaking creates 

any real conflict with state corporate 

laws. Although the rule will affect 

ERISA plan fiduciaries as to whether 

and how they exercise certain 

shareholder rights, the rule will not 

impact such rights themselves. 

Commenters failed to provide specific 

examples demonstrating any material 

conflict or compliance issue concerning 

these state laws. 

Coordination With Other Federal Laws 

and Policies 

Some commenters expressed their 

concern that the rule, if finalized, could 

negatively impact the U.S. securities 

markets to the extent the rule interferes 

with other federal agencies’ objectives— 

for example, by making it more difficult 

for the SEC to perform its mission of 

protecting securities markets and 

investors. According to commenters, in 

efficient markets shareholders are 

assumed to exercise their voting rights 

to ensure that investments are managed 

in their best interests, and the proposed 

rule would frustrate evolving market 

efficiencies concerning when and how 

shareholders vote proxies. Commenters 

also alleged that potential conflicts 

could arise for financial market 

stakeholders who are subject to the laws 

of other federal agencies, including the 

SEC, the Office of the Comptroller of the 

Currency, and the Commodity Futures 

Trading Commission. 

The Department believes that the 

changes made to the final rule mitigate 

any concerns with respect to potential 

conflicts with other regulatory regimes. 

For example, the final rule is intended 

to align with comparable SEC 

requirements imposed on investment 

advisers with respect to 

recordkeeping.68 Both the proposed and 

final rules were sent to the SEC and 

other federal agencies as part of the 

inter-agency review conducted by the 

Office of Management and Budget 

pursuant to Executive Order 12866. 

Also, the final rule, as described above, 

adopts a principles-based approach that 

is fundamentally consistent with the 

Department’s published interpretive 

guidance in this area beginning in 1994. 

Accordingly, the Department does not 

agree that the final rule will make it 

more difficult for the SEC or any other 

federal agency to perform their missions 

or that the final rule will have any 

negative impact on the U.S. securities 

markets. Rather, many public comments 

welcomed the final rule as appropriately 

describing the prudence and loyalty 

obligations of ERISA fiduciaries in 

connection with the exercise of 

shareholder rights. 

Consistency With International 

Practices and Regulatory Trends 

A few commenters also raised 

concerns about how the proposal, if 

finalized, would impact international 

investment. For example, one 

commenter, a financial services 

provider, claimed that the rule’s 

mandate that proxy voting be based 

solely on an ERISA plan’s economic 

interests is inconsistent with the 

provider’s clients’ expectations, and 

also with investment stewardship 

standards outside of the United States. 

The commenter claimed that asset 

managers in the European Union and 

other developed nations are increasingly 

subject to standards exactly opposite to 

those proposed by the Department, 

which incorporate (and sometimes 

require) consideration of ESG factors. 

Further, some international securities 

issuers require that investors vote 

proxies, and commenters queried what 

a plan fiduciary should do in such 

cases. 

This final rule reflects ERISA’s 

requirements. Fiduciaries of ERISAcovered pension and other benefit plans 

are statutorily bound to manage those 

plans, including shareholder rights 

appurtenant to shares of stock, with a 

singular goal of maximizing the funds 

available to pay benefits under the plan. 

The duties of prudence and loyalty 

under ERISA may not be the same 

investment standards the commenters 

referenced under which international 

regulation of proxy voting and other 

exercises of shareholder rights is taking 

place. Accordingly, international trends 

or the actions of regulators in other 

countries are not an appropriate gauge 

for evaluating ERISA’s requirements as 

they apply to fiduciary management of 

investments, including the topics 

covered by this final rule relating to the 

exercise of shareholder rights, including 

proxy voting, the use of written proxy 

voting policies and guidelines, and the 

selection and monitoring of proxy 

advisory firms. Moreover, to the extent 

foreign legal and financial standards 

condone sacrificing returns to consider 

non-pecuniary objectives, they are 

inconsistent with the fiduciary 

obligations imposed by ERISA. 

As to commenters’ assertion that some 

international securities issuers require 

that investors vote proxies, as discussed 

above, the final rule does not carry 

forward the provision from the proposal 

stating that a plan fiduciary must not 

vote any proxy unless the fiduciary 

prudently determines that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposed rule, 

taking into account the costs involved 

(including the cost of research, if 

necessary, to determine how to vote). 

The Department also believes that such 

a voting requirement by an issuer of 

securities held by a plan would be a 

relevant consideration for the plan 

fiduciary when applying the more 

principles-based approach adopted in 

the final rule when deciding whether to 

vote. However, the Department has 

previously noted that in deciding 


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69See, e.g., 29 CFR 2509.2016–01 (last paragraph 

in the section entitled ‘‘Proxy Voting’’). 

70ERISA section 404(a)(1). See also ERISA 

section 403(c)(1) (‘‘[T]he assets of a plan shall never 

inure to the benefit of any employer and shall be 

held for the exclusive purposes of providing 

benefits to participants in the plan and their 

beneficiaries’’). 

71Regulatory Planning and Review, 58 FR 51735 

(Oct. 4, 1993). 

72 Improving Regulation and Regulatory Review, 

76 FR 3821 (Jan. 18, 2011). 

73Reducing Regulation and Controlling 

Regulatory Costs, 82 FR 9339 (Jan. 30, 2017). 

74 5 U.S.C. 804(2) (1996). 

75 44 U.S.C. 3506(c)(2)(A) (1995). 

76 5 U.S.C. 601 et seq. (1980). 

77 2 U.S.C. 1501 et seq. (1995). 

78Federalism, 64 FR 43255 (Aug. 10, 1999). 

whether to purchase shares that may 

involve out-of-the-ordinary costs or 

unusual requirements—specifically 

referencing as an example voting 

proxies on shares of certain foreign 

corporations—the responsible fiduciary 

should consider whether the difficulty 

and expense of voting the shares is 

reflected in the market price.69

Similarly, in the Department’s view, in 

deciding whether to purchase or retain 

shares, a fiduciary would have to 

consider proxy voting requirements of 

an issuer that conflict with the 

fiduciary’s duties of prudence and 

loyalty under ERISA or that interfere 

with the fiduciary’s ability to comply 

with those duties. 

D. Regulatory Impact Analysis 

This section analyzes the regulatory 

impact of the Department’s final 

regulation amendments to the 

‘‘Investment Duties’’ regulation in 29 

CFR 2550.404a–1 addressing the 

application of the prudence and 

exclusive purpose responsibilities under 

ERISA with respect to the exercise of 

shareholder rights, including proxy 

voting, the use of written proxy voting 

policies and guidelines, and the 

selection and monitoring of proxy 

advisory firms. As stated earlier in this 

preamble, in connection with proxy 

voting, the Department’s longstanding 

position articulated in sub-regulatory 

guidance that was first issued in the 

1980s is that the fiduciary act of 

managing plan assets includes the 

management of voting rights (as well as 

other shareholder rights) appurtenant to 

shares of stock. In carrying out these 

duties, ERISA mandates that fiduciaries 

act ‘‘prudently’’ as well as ‘‘solely in the 

interest’’ and ‘‘for the exclusive 

purpose’’ of providing benefits to 

participants and their beneficiaries.70

This regulatory project was initiated 

because the Department believes there is 

a persistent misunderstanding among 

some fiduciaries and other stakeholders 

with respect to ERISA’s requirements 

regarding proxy voting and the exercise 

of shareholder rights. This 

misunderstanding may be due in part to 

varied statements the Department has 

made on the consideration of nonpecuniary or non-financial factors in 

sub-regulatory guidance about those 

activities. This final rule provides 

certainty to plan administrators and 

benefits ERISA plan participants by 

eliminating the misunderstanding that 

exists among some stakeholders that 

ERISA fiduciaries are required to vote 

all proxies rather than only proxies 

determined to have a net positive 

economic impact on the plan. The final 

rule also supplements the Department’s 

sub-regulatory guidance by specifying 

actions fiduciaries can take to ensure 

they are meeting their long-standing 

obligation under ERISA to act 

prudently, solely in the interests of 

participants and beneficiaries, and for 

the exclusive purpose of providing 

benefits and defraying reasonable plan 

expenses. 

While the Department expects that 

this final rule will benefit plans and 

participants overall, it also will impose 

some compliance costs to the extent that 

fiduciaries do not currently meet 

specific requirements found in the final 

rule. However, as discussed in the cost 

section below, the Department has made 

significant modifications to the proposal 

in the final rule by taking a less 

prescriptive, principles-based approach 

to the subject matter that focuses on 

whether a fiduciary has a prudent 

process for voting and other exercises of 

shareholder rights. These changes will 

significantly reduce the potential 

compliance costs for fiduciaries. 

The benefits, costs, and transfer 

impacts associated with the final rule 

depend on the number of plan 

fiduciaries that are currently not 

following or misinterpreting the 

Department’s existing sub-regulatory 

guidance. While the Department does 

not have sufficient data to estimate the 

number of such fiduciaries, the 

Department expects the number is small 

because the Department believes that 

most fiduciaries largely comply with the 

Department’s existing sub-regulatory 

guidance in this area, which is 

consistent with the principles-based 

requirements of the final rule. The 

Department expects that the benefits of 

the rule will be appreciable for 

participants and beneficiaries covered 

by plans with noncompliant investment 

fiduciaries. If the Department’s 

assumption regarding the number of 

noncompliant fiduciaries is understated, 

the proposed rule’s benefits, costs, and 

transfer impacts will be proportionately 

higher; however, even in this instance, 

the Department believes that the final 

rule’s benefits still justify its costs. 

1. Relevant Executive Orders 

The Department has examined the 

effects of this rule as required by 

Executive Order 12866,71 Executive 

Order 13563,72 Executive Order 

13771,73 the Congressional Review 

Act,74 the Paperwork Reduction Act of 

1995,75 the Regulatory Flexibility Act,76

Section 202 of the Unfunded Mandates 

Reform Act of 1995,77 and Executive 

Order 13132.78

Executive Orders 12866 and 13563 

direct agencies to assess the costs and 

benefits of available regulatory 

alternatives and, if regulation is 

necessary, to select regulatory 

approaches that maximize net benefits 

(including potential economic, 

environmental, public health and safety 

effects; distributive impacts; and 

equity). Executive Order 13563 

emphasizes the importance of 

quantifying both costs and benefits, of 

reducing costs, of harmonizing rules, 

and of promoting flexibility. 

Under Executive Order 12866, 

‘‘significant’’ regulatory actions are 

subject to review by the Office of 

Management and Budget (OMB). 

Section 3(f) of the Executive order 

defines a ‘‘significant regulatory action’’ 

as an action that is likely to result in a 

rule (1) having an annual effect on the 

economy of $100 million or more in any 

one year, or adversely and materially 

affecting a sector of the economy, 

productivity, competition, jobs, the 

environment, public health or safety, or 

state, local or tribal governments or 

communities (also referred to as 

‘‘economically significant’’); (2) creating 

a serious inconsistency or otherwise 

interfering with an action taken or 

planned by another agency; (3) 

materially altering the budgetary 

impacts of entitlement grants, user fees, 

or loan programs or the rights and 

obligations of recipients thereof; or (4) 

raising novel legal or policy issues 

arising out of legal mandates, the 

President’s priorities, or the principles 

set forth in the Executive order. 

OMB has determined that this rule is 

not economically significant within the 

meaning of section 3(f)(1) of the 

Executive Order 12866, but that it is 

significant within the meaning of 

section 3(f)(4) of the Executive order. 

Therefore, the Department provides an 

assessment of the potential costs, 

benefits, and transfers associated with 


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79 Department estimates are based on Form 5500 

annual reports filed by plans with 100 or more 

participants. These estimates include only stocks 

held directly or through Direct Filing Entities, not 

through mutual funds. 80 Department calculations are based on U.S. 

Federal Reserve statistics. Board of Governors of the 

Federal Reserve System, Financial Accounts of the 

United States—Z.1 (Sept. 2020). 81Morris Mitler, Dorothy Donohue & Sean 

Collins, Proxy Voting by Registered Investment 

Companies, 2017, Investment Company Institute 

Research Perspective (July 2019), at 4 (hereinafter 

‘‘ICI Proxy Voting Report’’). 82 Id., at 6; see also 15 U.S.C. 78n–1. 

83Procedural Requirements and Resubmission 

Thresholds under Exchange Act Rule 14a–8, 84 FR 

66458, 66491 (Dec. 4, 2019). 

84See 2019 ISS Proxy Voting Trends, supra note 

20. 

85See John G. Matsusaka, Oguzhan Ozbas, & Irene 

Yi, Can Shareholder Proposals Hurt Shareholders? 

Evidence from SEC No-Action Letter Decisions, 

U.S.C. CLASS Research Paper No. CLASS17–4 

(2019), https://papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=2881408, at 25; Joseph P. 

Kalt, L. Adel Turki, Kenneth W. Grant, Todd D. 

Kendall & David Molin, Political, Social, and 

Environmental Shareholder Resolutions: Do They 

Create or Destroy Shareholder Value?, National 

Association of Manufacturers (June 2018), 

www.shopfloor.org/wp-content/uploads/2018/06/ 

nam_shareholder_resolutions_survey.pdf. 

86 DOL estimates from the 2018 Form 5500 

Pension Research Files. 

this final rule below. OMB has reviewed 

the final rule pursuant to the Executive 

order. Pursuant to the Congressional 

Review Act, OMB has determined that 

this final rule is not a ‘‘major rule,’’ as 

defined by 5 U.S.C. 804(2). 

1. Introduction 

ERISA plan assets comprise a 

substantial stake of the shares of public 

companies. In 2018, pension plan assets 

contained stock holdings of $1.7 trillion; 

such holdings made up 27 percent of 

large defined benefit plan assets and 25 

percent of large defined contribution 

plan assets.79 However, ERISA pension 

holdings represent a decreasing share of 

all corporate equity. ERISA defined 

benefit and defined contribution plans 

held just 5.5 percent of total corporate 

equity in 2019, down from a high of 22 

percent in 1985.80

Prior to its annual meeting, a publicly 

traded company sets a record date and 

sends out a list of proposals on which 

shareholders will vote. A shareholder 

must hold shares as of the record date 

in order to vote at a shareholder 

meeting. There are two types of 

proposals: Management proposals and 

shareholder proposals. Management 

proposals—including director elections, 

audit firm ratification proposals, and 

proposals regarding the company’s 

executive compensation program (also 

known as ‘‘say-on-pay’’ proposals)— 

account for 98 percent of proposals and 

are largely mandated by law or 

exchange listing requirements. From 

2011 to 2017, shareholder proposals 

accounted for about two percent of 

proposals but often were more 

controversial and thus received more 

attention than management proposals.81

Shareholder votes on some proposals, 

such as director elections, are binding. 

Votes on many other proposals, 

including shareholder proposals and 

say-on-pay proposals, are not binding 

and serve only as shareholder 

recommendations for the company’s 

board.82

1.1. Need for Regulation 

As discussed above in section A, 

Background and Purpose of Regulatory 

Action, the Department believes that 

this final rule is necessary to provide 

clarity and certainty regarding the 

application of fiduciary obligations of 

loyalty and prudence with respect to 

exercises of shareholder rights, 

including proxy voting. Despite past 

efforts to make clear fiduciary 

obligations in this regard, the 

Department is concerned that its 

existing sub-regulatory guidance may 

have inadvertently created the 

perception that fiduciaries must vote 

proxies on every shareholder proposal 

to fulfill their obligations under ERISA. 

This belief may have caused some 

fiduciaries to pursue proxy proposals 

that have no connection to increasing 

the value of investments used to pay 

benefits or defray reasonable plan 

administrative expenses. 

For example, some fiduciaries may 

feel obligated to vote proxies for nonpecuniary proposals related to 

environmental, social, or public policy 

agendas. The situation is concerning 

due to the recent increase in the number 

of environmental and social shareholder 

proposals introduced. From 2011 

through 2017, shareholders submitted 

462 environmental proposals and 841 

social shareholder proposals, and 

resubmitted at least once 41 percent of 

environmental and 51 percent of social 

proposals.83 These proposals 

increasingly call for disclosure, risk 

assessment, and oversight, rather than 

for specific policies or actions, such as 

phasing out products or activities.84 The 

Department believes it is likely that 

many of these proposals have little 

bearing on share value or other relation 

to plan financial interests.85 The 

Department also has reason to believe 

that responsible fiduciaries may 

sometimes rely on third-party proxy 

voting advice without taking sufficient 

steps to ensure that the advice is 

impartial and rigorous. 

The Department’s objective in issuing 

this final rule is to ensure that plan 

fiduciaries act solely in accordance with 

the economic interest of the plan and its 

participants and beneficiaries and 

consider only pecuniary factors when 

deciding whether to vote proxies or 

exercise shareholder rights. The 

Department believes that addressing 

these issues in the final rule will help 

safeguard the interests of participants 

and beneficiaries in their plan benefits. 

1.2. Affected Entities 

This final rule would affect ERISAcovered pension, health, and other 

welfare plans that hold shares of 

corporate stock. It would affect plans 

with respect to stocks they hold 

directly, as well as with respect to 

stocks they hold through ERISA-covered 

intermediaries, such as common trusts, 

master trusts, pooled separate accounts, 

and 103–12 investment entities. The 

final rule would not affect plans with 

respect to stock held through registered 

investment companies, because the final 

rule does not apply to such funds’ 

internal management of such underlying 

investments. The final rule also does not 

apply to voting, tender, and similar 

rights with respect to securities that are 

passed through pursuant to the terms of 

an individual account plan to 

participants and beneficiaries with 

accounts holding such securities. 

ERISA-covered plans with 100 or 

more participants (large plans) annually 

report data on their stock holdings on 

Form 5500 Schedule H (see Table 1). 

Approximately 27,000 defined 

contribution plans and 5,000 defined 

benefit plans, with approximately 84 

million participants, either hold 

common stocks or are an Employee 

Stock Ownership Plan (ESOP). 

Additionally, 573 health and other 

welfare plans file the schedule H and 

report holding common stocks either 

directly or indirectly. In total, large 

pension plans and welfare plans hold 

approximately $1.7 trillion in stock 

value. Common stocks constitute about 

25 percent of total assets of those 

pension plans that are not ESOPs and 

hold common stock. Out of the 25,400 

pension plans that hold common stock 

and are not ESOPs, about 20,000 plans 

hold common stock through an ERISAcovered intermediary and 

approximately 3,500 plans hold 

common stock directly. A smaller 

number of plans hold stock both 

directly and indirectly.86 In total, there 

are approximately 32,000 plans holding 

either common stock or employer stock, 

comprised of large plans, welfare plans, 

and ESOPs. In addition to the large 

pension plans, approximately 629,000 


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81682 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

87The Form 5500 does not require these plans to 

categorize the assets as common stock, so the 

Department does not know if they hold stock. 88 DOL estimates are derived from the 2018 Form 

5500 Schedule C. 

89One commenter pointed out that in a 

proprietary survey of the largest pension funds and 

defined contribution plans, approximately 92 

percent of the respondents indicated that they have 

formally delegated proxy voting responsibilities to 

another named fiduciary (e.g., an Investment 

Manager), and approximately 42 percent of 

respondents engage a proxy advisory firm (directly 

or indirectly) to help with voting some or all 

proxies. 

90 Glassman, James K., and J.W. Verret, ‘‘How to 

Fix our Broken Proxy Advisory System.’’ Arlington, 

VA: Mercatus Center (2013). 

91Exemptions from the Proxy Rules for Proxy 

Voting Advice, 85 FR 55082 (Sept. 3, 2020) (2020 

SEC Proxy Voting Advice Amendments). 

92 Dimson, Elroy, Og ̆uzhan Karakas ̧, and Xi Li., 

Active Ownership, 28 The Review of Financial 

Studies 12 (2015). 

small pension plans hold assets and 

some may invest in stock.87

TABLE 1—NUMBER OF PENSION AND WELFARE PLANS HOLDING COMMON STOCKS OR ESOP BY TYPE OF PLAN, 2018 a

Common Stock 

(no employer securities) 

Defined 

benefit 

Defined 

contribution 

Total 

pension plans Welfare plans Total all plans 

Direct Holdings Only ............................................................ 1,272 2,286 3,558 569 4,127 

Indirect Holdings Only .......................................................... 2,792 17,591 20,383 3 20,386 

Both Direct and Indirect ....................................................... 941 586 1,527 1 1,528 

Total .............................................................................. 5,005 20,463 25,468 573 26,041 

ESOP (No Common Stock) ................................................. ........................ 5,809 5,809 ........................ 5,809 

Common Stock and ESOP .................................................. ........................ 591 591 ........................ 591 

Total All Plans Holding Stocks ..................................... 5,005 26,863 31,868 573 32,441 

a DOL calculations from the 2018 Form 5500 Pension Research Files. 

While this final rule would directly 

affect ERISA-covered plans that possess 

the relevant shareholder rights, the 

activities covered under the final rule 

would be carried out by responsible 

fiduciaries on plans’ behalf. Many plans 

hire asset managers to carry out 

fiduciary asset management functions, 

including proxy voting. In 2018, large 

ERISA plans reportedly used 

approximately 17,800 different service 

providers, some of whom provide 

services related to the exercise of plans’ 

shareholder rights. Such service 

providers include trustees, trust 

companies, banks, investment advisers, 

and investment managers.88

In addition, this final rule will 

indirectly affect proxy advisory firms.89

Currently, this market is dominated by 

two firms: Institutional Shareholder 

Services, Inc. (ISS) and Glass, Lewis & 

Co., LLC (Glass Lewis). It has been 

estimated that in 2013, the combined 

market share of these two firms was 97 

percent (61 percent for ISS and 36 

percent for Glass Lewis).90 Each year, 

ISS covers approximately 44,000 

shareholder meetings and executes 10.2 

million ballots on behalf of clients 

holding 4.2 trillion shares. Glass Lewis 

covers about 20,000 shareholder 

meetings annually and provides services 

to more than 1,300 clients that 

collectively manage more than $35 

trillion in assets.91

ERISA plans’ demand for proxy 

advice might decline if fiduciaries 

refrain from voting shares under the 

provisions of this final rule or under 

proxy voting policies adopted pursuant 

to the safe harbors provided in 

paragraphs (e)(3)(i)(A) and (B). Plan 

fiduciaries may want customized 

recommendations about which 

particular proxy proposals would have 

a material effect on the investment 

performance of their particular plan and 

how they should cast their vote. Plans’ 

preferences for proxy advice services 

could shift to prioritize services offering 

more rigorous and impartial 

recommendations. These effects may be 

more muted, however, if the SEC rule 

amendments enhance the transparency, 

accuracy, and completeness of the 

information provided to clients of proxy 

voting firms in connection with proxy 

voting decisions. 

1.3. General Comments on the Proposed 

Regulatory Impact Analysis 

Comments on the proposed regulatory 

impact analysis included comments that 

supported the proposal and others that 

challenged the Department’s analytical 

approach, assumptions, and 

conclusions, including criticizing the 

Appendix A ‘‘illustrative’’ analysis as a 

fundamentally flawed approach to the 

measurement of possible costs, benefits, 

and transfers associated with the 

proposed rule. 

As noted, a few commenters agreed 

with the Department’s conclusion that 

the rule would provide certainty to plan 

administrators and benefits ERISA plan 

participants by eliminating the 

misunderstanding that exists among 

some stakeholders that ERISA 

fiduciaries are required to vote all 

proxies rather than only proxies 

determined to have a net positive 

economic impact on the plan analysis. 

One commenter stated that outside of 

clear cases of economic gain, the 

benefits of proxy voting ‘‘are dubious at 

best.’’ Another commenter dismissed 

the argument that the benefits of 

shareholder engagement may include 

realizing gains over the long term and 

asserted that short-term costs are nontrivial and long-term future benefits are 

highly speculative. A commenter stated 

that the rule will add elements of 

transparency and accountability to the 

proxy voting process. 

Many commenters, however, 

challenged the Department’s proposed 

Regulatory Impact Analysis and 

criticized the Department’s analysis of 

the relevant literature. 

With respect to the literature, 

commenters criticized DOL’s assertion 

that the evidence on the effectiveness of 

and benefits from proxy voting is 

‘‘mixed.’’ The Department continues to 

believe that the research studies have a 

wide range of findings. Some studies 

have found that the adoption of 

shareholder proposals has a positive 

effect on financial performance. For 

example, Dimson, Karakas, and Li’s 

research, which examines U.S. public 

companies, finds that the adoption of 

ESG shareholder proposals increases the 

returns of companies.92 Flammer’s 

research, which examines shareholders 

proposals of U.S. publicly traded 

companies, also finds that the adoption 

of shareholder proposals related to 

corporate social responsibility improves 

the financial performance of 


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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 81683 

93Flammer, Caroline, Does Corporate Social 

Responsibility Lead to Superior Financial 

Performance? A Regression Discontinuity 

Approach, 61 Management Science 11 (2015). 94Martins, Fernando, Corporate Social 

Responsibility, Shareholder Value, and 

Competition. (2020). 95Cun ̃ at, Vicente, Mireia Gine ́, and Maria 

Guadalupe, Say Pays! Shareholder Voice and Firm 

Performance, 20 Review of Finance 5 (2016). 96Cai, Jie, and Ralph A. Walkling., Shareholders’ 

Say on Pay: Does it Create Value?, Journal of 

Financial and Quantitative Analysis (2011). 97Prevost, Andrew K., and Ramesh P. Rao, Of 

What Value are Shareholder Proposals Sponsored 

by Public Pension Funds, 73 Journal of Business 2 

(2000). 98Larcker, David F., Allan L. McCall, and Gaizka 

Ormazabal, Outsourcing Shareholder Voting to 

Proxy Advisory Firms, 58 Journal of Law and 

Economics 18 (2015). 99Woidtke, Tracie, Agents Watching Agents?: 

Evidence from Pension Fund Ownership and Firm 

Value, 63 Journal of Financial Economics 1 (2002). 100 Karpoff, Jonathan M., Paul H. Malatesta, and 

Ralph A. Walkling, Corporate Governance and 

Shareholder Initiatives: Empirical Evidence, 42 

Journal of Financial Economics 3 (1996). 

101Wahal, Sunil, Pension Fund Activism and 

Firm Performance, Journal of Financial and 

Quantitative Analysis (1996). 

102 Id. 

103 Del Guercio, Diane, and Jennifer Hawkins, The 

Motivation and Impact of Pension Fund Activism, 

52 Journal of Financial Economics 3 (1999). 

104Smith, Michael, Shareholder Activism by 

Institutional Investors: Evidence from CalPERS, 51 

Journal of Finance 1 (1996). 

105 Vicente Cun ̃ at & Mireia Gine ́ & Maria 

Guadalupe, 2012. ‘‘The Vote Is Cast: The Effect of 

Corporate Governance on Shareholder Value,’’ 

Journal of Finance; Vicente Cun ̃ at & Mireia Gine ́ & 

Maria Guadalupe, 2016. ‘‘Say Pays! Shareholder 

Voice and Firm Performance,’’ Review of Finance, 

European Finance Association, vol. 20(5), at 1799– 

1834. 

106 Data on abstentions not tipping votes is 

suggestive, but not definitive. Figure 9 of the ICI’s 

2017 research on proxy voting (www.ici.org/pdf/ 

per25-05.pdf), indicates that the percentage of 

shares voting ‘‘for’’ various proposals (the 

overwhelming number of which were management 

proposals) as 95.2% in favor of management 

proposals and 29.2% in favor of shareholder 

proposals. The data is aggregated for all votes and 

not focused on specific proposals, which could 

indicate that there are no close votes or at least 

some close votes which could be tipped. Based on 

this uncertainty, the Department cannot quantify 

the number of close votes that could be tipped 

based on the available data, especially for 

shareholder proposals. While the Department 

received multiple comments expressing concern 

that the rule would make it more difficult to reach 

a quorum, the commenters did not include any data 

supporting this assertion, and the Department is not 

aware of any data sources that would support a 

qualitative or quantitative analysis of the final rule’s 

impact on reaching a quorum. 

107For the CFA Institute Code of Ethics and 

Standards of Professional Conduct and the CFA 

Institute Corporate Governance Manual, please see 

www.cfainstitute.org/en/ethics-standards/ethics/ 

code-of-ethics-standards-of-conduct-guidance. 

108Some commenters cited a 2015 survey by the 

CFA Institute that reported that 73 percent of global 

investors take ESG factors into account in their 

investment analysis and decisions. They also refer 

to a McKinsey study that reports that ESG 

Continued 

companies.93 In addition, Martin’s 

research finds that the adoption of 

shareholder proposals relating to 

corporate social responsibility increases 

the returns and market share of 

companies.94 Finally, Cun ̃ at, Gine ́, and 

Guadalupe’s research, which examines 

shareholder proposals filed with the 

SEC, finds that adoption of shareholder 

proposals relating to executive pay 

improves the market value and the longterm profitability of firms.95 In contrast, 

other studies have found shareholder 

proposals to have a negative effect on 

financial performance. Cai and 

Walking’s research finds that the 

announcement of labor-sponsored 

shareholder proposals results in a 

negative market reaction.96 Prevost and 

Rao’s research finds that firms that 

receive shareholder proposals for the 

first time experience transitory declines 

in market returns, while firms that 

repeatedly receive shareholder 

proposals experience permanent 

declines in market returns.97 In 

addition, Larcker, McCall, and 

Ormazabal’s research, which examines 

Russell 3000 companies, finds that 

changes in compensation contracts 

made to comply with proxy advisor 

voting policies results in a negative 

stock market reaction.98 Finally, 

Woidtke’s research, which examines 

Fortune 500 companies, finds that an 

increase in shareholder activism by 

public pension funds is negatively 

associated with stock returns.99

Furthermore, there are studies with 

inconclusive results. Karpoff, Malatesta, 

and Walking’s research finds that 

shareholder proposals have a negligible 

effect on the share values and operating 

returns of firms.100 Wahal’s research, 

which examines firms targeted by 

pension funds with a social agenda, 

finds that firms that receive proxy 

proposals do not experience significant 

abnormal returns.101 Wahal’s research 

also finds no evidence of long-term 

improvement in the performance of the 

firm.102 Similarly, Del Guercio and 

Hawkins’ research, which examines 

firms that received shareholder 

proposals from large pension funds, 

finds no evidence of significant 

abnormal long-term returns.103 Smith’s 

research, which also examines firms 

targeted by CalPERS, finds that there is 

no statistically significant change in the 

operating performance.104

With respect to the Department’s 

analysis, assumptions, and conclusions, 

although several commenters noted that 

the costs and benefits associated with a 

proxy vote are highly uncertain and 

difficult to quantify, commenters argued 

that the Department’s analysis 

overstated the current costs of proxy 

voting, understated the new costs that 

ERISA plans will incur if the proposal 

were finalized, and neglected to account 

for benefits to proxy voting that the 

proposal would appear to classify as 

non-economic in nature yet have been 

linked to better financial performance. 

One commenter cited the research of a 

team of academics that found benefits of 

shareholder voting for the market value 

of shares.105

Many commenters asserted that the 

proposed rule will discourage voting, 

and some suggested that less proxy 

voting by ERISA investors will increase 

the influence of non-ERISA investors. 

Several of the commenters expressed 

concerns that the costs imposed by the 

rule would cause fiduciaries not to vote 

proxies, even when economically 

beneficial, or to adopt the permitted 

practices described in the proposal 

which they argued would benefit 

corporate management at the expense of 

plan participants and beneficiaries. A 

commenter asserted that because 

abstentions may have the effect of a 

‘‘no’’ or ‘‘yes’’ vote, the rule may tip 

votes one way or the other.106 Some 

commenters argued that having proxy 

votes cast by individuals who are not 

experts, for example by activists or 

hedge fund managers rather than by 

stable, expert, fiduciary shareholders, 

would not be in the interests of ERISA 

beneficiaries. Several commenters stated 

that the rule could lead to a 

concentration of voting power among a 

few large firms whose proxy votes are 

large enough to make an economic 

impact on the plan’s investment. 

Several commenters noted that proxy 

voting serves as an important vehicle for 

checks and balances to keep corporate 

management accountable, focused on 

long-term value creation, and to prevent 

opportunistic behavior.107 Another 

commenter suggested that there is 

significant uncertainty with respect to 

the economic impact of any proxy vote 

and that the proposal’s requirement to 

determine the economic impact of 

voting proxies requires a level of 

precision that is inconsistent with the 

way fiduciaries operate. Other 

commenters expressed concern about 

determining whether to vote proxies in 

relation to ESG issues; many criticized 

the rule for ignoring academic evidence 

supporting the pecuniary impact of 

issues the proposal deemed to be noneconomic, such ESG concerns that 

involve significant risks to companies— 

such as litigation, reputational harm, or 

stranded assets—and business activities 

that cause adverse impacts to 

individuals, employees, and 

communities.108 They argued such 


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81684 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

companies create value disproportionate to their 

peers. Similarly, by citing many studies made by 

the investment industry, some commenters asserted 

that there is a substantial, and growing, body of 

empirical research that has identified meaningful 

links between a company’s ESG characteristics and 

financial performance. These include studies 

produced by MSCI, Bank of America Merrill Lynch, 

Allianz Global Investors, Nordea Equity Research, 

Goldman Sachs, Morningstar, and Deutsche Asset & 

Wealth Management. Some commenters cited an 

academic study that uses ISS and FactSet data to 

present evidence of a positive causal effect of the 

passing of corporate social responsibility 

shareholder proposals, the ones that are presumably 

tied to ESG investing motives, to the correspondent 

shareholder returns. Martins, Fernando, Corporate 

Social Responsibility, Shareholder Value, and 

Competition (July 1, 2020). Available at SSRN: 

https://ssrn.com/abstract=3651240 or http://

dx.doi.org/10.2139/ssrn.3651240. The same 

commenter cited an observational study that 

reaches the same conclusion: www.hbs.edu/faculty/ 

conferences/2013-sustainability-and-corporation/ 

Documents/Active_Ownership_-_Dimson_Karakas_

Li_v131_complete.pdf. One commenter referred to a 

meta-study showing that there is a correlation 

between sustainability business practices and 

economic performance. Clark, Gordon L. and 

Feiner, Andreas and Viehs, Michael, From the 

Stockholder to the Stakeholder: How Sustainability 

Can Drive Financial Outperformance (March 5, 

2015). Available at SSRN: https://ssrn.com/ 

abstract=2508281 or http://dx.doi.org/10.2139/ 

ssrn.2508281. 

matters are critical to performing due 

diligence risk analysis and have become 

increasingly germane to assessing 

company strategy and long-term 

financial viability. One commenter 

criticized the Department for allowing 

the permitted practice of voting with 

management but not allowing a similar 

permitted practice of voting with proxy 

advisors. The commenter asserted that 

voting with proxy advisors costs less 

and that proxy advisors are subject to 

fewer and less severe conflicts than 

management. 

Finally, some commenters focused 

specifically on proxy advisory firms. 

Some commenters disagreed with the 

Department’s expectation that the rule 

may reduce plans’ demand for proxy 

advice. A commenter pointed to a report 

from the Manhattan Institute that 

suggested that some ERISA fiduciaries 

are using proxy advisors as a low-cost 

way of meeting their own fiduciary 

voting obligations, despite the fact that 

the proxy advisor firms themselves are 

not held to a fiduciary standard. One 

commenter argued that proxy advisors 

are in a resource-constrained 

environment that adversely affects the 

advice they provide. In support, the 

commenter cites a study suggesting that 

ISS provides lower quality advice 

during the proxy season, when the firm 

is at its busiest, and higher quality 

advice during other times. This result 

suggests that during the busy proxy 

season, when proxy advisor firms’ 

resources are most constrained, such 

firms are unable to maintain the same 

quality of service as provided during 

other periods. 

After reviewing the public comments, 

the Department agrees that there is 

uncertainty regarding the costs and 

benefits of proxy voting activities of 

ERISA plans, both currently and under 

the terms of the proposed regulation. 

The Department presented an 

illustration of an analytical approach to 

evaluating the possible impacts of the 

proposed rule. The Department 

presented the data it had to estimate the 

impacts of the rule and also highlighted 

places where it lacked data to accurately 

measure key parameters. In so doing, 

the Department solicited comments and 

data to allow the accurate estimation of 

the impact of the rule’s requirement and 

the permitted practices. The Department 

received comments on the illustration 

and its assumptions that sought to 

estimate the costs of the proposed rule. 

Commenters did not provide explicit 

data or estimates for a per vote burden 

to conduct research or required 

documentation, nor did they provide 

alternative estimates of the number of 

proxies that would be impacted by the 

proposal. Thus, notwithstanding the 

solicitation of such data, the Department 

still lacks critical information that 

would allow it to use or modify the 

model to try to produce a more accurate 

measure of the cost of the final rule’s 

requirements. 

The Department included the 

illustration to solicit public input on 

one possible way to envision and 

quantify the potential cost burden and 

costs savings that could be associated 

with the proposal. The Department 

emphasized that the illustration was 

based on speculative assumptions due 

to insufficient data, and, as noted above, 

many of the commenters criticized its 

basis. Based on the public comments 

and the fact that commenters did not 

provide data or estimates that would 

support continued use of the illustration 

as part of this final regulatory impact 

analysis, the Department has concluded 

that the illustrative analysis that was 

presented for public comment as part of 

the proposal does not represent a 

reliable construct for evaluating the 

costs, benefits, and transfers associated 

with the final rule. Perhaps more 

importantly, however, as discussed 

above and below, the Department has 

made substantial changes to the 

proposed rule that have reduced much 

of the cost burden associated with the 

final rule and thus the illustrative 

analysis, even with its challenges 

identified by the commenters, no longer 

reflects the potential burdens associated 

with the rule. 

1.4. Benefits 

This final rule would benefit plans by 

providing improved guidance regarding 

how ERISA’s fiduciary duties apply to 

proxy voting. As discussed above, subregulatory guidance that the Department 

has previously issued over the years 

may have led to a misunderstanding 

among some that fiduciaries are 

required to vote on all proxies presented 

to them. This misunderstanding may 

have led some plans to expend plan 

assets unnecessarily to research and 

vote on proxy proposals not likely to 

have a pecuniary impact on the value of 

the plan’s investments. The final rule is 

intended to eliminate that confusion 

and includes specific language in 

paragraph (e)(2)(ii) clearly stating that 

plan fiduciaries do not have an 

obligation to vote all proxies. The rule 

also includes a ‘‘safe harbor’’ provision 

under which plan fiduciaries may adopt 

proxy voting policies and parameters 

prudently designed to serve the plan’s 

economic interest. This will encourage 

ERISA fiduciaries to execute 

shareholder rights in an appropriate and 

cost-efficient manner. 

The final rule clarifies the duties of 

fiduciaries with respect to proxy voting 

and the monitoring of proxy advisory 

firms. Specifically, in order to meet 

their fiduciary obligations to manage 

shareholder rights, plan fiduciaries must 

(i) act solely in accordance with the 

economic interest of the plan and its 

participants and beneficiaries 

considering the impact of any costs 

involved; (ii) not subordinate the 

interests of the participants and 

beneficiaries in their retirement income 

or financial benefits under the plan to 

any non-pecuniary objective, or promote 

non-pecuniary benefits or goals; and (iii) 

prudently monitor the proxy voting 

activities of investment managers or 

proxy advisory firms to whom that 

authority to vote proxies or exercise 

shareholder rights has been delegated. 

Accordingly, plan fiduciaries will be 

better positioned to conserve plan assets 

by having clear direction and the option 

to prudently adopt voting policies that 

(i) focus voting resources only on 

particular types of proposals that the 

fiduciary has prudently determined are 

substantially related to the issuer’s 

business activities or are expected to 

have a material effect on the value of the 

investment; and (ii) refrain from voting 

on proposals or particular types of 

proposals when the plan’s holding in a 

single issuer relative to the plan’s total 

investment assets is below a 

quantitative threshold that the fiduciary 

prudently determines, considering its 

percentage ownership of the issuer and 


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109 David Yermack, Shareholder Voting and 

Corporate Governance, 2 Ann Rev. Fin. Econ. 2.1, 

2.15 (2010); Frederick Alexander, The Benefit 

Stance: Responsible Ownership in The Twenty-First 

Century, 36 Oxford Rev. Econ Policy 341, 355 

(2020); Robert G. Hansen and John R. Lott, 

Externalities and Corporate Objectives in a World 

with Diversified Shareholder/Consumers, Journal Of 

Financial And Quantitative Analysis, 1996, vol. 31, 

issue 1, 43–68. 

other relevant factors, is sufficiently 

small that the matter being voted upon 

is not expected to have a material effect 

on the investment performance of the 

plan’s portfolio. Thus, votes will be cast 

that more frequently advance plans’ 

economic interests. Cost savings and 

other benefits to plans would flow to 

plan participants and beneficiaries and 

plan sponsors. 

The final rule will replace existing 

guidance on fiduciary responsibilities 

for exercising shareholders’ rights. The 

final rule will provide more certainty 

than the existing sub-regulatory 

guidance, and unlike such guidance, the 

final rule sets forth binding, specific 

requirements. 

The final regulation could increase 

investment returns on plan assets by 

specifying when plan fiduciaries should 

or should not exercise their shareholder 

rights to vote proxies. Plan fiduciaries 

are responsible for maximizing the 

economic benefits to the plan, including 

in their management of proxy voting 

rights, which may involve voting 

proxies or declining to vote them. If the 

cost of obtaining information that 

informs the vote exceeds the likely 

economic benefits to the plan of voting, 

then fiduciaries should not vote. This 

course of action will save resources and 

increase societal benefits. 

The resources freed for other uses due 

to voting fewer proxies (minus potential 

upfront transition costs) would 

represent benefits of the rule. To the 

extent that the final regulation increases 

the investment return on plan assets, it 

would enhance participants’ and 

beneficiaries’ retirement security, 

thereby strengthening a central purpose 

of ERISA. For the plans and participants 

that would be affected by the final rule, 

the benefits they would experience from 

higher investment returns, compounded 

over many years, could be considerable. 

The increased returns would be 

associated with investments generating 

higher pre-fee returns, which means the 

higher returns qualify as benefits of the 

rule. However, to the extent that there 

are any externalities, public goods, or 

other market failures, those might 

generate costs to society on an ongoing 

basis. For example, a fiduciary may vote 

for a proposal on a corporate merger or 

acquisition transaction to maximize 

shareholder value even though 

implementation of the proposal would 

bring about impacts in an affected 

geographic area that would be adverse 

for local businesses or residents. 

Finally, some portion of the increased 

returns would be associated with 

transactions in which there is an 

opposite party experiencing a decreased 

return of equal magnitude. This portion 

of the rule’s impact would, from a 

society-wide perspective, be 

appropriately categorized as a transfer 

as discussed further in the Transfers 

section below (though it should be 

noted that, if there is evidence of wealth 

differing across the transaction parties, 

it would have implications for marginal 

utility of the assets). 

1.5. Costs 

The Department received several 

comments regarding estimated costs for 

the proposed rule. Commenters were 

divided in their opinions about whether 

the illustration over or under estimated 

the proposed rule’s total costs. 

Several commenters expressed 

concern that the rule will increase plan 

costs. One commenter said that 

conducting a cost-benefit analysis for 

each vote is ‘‘unworkable’’ and will 

‘‘create a dramatic cost burden.’’ Some 

commenters asserted that the proposed 

rule would substantially increase costs 

because the commenters claimed that 

the current cost to vote proxies was 

small, with one commenter even 

suggesting it was approaching zero. 

Other commenters argued that the 

Department’s cost estimates were 

suspect because the Department 

estimates that saving resulting from 

adopting the proposal’s permitted 

practices were significantly larger than 

the entire revenues of the proxy 

advisory market. One commenter 

suggested their cost to provide services 

would increase by 10 to 20 times their 

current rate. Other commenters pointed 

out that although the model showed 

large costs, actual costs would be even 

larger, approaching $13 billion a year. 

A few of the commenters criticized 

that the rule places a higher emphasis 

on short-term costs and performance, as 

the short-term economic impact is often 

easier to quantify with less uncertainty. 

The commenters argued that this would 

lead fiduciaries to focus on short-term 

economic implications at the expense of 

long-term value, which some 

commenters argued would be in 

violation of a fiduciary’s duty. 

One commenter stated the proposal 

was onerous and that it may not even 

be possible for a plan fiduciary to do the 

proposal’s mathematical exercises to 

determine the economic impact, let 

alone defend the determination, of every 

proxy vote in a detailed way and 

document it. The commenter felt this 

would raise the costs of even routine 

proxy votes. The commenter also said 

plans may need to hire additional 

service providers to help determine the 

economic impact on the plan of each 

vote. The need to have additional 

reviews and recordkeeping procedures 

would increase costs for voting analysis. 

Several commenters noted that the 

Department’s economic analysis 

overlooked costs associated with the 

proposed rule, such as the cost of 

analyzing whether to abstain from a vote 

and the overhead costs of voting with 

management. 

A commenter said plans do not have 

the expertise nor the desire to vote the 

proxies themselves but instead rely on 

asset managers. The commenter 

suggested the proposed rule would 

make proxy advisory services more 

expensive, and the need to 

independently investigate the basis of 

the proxy advisor’s recommendation 

will be costly. Another commenter 

reported that they would need to charge 

a rate 10 to 20 times the firm’s current 

rate due to the proposal. The commenter 

stated that such a high cost to vote 

would force plans to either not vote or 

defer to management. 

Another commenter expressed the 

view that the cost to use ERISA 3(38) 

investment managers will increase as 

they will have to bifurcate their 

processes, policies, and voting to 

accommodate ERISA and non-ERISA 

accounts. Additionally, the commenter 

argued that institutional investors 

already approach their proxy voting 

methodically and professionally. 

Several commenters noted that the 

analysis failed to address opportunity 

costs or externalities. With reference to 

externalities, one commenter referred to 

academic research on corporate voting 

and elections that highlights the voters’ 

motivation of communication with the 

board of directors.109 According to this 

research, voting can be used as a 

channel of communication with boards 

of directors, and protest voting can lead 

to significant changes in corporate 

governance and strategy. In such 

scenarios, voting success would not 

only be assessed by examining the 

returns to individual targeted firms’ 

stocks, but also by the impact on the 

behavior of other companies throughout 

their portfolios. Another commenter 

noted, as an example of a negative 

externality, a study by Arjuna Capital 

that emphasized the negative 

environmental effects of carbon 


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81686 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

110See http://arjuna-capital.com/wp-content/ 

uploads/2016/07/Climate_Change_from_the_

Investor_s_Perspective.pdf. 

111The burden is estimated as follows: (63,911 

plans * 4 hours) = 255,644 hours. A labor rate of 

$138.41 is used for a lawyer. The cost burden is 

estimated as follows: (63,911 plans * 4 hours * 

$138.41) = $34,309,915. 

112 29 CFR 2509.2016–01 (81 FR 95879, Dec. 29, 

2016). 

113The burden is estimated as follows: 63,911 

plans * 0.5 hours = 31,955.4 hours for both a plan 

fiduciary and clerical staff. A labor rate of $134.21 

is used for a plan fiduciary and a labor rate of 

$55.14 for clerical staff (31,955.4 * $134.21 = 

$4,288,739 and 31,955.4 * $55.14 = $1,762,023). 

114The burden is estimated as follows: 63,911 

plans * 2 hours = 127,821.8. A labor rate of $134.21 

emissions, which could potentially be 

addressed through proxy voting.110

One commenter stated they currently 

incur minimal costs to execute proxy 

votes in a way that they believe best 

protects the interests of participants and 

beneficiaries. Another commenter said 

that any increased costs would be 

minimal and suggested that to ensure 

the rule imposes a minimal burden on 

plan managers and proxy advisory 

firms, the Department could allow these 

firms to make the data used for voting 

shareholder decisions publicly available 

for external economic analysis, allowing 

academics, think tanks, and concerned 

citizens to provide additional economic 

analysis. 

Finally, commenters expressed 

concern that by requiring plan 

fiduciaries to determine economic 

materiality and to document that 

determination, the proposed rule would 

increase litigation risk for plan 

fiduciaries. A few of the commenters 

specifically alluded to increased 

litigation risk from plan participants, 

alleging improper voting activity. Some 

of the commenters stated that this risk 

would discourage plan fiduciaries to 

vote proxy votes. 

After carefully considering such 

comments, the Department made several 

modifications to the proposed rule. The 

most significant adjustment from the 

proposal results from the Department’s 

agreement with the recommendation of 

some commenters that the final rule 

take a more principles-based approach 

to this subject matter. The Department 

estimates that the more principles-based 

approach will reduce much of the cost 

burden associated with the proposed 

rule. As discussed earlier in this 

preamble, the most significant revision 

in the final rule eliminates paragraphs 

(e)(3)(i) and (ii) from the proposal. 

Paragraph (e)(3)(i) of the proposal 

provided that a plan fiduciary must vote 

any proxy where the fiduciary 

prudently determines that the matter 

being voted upon would have an 

economic impact on the plan, after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved 

(including the cost of research, if 

necessary, to determine how to vote). 

Paragraph (e)(3)(ii) of the proposal 

provided that a plan fiduciary must not 

vote any proxy unless the fiduciary 

prudently determines that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved. 

As stated above, commenters 

criticized these provisions of the 

proposal as requiring a fiduciary to 

undertake an economic impact analysis 

in advance of each issue that is the 

subject of a proxy vote in order to even 

consider voting. A commenter further 

noted that a fiduciary may not discover 

until after the analysis is performed that 

the cost involved in determining 

whether to vote outweighs the economic 

benefit to the plan. 

The Department is persuaded by the 

comments that the requirements 

contained in paragraphs (e)(3)(i) and (ii) 

of the proposal should not be 

incorporated in the final rule. The 

Department recognizes the concerns 

expressed regarding potential increased 

costs and liability exposure, as well as 

potential risks to plan investments that 

could result from fiduciaries not voting 

when prudent to do so. Due to this and 

other changes the Department has made 

in the final rule that are discussed 

above, the Department expects that the 

incremental costs of the final rule 

provisions will be minimal on a perplan basis. 

The Department recognizes that plans 

will need to spend time reviewing the 

final rule, evaluating how it affects their 

proxy voting practices, and 

implementing any necessary changes. 

The Department estimates that this 

review process will require a lawyer to 

spend approximately four hours to 

complete, resulting in a cost burden of 

approximately $34.3 million.111 The 

Department believes that these 

processes will likely be performed for 

most plans by a service provider that 

likely oversees multiple plans. 

Therefore, the Department’s estimate 

likely represents an upper bound, 

because it is based on the number of 

affected plans. The Department does not 

have sufficient data that would allow it 

to estimate the number of service 

providers acting in such a capacity for 

these plans. 

The Department believes that many 

fiduciaries already are compliant with 

the final rule, because they are meeting 

the requirements of the Department’s 

sub-regulatory guidance and prudently 

conducting their business operations to 

satisfy their fiduciary obligations as 

required by ERISA.112 The Department 

acknowledges that such practices are 

not universal. In the course of its 

enforcement activity, the Department 

sometimes encounters instances where 

documentation is absent or does not 

meet the requirements of this final rule. 

The Department additionally believes 

that the availability of economies of 

scale limits the costs of this final rule. 

The Department understands that under 

the final rule, most of the relevant 

fiduciary duties will reside with, and 

most of the required activities will be 

performed by, third-party asset 

managers, as is already common 

practice. Such asset managers are often 

large and provide the relevant fiduciary 

services for a large number of plans. The 

Department estimates that plan 

fiduciaries or investment managers will 

require a half hour annually and a half 

hour of help from clerical staff to 

maintain or document the required 

information, resulting in an annual cost 

burden estimate of $6.05 million.113 For 

a more in-depth discussion on the costs 

for maintaining the required 

documentation, please refer to the 

Paperwork Reduction Act section of this 

document below. 

Several of the commenters noted that 

the Department failed to recognize the 

additional costs associated with 

developing or updating policies or 

procedures to reflect the requirements of 

the proposed rule. One commenter, 

however, asserted that most fiduciaries 

have thoughtful proxy policies. Another 

commenter stated that, contrary to the 

DOL assumption that there are ‘‘cost 

savings’’ because of the provisions in 

the rule that allow the adoption of proxy 

voting policies, proxy voting policies 

already exist and the rule would impose 

additional costs because such policies 

will need to be reviewed on an initial 

and ongoing basis. After further 

deliberation, the Department agrees that 

plans are likely to incur such costs, 

particularly plans that choose to adopt 

the safe harbors contained in paragraphs 

(e)(3)(i)(A) and (B) of the final rule. The 

Department believes that the final rule 

largely comports with industry practice 

for ERISA fiduciaries; therefore the 

Department estimates that on average, it 

will take a legal professional two hours 

to update policies and procedures for 

each of the estimated 63,911 plans 

affected by the rule. This results in a 

cost of $17.2 million in the first year.114


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is used for a plan fiduciary: (127,821.8 * $134.21 

= $17,154,957). 

115The SEC’s rule amendments require proxy 

advisory firms engaged in a solicitation to provide 

conflicts of interest disclosure, to adopt and 

publicly disclose policies and procedures 

reasonably designed to ensure that the company 

subject of the proxy voting advice has such advice 

made available to it at or prior to the time the 

advice is disseminated, and to provide a 

mechanism by which its clients can become aware 

of any written statements by the company in 

response to the proxy advice. The SEC also 

modified its proxy solicitation antifraud rule to 

specifically include material information about the 

proxy advisor’s methodology, sources of 

information, or conflicts of interest, as examples of 

when the failure to disclose could, depending upon 

the particular facts and circumstances, be 

considered misleading. See 2020 SEC Proxy Voting 

Advice Amendments, at 242–246. 

116The costs would be $101.58 million over 10- 

year period with an annualized cost of $11.91 

million, applying a three percent discount rate. 

117The annualized costs in 2016 dollars would be 

$6.31 million applying a three percent discount 

rate. 

The requirement in paragraph (e)(3)(ii) 

to periodically review proxy voting 

policies already is required for 

fiduciaries to meet their obligations 

under ERISA; therefore, the Department 

does not expect that plans will incur 

additional cost associated with the 

periodic review. 

The Department generally does not 

expect that this final rule will change 

the costs associated with plans’ 

remaining voting activity. Provisions 

requiring responsible fiduciaries to 

monitor and document voting policies 

and activities would generally be 

satisfied by current best practices that 

satisfy earlier Departmental guidance. 

Neither does the Department expect 

plans to incur substantial costs from 

proxy advisory firms’ potential efforts to 

help fiduciaries meet the final rule’s 

requirements. If they do not already 

meet the standards detailed in the final 

regulation, plans that currently exercise 

shareholder rights, including proxy 

voting activities, will incur the costs 

associated with deciding whether to 

exercise shareholder rights pursuant to 

this final rule. The Department, 

however, does not have sufficient 

information to document such costs. 

It is possible that proxy advisory firms 

would take steps to avoid or mitigate 

conflicts of interest, strengthen factual 

and analytic rigor, better match their 

research and recommendations with 

ERISA plans’ interests, or increase 

transparency as a result of the final rule. 

The Department notes, however, that 

proxy advisory firms are likely to take 

at least some of these steps in response 

to recent SEC policy initiatives and 

spread their related costs across all of 

their clients, not just ERISA plans.115 At 

the same time, the final rule may reduce 

plans’ demand for proxy advice. 

However, this reduction in demand is 

beneficial to plans as they previously 

were purchasing more advice than they 

would have otherwise chosen due to 

their misunderstanding that they were 

required to vote all proxies. This 

reduced demand will lower the market 

price and the amount of advice 

purchased. Consequently, any 

compliance costs passed on from proxy 

advisory firms to ERISA plans are likely 

to be at least partially offset by plans’ 

cost savings from purchasing a smaller 

amount of advice. It should be noted 

that proxy advisory firms will see a 

reduction in revenues as a result of the 

decreased demand for their services. In 

addition, proxy advisory firms’ efforts to 

satisfy any SEC requirements might ease 

responsible fiduciaries’ efforts to 

comply with this final rule. For 

example, it may be easier to monitor 

proxy advisory firms if those firms 

provide additional disclosure about 

their conflicts of interest and their 

policies and procedures to address such 

conflicts. 

The Department estimates that the 

final rule would impose incremental 

costs of approximately $57.52 million in 

the first year and $6.05 million in 

subsequent years. Over 10 years, the 

associated costs would be 

approximately $90.6 million with an 

annualized cost of $12.90 million, using 

a seven percent discount rate.116 Using 

a perpetual time horizon (to allow the 

comparisons required under Executive 

Order 13771), the annualized costs in 

2016 dollars are $6.76 million at a seven 

percent discount rate.117

1.6. Transfers 

Proxy advisory firms that respond 

best to this final rule will likely gain a 

relative competitive advantage. Firms 

that limit or eliminate conflicts of 

interest and modify their services to 

better align with the guidance of these 

final regulations could gain market 

share relative to firms that do not. Firms 

that are willing to tailor their voting 

guidelines, strategies, and costs 

according to each plan’s investment 

guidelines could gain market share 

relative to firms that do not. 

The final rule may reduce plans’ 

demand for proxy advice, lowering the 

market price, the amount of advice 

purchased, and revenues. This 

represents a transfer from proxy 

advisory firms to plans, who will benefit 

as they previously were purchasing 

more advice than they would have 

chosen to due to their misunderstanding 

that plan fiduciaries were required to 

vote all proxies. 

The Department also notes, however, 

that the market for proxy advisors could 

also change as a result of the final rule. 

Such changes could lead to increased 

competition among proxy advisory 

firms. In such a scenario, it is possible 

that the rule will result in a reduction 

in the expenses plans incur to purchase 

proxy advisory services. Although the 

Department does not have sufficient 

data to quantify this possibility, it 

would result in a transfer from proxy 

advisory firms to plans. 

Moreover, as noted previously, if 

some portion of rule-induced increases 

in returns would be associated with 

transactions in which the opposite party 

experiences decreased returns of equal 

magnitude, then this portion of the final 

rule’s impact would, from a societywide perspective, be appropriately 

categorized as a transfer. 

1.7. Regulatory Alternatives 

As discussed above, the Department 

considered retaining paragraphs (e)(3)(i) 

and (ii) of the proposal. Paragraph 

(e)(3)(i) of the proposal provided that a 

plan fiduciary must vote any proxy 

where the fiduciary prudently 

determines that the matter being voted 

upon would have an economic impact 

on the plan, after considering those 

factors described in paragraph (e)(2)(ii) 

of the proposal and taking into account 

the costs involved (including the cost of 

research, if necessary, to determine how 

to vote). Paragraph (e)(3)(ii) of the 

proposal provided that a plan fiduciary 

must not vote any proxy unless the 

fiduciary prudently determines that the 

matter being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved. 

After carefully considering comments, 

the Department was persuaded to 

eliminate paragraphs (e)(3)(i) and (ii) 

and adopt a more principles-based, less 

prescriptive approach in the final rule 

that will reduce much of the cost 

burden associated with the proposed 

rule. Commenters criticized these 

provisions of the proposal as requiring 

a fiduciary to undertake an economic 

impact analysis in advance of each issue 

that is the subject of a proxy vote in 

order to even consider voting. A 

commenter further noted that a 

fiduciary may not discover until after 

the analysis is performed that the cost 

involved in determining whether to vote 

outweighed the economic benefit to the 

plan. The Department recognizes the 

concerns expressed regarding potential 

increased costs and liability exposure 

associated with these provisions, as well 

as potential risks to plan investments 


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118 Department calculations based on U.S. Federal 

Reserve statistics, Financial Accounts of the United 

States—Z.1. 

119See Commission Interpretation Regarding 

Standard of Conduct for Investment Advisers, 84 FR 

33669, 33673 (July 12, 2019) (discussing an 

adviser’s obligation to make a reasonable inquiry 

into its client’s financial situation, level of financial 

sophistication, investment experience and financial 

goals and have a reasonable belief that the advice 

it provides is in the best interest of the client based 

on the client’s objectives); Commission Guidance 

Regarding Proxy Voting Responsibilities of 

Investment Advisers, Release No. IA–5325 (Aug. 21, 

2019) (82 FR 47420 (Sep. 10, 2019) (clarifying 

investment advisers’ duties when voting 

shareholder proxies). See also Rule 206(4)–6 under 

the Investment Advisers Act of 1940, 17 CFR 

275.206(4)–6 (Under rule 206(4)–6, it is a 

fraudulent, deceptive, or manipulative act, practice 

or course of business within the meaning of section 

206(4) of the Investment Advisers Act for an 

investment adviser to exercise voting authority with 

respect to client securities, unless the adviser (i) has 

adopted and implemented written policies and 

procedures that are reasonably designed to ensure 

that the adviser votes proxies in the best interest of 

its clients, which procedures must include how the 

investment adviser addresses material conflicts that 

may arise between the adviser’s interests and 

interests of their clients; (ii) discloses to clients how 

they may obtain information from the investment 

adviser about how the adviser voted with respect 

to their securities; and (iii) describes to clients the 

investment adviser’s proxy voting policies and 

procedures and, upon request, furnishes a copy of 

the policies and procedures to the requesting client. 

that could result from fiduciaries not 

voting when prudent to do so. 

1.8. Uncertainty 

The Department’s economic 

assessment of this final rule’s effects is 

subject to uncertainty. Specific areas of 

uncertainty are discussed below: 

Cost Savings—As noted earlier, the 

Department lacks complete data on 

plans’ exercise of their shareholder 

rights appurtenant to their stock 

holdings, including proxy voting 

activities, and on the attendant costs 

and benefits. Many of the commenters 

criticized that the Department lacks data 

and evidence to support its cost-benefit 

analysis and remarked that the 

Department should not move forward 

with the rule until the associated costs 

and benefits are more certain. The 

Department firmly disagrees and 

believes that the impact of the rule has 

been reasonably assessed based on the 

best available data. 

Demand for New Services—The 

Department solicited comments 

regarding whether the final rule would 

create a demand for new services, and 

if so, what alternate services or 

relationships with service providers 

might result and how overall plan 

expenses could be impacted. The 

Department did not receive comments 

that specifically addressed this 

question. 

Other Securities—The final rule will 

generally govern plans’ exercise of 

shareholder rights appurtenant to their 

stock holdings of individual companies, 

but not to their holdings of other 

securities. The Department cannot 

determine whether some plans 

nonetheless would modify their 

practices with respect to other securities 

because of this final rule. As noted 

earlier, ERISA pensions held just 5.5 

percent of total corporate equity in 

2019, down from a high of 22 percent 

in 1985. Mutual funds, in contrast, held 

22 percent of all corporate equity in 

2019, up from 6 percent in 1985.118 As 

ERISA-covered pensions have shifted 

from defined benefit to defined 

contribution plans, both the proportion 

of pension assets invested in mutual 

funds and the proportion of all mutual 

fund shares owned by pensions have 

increased dramatically. In 2019, ERISAcovered pensions held 25 percent of all 

mutual fund shares, up from 8 percent 

in 1985. ERISA would apply to any 

proxy votes for mutual fund shares and 

shares of other funds registered with the 

SEC for which the plan fiduciary is 

responsible. ERISA does not govern the 

management of the portfolio internal to 

a fund registered with the SEC, 

including such fund’s exercise of its 

shareholder rights appurtenant to the 

portfolio of stocks it holds, though 

ERISA would apply to similar funds 

organized as collective investment 

trusts. One commenter stated that if 

plans do not participate in the proxy 

process, it may prevent issuers from 

reaching quorum for their shareholder 

meetings, and this would impose costs 

on plans. 

Non-ERISA Investors—Many asset 

managers serve both ERISA plans and 

other investors. The Department 

believes such uniform voting for ERISA 

and non-ERISA clients may sometimes 

jeopardize responsible fiduciaries’ 

satisfaction of their duties under ERISA. 

However, as noted earlier in the 

preamble, this concern may be mitigated 

in the case of investment managers 

subject to the SEC’s jurisdiction by the 

fact that federal securities law requires 

investment advisers to make the 

determination in their client’s best 

interest and not to place the investment 

adviser’s own interests ahead of their 

client’s.119 Where an SEC registered 

investment adviser has assumed the 

authority to vote on behalf of its client, 

the SEC has stated that the investment 

adviser, among other things, must have 

a reasonable understanding of the 

client’s objectives and must make voting 

determinations that are in the client’s 

best interest. 

Under this final rule, responsible 

fiduciaries might increase their 

demands for asset managers to 

implement separate policies customized 

for particular ERISA plans or for ERISA 

plans generally, such as policies that 

align with the proposed permitted 

practices in paragraph (e)(3)(iii). One 

commenter noted that policies would 

increase costs for plans and investment 

without an incremental benefit to 

participants and beneficiaries. The 

Department discusses the impact of 

updating policies and procedures in the 

cost section above. 

Asset Allocation—This final rule 

could exert influence on a plan’s asset 

allocation. For example, the quantitative 

threshold provision in paragraph 

(e)(3)(i)(B) would permit responsible 

fiduciaries, after prudently considering 

the relevant factors, to adopt proxy 

voting policies allowing them to refrain 

from voting on proposals or particular 

types of proposals when the plan’s 

holding in a single issuer is sufficiently 

small relative to the plan’s total 

investment that the outcome of the vote 

is not expected to have a material 

impact on the investment performance 

of the plan’s portfolio. This provision 

might produce additional economic 

benefits by promoting fuller and more 

optimal diversification where it may 

otherwise have been lacking. That is, 

the quantitative threshold could prompt 

a fiduciary to diversify what otherwise 

would have been a concentration of 

more than the specified threshold 

amount of a plan’s portfolio in a single 

stock. 

Vote Categories—Proxy votes can be 

tallied in four ways: For, against/ 

withhold, abstain, and not voted. The 

vast majority of outstanding shares are 

held in ‘‘street name’’ by intermediaries, 

such as broker-dealers. Broker-dealers 

may have discretionary authority to vote 

proxies without receiving voting 

instructions from the owner of the 

shares for routine and noncontroversial 

matters, such as the ratification of a 

company’s independent auditors. For 

matters in which a broker-dealer does 

not have discretionary authority to vote, 

a broker non-vote is required. For 

matters that require approval of a 

majority of shares present and voting, 

abstentions (which are cast neither for 

nor against a proposal) and broker nonvotes are not counted in the final tally. 

For matters that require approval of a 

majority of the shares issued and 

outstanding, abstentions or broker nonvotes are treated as votes against the 

proposal. If an investor is unsure about 

a matter or unsure whether her interests 

and management’s interests are aligned, 

the investor arguably should abstain. 


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120 29 CFR 2509.2008–2 (73 FR 61731 (Oct. 17, 

2008)). 

121EBSA estimates using 2018 Form 5500 filing 

data. 

1.9. Conclusion 

The final rule would benefit ERISAcovered plans, as it provides guidance 

regarding how ERISA’s fiduciary duties 

apply to proxy voting and in particular 

when fiduciaries should refrain from 

voting. Plan fiduciaries will be able to 

conserve plan assets as they refrain from 

researching and voting on proposals that 

are unlikely to have a material effect on 

the investment performance of the 

plan’s portfolio, and thereby increase 

the return on plan assets. The 

Department estimates that the final 

rule’s cost impact is substantially less 

than the proposal due to significant 

revisions to the required actions of a 

plan fiduciary that were made in the 

final rule in response to comments on 

the proposal. 

2. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act of 1995 (PRA 95) (44 

U.S.C. 3506(c)(2)(A)), the Department 

solicited comments concerning the 

information collection request (ICR) 

included in the Fiduciary Duties 

Regarding Proxy Voting and 

Shareholder Rights ICR (85 FR 55219). 

At the same time, the Department also 

submitted an information collection 

request (ICR) to the Office of 

Management and Budget (OMB), in 

accordance with 44 U.S.C. 3507(d). 

The Department received comments 

that specifically addressed the 

paperwork burden analysis of the 

information collection requirement 

contained in the proposed rule. The 

Department took into account such 

public comments in developing the 

revised paperwork burden analysis 

discussed below. 

In connection with publication of this 

final rule, the Department is submitting 

an ICR to OMB requesting approval of 

a new collection of information under 

OMB Control Number 1210–0165. The 

Department will notify the public when 

OMB approves the ICR. 

A copy of the ICR may be obtained by 

contacting the PRA addressee shown 

below or at www.RegInfo.gov. PRA 

ADDRESSEE: G. Christopher Cosby, 

Office of Regulations and 

Interpretations, U.S. Department of 

Labor, Employee Benefits Security 

Administration, 200 Constitution 

Avenue NW, Room N–5718, 

Washington, DC 20210; cosby.chris@

dol.gov. Telephone: 202–693–8410; Fax: 

202–219–4745. These are not toll-free 

numbers. 

It has long been the view of the 

Department that the duty to monitor 

necessitates proper documentation of 

the activities that are subject to 

monitoring.120 Accordingly, the 

Department’s final rule requires that 

plan fiduciaries maintain records on 

proxy voting activities and other 

exercises of shareholder rights. This 

requirement applies to all pension plans 

with investments, including those that 

have shareholder rights and proxy votes 

that may need to be exercised. 

The Department believes that most 

plan fiduciaries have followed the 

Department’s prior sub-regulatory 

guidance or already are performing most 

if not all of the documentation 

requirements of the final rule as a 

prudent practice in their normal course 

of business. While the incremental 

burden of the final rule is generally 

small, perhaps even de minimis, the 

Department discussed the full burden of 

such requirements below to allow for 

full evaluation of the requirements in 

the information collection. 

According to the most recent Form 

5500 data there are 721,876 pension 

plans (92,480 large plans and 629,396 

small plans) and 8,475 health or welfare 

plans (5,626 large plans filing a 

schedule H, and 2,849 small plans filing 

a schedule I).121 While the Schedule H 

collects information on a plan’s stock 

holdings, Schedule I lacks the 

specificity to determine if small plans 

hold stocks. As shown in Table 1, 

31,868 pension plans hold stocks and 

would have shareholder rights they may 

need to exercise. Additionally, 573 

health and other welfare plans file the 

schedule H and report holding either 

common stocks or employer stocks. The 

Department lacks information on the 

number of small plans that hold stock. 

Small plans are significantly less likely 

to hold stock than larger plans. For 

purposes of estimating the burden, five 

percent of small plans are presumed to 

hold stock resulting in 31,470 small 

plans needing to comply with the 

information collection. Therefore, a total 

of 63,911 plans will need to comply 

with this information collection. 

2.1. Maintain Documentation 

The final rule requires that the named 

plan fiduciary must maintain records on 

proxy voting activities and other 

exercises of shareholder rights. Where 

the authority to vote proxies or exercise 

shareholder rights has been delegated to 

an investment manager pursuant to 

ERISA section 403(a)(2), or a proxy 

voting firm or another person performs 

advisory services as to the voting of 

proxies, plan fiduciaries must prudently 

monitor the proxy voting activities of 

such investment manager or proxy 

advisory firm and determine whether 

such activities are consistent with 

paragraphs (e)(2)(i) and (ii) and (e)(3) of 

this section. 

Much of the information needed to 

fulfill these requirements is generated in 

the normal course of business. Plans 

may need additional time to maintain 

the proper documentation, but this 

burden is likely to be reduced by the 

adoption of policies by plan fiduciaries 

that incorporate one or more of the final 

rule’s safe harbors. 

Commenters expressed concerns that 

the proposed rule would be onerous, 

since it would not be feasible for plan 

fiduciaries to determine the economic 

impact of every proxy vote in a detailed 

way and document it. Thus, 

commenters suggested that the 

Department underestimated the amount 

of time that fiduciaries and clerical staff 

would spend documenting and 

maintaining documentation for votes. 

As discussed above in Section 1.5, after 

carefully considering these comments, 

the Department was persuaded to adopt 

a more principles-based, less 

prescriptive approach in the final rule 

that does not carry forward specific 

documentation and recordkeeping 

provisions in the proposal that were 

identified by commenters as 

burdensome and unnecessary. The 

Department believes that with this 

revision, the final rule’s documentation 

and recordkeeping requirements should 

result in less burden than the proposal’s 

requirements, because the final rule 

requirements mirror previous guidance 

and align with existing fiduciary duty of 

documentation. 

However, in light of the public 

comments that argued that the 

Department underestimated the 

recordkeeping burden and because of 

the uncertainty involved in determining 

which plans will need to change 

recordkeeping practices to comply with 

the final rule, the Department is 

retaining the documentation time 

estimate from the proposal. This is 

responsive to the commenters’ assertion 

and is a step intended to avoid 

underestimating the average time 

required for plan fiduciaries to comply 

with the final rule. 

The Department estimates that plan 

fiduciaries or investment managers will 

require a half hour annually and a half 

hour of help from clerical staff to 

maintain or document the required 

information. This is likely an 

overestimate, because many, if not most, 

plans use investment managers. These 

investment managers provide similar 

services for many plans. This results in 


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122The burden is estimated as follows: 63,911 

plans * 0.5 hours = 31,955.4 hours for both a plan 

fiduciary and clerical staff. A labor rate of $134.21 

is used for a plan fiduciary and a labor rate of 

$55.14 for clerical staff (31,955.4 * $134.21 = 

$4,288,739 and 31,955.4 * $55.14 = $1,762,023). 

123 5 U.S.C. 601 et seq. (1980). 

124 5 U.S.C. 551 et seq. (1946). 

125 5 U.S.C. 604 (1980). 

126The Department consulted with the Small 

Business Administration Office of Advocacy in 

making this determination, as required by 5 U.S.C. 

603(c) and 13 CFR 121.903(c) in a memo dated June 

4, 2020. 

127 13 CFR 121.201 (2011). 

128 15 U.S.C. 631 et seq. (2011). 

an annual cost burden estimate of 

$6,050,762.122

These paperwork burden estimates 

are summarized as follows: 

Type of Review: New collection. 

Agency: Employee Benefits Security 

Administration, Department of Labor. 

Title: Fiduciary Duties Regarding 

Proxy Voting and Shareholder Rights. 

OMB Control Number: 1210–0165. 

Affected Public: Businesses or other 

for-profits. 

Estimated Number of Respondents: 

63,911. 

Estimated Number of Annual 

Responses: 63,911. 

Frequency of Response: Occasionally. 

Estimated Total Annual Burden 

Hours: 0. 

Estimated Total Annual Burden Cost: 

$6,050,762. 

3. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(RFA) 123 imposes certain requirements 

with respect to federal rules that are 

subject to the notice and comment 

requirements of section 553(b) of the 

Administrative Procedure Act 124 and 

are likely to have a significant economic 

impact on a substantial number of small 

entities. Unless the head of an agency 

certifies that a final rule is not likely to 

have a significant economic impact on 

a substantial number of small entities, 

section 604 of the RFA requires the 

agency to present a final regulatory 

flexibility analysis of the final rule.125

For purposes of analysis under the 

RFA, the Employee Benefits Security 

Administration (EBSA) considers 

employee benefit plans with fewer than 

100 participants to be small entities.126

The basis of this definition is found in 

section 104(a)(2) of ERISA, which 

permits the Secretary of Labor to 

prescribe simplified annual reports for 

plans that cover fewer than 100 

participants. Under section 104(a)(3) of 

ERISA, the Secretary may also provide 

for exemptions or simplified annual 

reporting and disclosure for welfare 

benefit plans. Pursuant to the authority 

of section 104(a)(3), the Department has 

previously issued (see 29 CFR 

2520.104–20, 2520.104–21, 2520.104– 

41, 2520.104–46, and 2520.104b–10) 

simplified reporting provisions and 

limited exemptions from reporting and 

disclosure requirements for small plans, 

including unfunded or insured welfare 

plans, that cover fewer than 100 

participants and satisfy certain 

requirements. While some large 

employers have small plans, small plans 

are maintained generally by small 

employers. Thus, the Department 

believes that assessing the impact of this 

final rule on small plans is an 

appropriate substitute for evaluating the 

effect on small entities. The definition 

of small entity considered appropriate 

for this purpose differs, however, from 

a definition of small business based on 

size standards promulgated by the Small 

Business Administration (SBA) 127

pursuant to the Small Business Act.128

The Department solicited comments on 

this assumption in the proposed rule; 

however, no comments were received. 

The Department has determined that 

this final rule could have a significant 

impact on a substantial number of small 

entities during the first year. Therefore, 

the Department has prepared a Final 

Regulatory Flexibility Analysis that is 

presented below. 

3.1. Need for and Objectives of the Rule 

The Department believes that this 

final rule is an appropriate way to 

provide clarity and certainty regarding 

the application of fiduciary obligations 

of loyalty and prudence with respect to 

exercises of shareholder rights, 

including proxy voting. Despite past 

efforts to make clear fiduciary 

obligations in this regard, the 

Department is concerned that its 

existing sub-regulatory guidance may 

have inadvertently created the 

perception that fiduciaries must vote 

proxies on every shareholder proposal 

to fulfill their obligations under ERISA. 

This belief may have caused some 

fiduciaries to pursue proxy proposals 

that have no connection to increasing 

the value of investments used to pay 

benefits or defray the reasonable plan 

administrative expenses. 

Both of these concerns point to the 

risk that a plan’s proxy voting activity 

will sometimes impair rather than 

advance participants’ economic interest 

in their benefits. This final rule aims to 

ensure that the costs plans incur to vote 

proxies and exercise other shareholder 

rights are economically justified, and 

that responsible fiduciaries’ use of thirdparty advice supports rather than 

jeopardizes their adherence to ERISA’s 

fiduciary requirements. 

The Department is monitoring other 

federal agencies whose statutory and 

regulatory requirements overlap with 

ERISA. In particular, the Department is 

monitoring SEC rules and guidance to 

avoid creating duplicate or overlapping 

requirements with respect to proxy 

voting. 

3.2. Significant Issues Raised by Public 

Comments in Response to the IFRA and 

Changes Made to the Proposed Rule in 

Response 

One of the most significant issue 

raised by commenters was that 

paragraphs (e)(3)(i) and (ii) of the 

proposal require a fiduciary to 

undertake an economic impact analysis 

in advance of each issue that is the 

subject of a proxy vote in order to even 

consider voting. A commenter further 

noted that a fiduciary may not discover 

until after the analysis is performed that 

the cost involved in determining 

whether to vote outweighed the 

economic benefit to the plan. The 

Department recognizes the concerns 

expressed regarding potential increased 

costs and liability exposure associated 

with these provisions, as well as 

potential risks to plan investments that 

could result from fiduciaries not voting 

when prudent to do so. Therefore, after 

carefully considering comments, the 

Department was persuaded to eliminate 

paragraphs (e)(3)(i) and (ii) and adopt a 

more principles-based, less prescriptive 

approach in the final rule that reduces 

the cost burden associated with the 

proposed rule. This revision to the 

proposal is further discussed in Section 

3.5 below. 

In the proposal, the Department 

included an illustration to try to capture 

the cost burden on service providers 

from the rule. This illustration was 

based on certain assumptions the 

Department described as speculative in 

the proposal, and many of the 

commenters criticized its basis. In 

response to the commenters and 

changes made to the rule since the 

proposal, the Department has removed 

this illustration. For a more detailed 

description about the Department’s 

decision, please refer to the Cost section 

above. 

Some commenters were concerned 

that the rule would be burdensome on 

small plan sponsors. One commenter 

expressed concern that the requirements 

of the regulation will have a significant 

impact on small entities because of their 

limited staff resources. The Department 

acknowledges this concern as well as 

the concern that smaller plans may not 

be able to absorb the additional burden 

of the regulation as easily as larger 

plans. As described in the Cost section 


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129To capture the number of potentially affected 

service providers, the Department looked at the 

number of small entities with the following North 

American Industry Classification System (NAICS) 

Codes: 523110 Investment Banking and Securities 

Dealing; 523920 Portfolio Management; 523930 

Investment Advice; 523991 Trust, Fiduciary, and 

Custody Activities; and 525910 Open-End 

Investment Funds. Small entities were identified 

based on their revenue and the size standards from 

the SBA. According to data provided by the SBA, 

the Department estimates there are 8,616 small 

entities in these industries with revenues less than 

$100,000. This accounts for 7.5 percent of all firms 

in these industries. The calculation of the number 

of firms by industry is based on: NAICS. Businesses 

by NAICS, https://www.naics.com/business-lists/ 

counts-by-company-size/. 

130Labor costs are based on statistics from Labor 

Cost Inputs Used in the Employee Benefits Security 

Administration, Office of Policy and Research’s 

Regulatory Impact Analyses and Paperwork 

Reduction Act Burden Calculation, Employee 

Benefits Security Administration (June 2019), 

www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/technicalappendices/labor-cost-inputs-used-in-ebsa-opr-riaand-pra-burden-calculations-june-2019.pdf. 

above, the Department has amended the 

proposed rule’s requirements and 

adopted a less prescriptive, principlesbased approach in the final rule that 

mirrors and supplements requirements 

contained in the Department’s prior subregulatory guidance and industry best 

practices. These changes will 

substantially reduce the Department’s 

estimate of the proposed rule’s cost 

impact. 

Another commenter expressed 

concern that the Department 

substantially underestimated costs for 

small plans, as many small plans would 

need to hire a service provider to 

produce additional documentation to 

supplement existing investment policy 

statements. The Department recognizes 

that plans may need to make various 

changes to compliance policies and 

procedures to respond to the rule, so it 

has added an additional cost for the 

time it takes to develop or update such 

policies and procedures in the final 

rule. 

3.2. Affected Small Entities 

This final rule will affect ERISAcovered pension, health, and welfare 

plans that hold stock either through 

common stock or employer securities. 

This includes plans that indirectly hold 

stocks through collective trusts, master 

trusts, pooled separate accounts, and 

other similar plan asset investment 

entities. Plans that only hold their assets 

in registered investment companies, 

such as mutual funds, will be unaffected 

by the final rule. 

There is minimal data available about 

small plans’ stock holdings. The 

primary source of information on assets 

held by pension plans is the Form 5500. 

Schedule H, which reports data on stock 

holdings, is filed almost exclusively by 

large plans. While the majority of 

participants and assets are in large 

plans, most plans are small plans (plans 

with fewer than 100 participants). It is 

likely that many small defined benefit 

plans hold stock. Many small defined 

contribution plans hold stock only 

through mutual funds, and 

consequently would not be affected by 

this final rule. In 2018, there were 

39,142 small defined benefit plans and 

590,254 small defined contribution 

plans. The Department lacks sufficient 

data to estimate the number of small 

plans that hold stock, but it assumes 

that small plans are significantly less 

likely to hold stock than larger plans. 

The Department did not receive any 

comments or additional data from 

commenters regarding the number of 

small plans that hold stock directly or 

indirectly. As discussed elsewhere, 

while the Department assumes that 

small affected entities will spend some 

time familiarizing themselves with the 

rule, it expects that even in the case of 

small plans that hold stock directly or 

indirectly, these costs will be small, 

because the required activities are 

reflected in common practice. 

Therefore, for purposes of determining 

whether a substantial number of small 

plans are affected, the Department 

presumes that five percent of small 

plans hold stock resulting in as assumed 

31,470 affected small plans. 

The Department recognizes that 

service providers, including small 

service providers who act as asset 

managers, could also be impacted by 

this rule, if they provide compliance 

assistance to the plans they serve. The 

Department does not have complete 

information on the number of affected 

small service providers. However, the 

Department does not believe that there 

will be more service providers than the 

63,911 affected plans. The Department 

assumes the number of service 

providers who will experience a 

substantial impact from the final rule 

will be significantly smaller as only 

about 7.5 percent of service providers in 

the NAICS categories that could be 

affected have revenues below 

$100,000.129 As discussed in Table 2, 

below, the Department estimates that 

compliance costs in the first year are 

less than $900. Therefore, only service 

providers with revenues less than 

$100,000 could experience a cost that is 

more than one percent of revenues. If 

service providers incur compliance 

costs, they could pass some of these 

costs onto plans and experience a 

smaller impact. 

3.4. Estimate Cost Impact of the Final 

Rule on Affected Small Entities 

This final rule will benefit small 

plans, by providing guidance regarding 

how ERISA’s fiduciary duties apply to 

proxy voting and the monitoring of 

proxy advisory firms, and in particular, 

when fiduciaries should refrain from 

voting. Plan fiduciaries will be able to 

better conserve plan assets by having 

clear direction to refrain from 

researching and voting on proposals that 

they prudently determine have no 

material effect on the investment 

performance of the plan’s portfolio (or 

investment performance of assets under 

management in the case of an 

investment manager). The final rule also 

will benefit plans by improving the 

frequency with which voting resources 

are expended on matters that the 

fiduciary has prudently determined are 

substantially related to the issuer’s 

business activities or are expected to 

have a material effect on the value of the 

investment. Cost savings and other 

benefits to small plans will flow to plan 

participants and beneficiaries in the 

form of more secure retirement income. 

As discussed under the Costs section 

above, while the Department assumes 

that small affected entities will spend 

some time familiarizing themselves with 

the rule, it expects that these 

familiarization costs will be small, 

because the required activities are 

reflected in common practice. The 

Department estimates it will take four 

hours for an in-house attorney to review 

the rule, at an hourly labor cost of 

$138.41,130 resulting in an average cost 

of $536.84. The Department believes 

small plans are likely to rely on service 

providers to monitor regulatory changes 

and make necessary changes to the plan, 

so this is likely an overestimate of the 

costs incurred by small plans to 

familiarize themselves with the rule. 

Fiduciaries of plans must ensure that 

all investments are prudently 

monitored. The final rule provides that 

fiduciaries responsible for the exercise 

of shareholder rights must maintain 

records on proxy voting activities and 

other exercises of shareholder rights in 

order to demonstrate compliance with 

ERISA’s fiduciary provisions. The 

Department assumes that, because the 

documentation of fiduciary decisionmaking is a common practice, 

responsible fiduciaries are likely already 

recording and maintaining 

documentation related to their own and 

investment managers’ actions, including 

voting proxies and exercising other 

shareholder rights. 

The final rule will have a small 

impact on plans that are not currently 

in full compliance, because their 


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131Labor costs are based on statistics from Labor 

Cost Inputs Used in the Employee Benefits Security 

Administration, Office of Policy and Research’s 

Regulatory Impact Analyses and Paperwork 

Reduction Act Burden Calculation, Employee 

Benefits Security Administration (June 2019), 

www.dol.gov/sites/dolgov/files/EBSA/laws-andregulations/rules-and-regulations/technicalappendices/labor-cost-inputs-used-in-ebsa-opr-riaand-pra-burden-calculations-june-2019.pdf. 

132This cost is estimated as: 0.5 hours * $134.21 

+ 0.5 hours * $55.14 = $94.68. 

133 Deloitte. ‘‘2019 Defined Contribution 

Benchmarking Survey Report: the Retirement 

Landscape has Changed—Are Plan Sponsors 

Ready?’’ www2.deloitte.com/us/en/pages/humancapital/articles/annual-defined-contributionbenchmarking-survey.html. 134Manganaro, John. ‘‘Recordkeeping Fees Under 

the Microscope Retirement Plans of All Sizes are 

Seeing Their Recordkeeping Fee Schedules 

Questioned, Especially When Those Fees are 

Expressed as a Percentage of Assets.’’ Planadviser. 

(November 2019). www.planadviser.com/ 

recordkeeping-fees-microscope/. 

135 Deloitte Consulting and Investment Company 

Institute, ‘‘Inside the Structure of Defined 

Contribution/401(k) Plan Fees, 2013: A Study 

Assessing the Mechanics of the ‘All-in’ Fee’’ (Aug. 

2014). 

136BrightScope, ICI. ‘‘The BrightScope/ICI 

Defined Contribution Plan Profile: a Close Look at 

401(k) Plans, 2017.’’ (August 2020). 

137BrightScope, ICI. ‘‘The BrightScope/ICI 

Defined Contribution Plan Profile: a Close Look at 

401(k) Plans, 2017.’’ (August 2020). 

fiduciaries will be required to maintain 

records or document decisions related 

to voting proxies or exercising other 

shareholder rights. Much of the 

information required to comply with 

this requirement is generated by affected 

entities in the normal course of 

business; however, additional time may 

be required to maintain the proper 

documentation. The Department 

estimates that compliance with this 

final regulation will require 30 minutes 

of a plan fiduciary’s time and 30 

minutes of a clerical worker’s time. The 

Department assumes an hourly rate of 

$134.21 for a plan fiduciary and an 

hourly rate of $55.14 for a clerical 

worker,131 resulting in an estimated perentity annual cost of $94.68.132

Additionally, the Department 

estimates that to comply with the rule, 

many plans will need to either develop 

or update proxy-voting policies and 

procedures. This is particularly true for 

plans choosing to adopt one of the final 

rule’s safe harbors. The Department 

estimates that it will take two hours for 

a legal professional to develop or update 

relevant policies and procedures. The 

Department assumes an hourly rate of 

$134.21 for a legal professional, 

resulting in an estimate per-entity cost 

of $268.42 in the first year. 

Under these assumptions, the 

Department estimates the additional 

requirements of the rule will increase 

costs by $899.94 per plan in the first 

year and $94.68 per plan in subsequent 

years, on average. This is illustrated in 

Table 2 below. 

TABLE 2—COSTS FOR PLANS TO COMPLY WITH REQUIREMENTS

Affected entity Labor rate Hours Year 1 cost Year 2 cost 

Documentation: Plan Fiduciary ........................................................................ $134.21 0.5 $67.11 $67.11 

Documentation: Clerical workers ..................................................................... 55.14 0.5 27.57 27.57 

Rule Familiarization: Plan Fiduciary ................................................................ 134.21 4 536.84 0 

Develop or Update Proxy-Voting Policies and Procedures ............................. 134.21 2 268.42 0 

Total .......................................................................................................... ........................ ........................ 899.94 94.68 

Source: DOL calculations based on statistics from Labor Cost Inputs Used in the Employee Benefits Security Administration, Office of Policy 

and Research’s Regulatory Impact Analyses and Paperwork Reduction Act Burden Calculation, Employee Benefits Security Administration (June 

2019), www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-oprria-and-pra-burden-calculations-june-2019.pdf. 

To put these costs in perspective, the 

Department looked at how the 

additional cost from the proposed rule 

would compare to the average total plan 

cost of 401(k) plans by assets. Plan costs 

include investment fees as well as 

administrative and recordkeeping fees. 

The way plan costs are paid vary by 

plan. A 2019 survey of 240 plan 

sponsors found that 33 percent of 

defined contribution (DC) plans paid all 

recordkeeping and administrative fees 

through investment revenue, while 52 

percent of DC plans paid recordkeeping 

and administrative fees through a direct 

fee.133 Accounts from the industry 

purport that per-participant 

recordkeeping fees are becoming the 

best practice standard; this trend has 

been driven by digital recordkeeping 

technology that requires the same 

amount of resources for large accounts 

as small accounts.134

Fees paid by plans also vary by firm 

size. A survey of 361 defined 

contribution plans for the Investment 

Company Institute calculated an ‘‘allin’’ fee that included both 

administrative and investment fees paid 

by the plan and the participant. They 

found that small plans with 10 

participants pay approximately 50 basis 

points more than plans with 1,000 

participants. Further, small plans with 

10 participants are paying about 90 

basis points more than large plans with 

50,000 participants.135 Another study 

documented the same trend, noting that 

larger plans tend to have lower fees 

because larger plans tend to have a 

greater share of assets invested in index 

funds, which tend to have lower 

expenses. Additionally, large 401(k) 

plans are able to spread the fixed costs 

across more participants, lowering the 

per participant fee.136

For this analysis, the Department 

relies on data from BrightScope to 

establish a baseline of total plan fees, 

before the implementation of this rule. 

In August of 2020, BrightScope released 

updated total plan costs based on 2017 

data. Their total plan cost includes 

asset-based investment management 

fees, asset-based administrative and 

advice fees, and other fees from the 

Form 5500 and audited financial 

statements of ERISA-covered 401(k) 

plans.137 This data does not include 

plans with fewer than 100 participants, 

the standard set for a small plan in this 

analysis. However, the Department 

believes that the median total plan 

costs, provided by BrightScope, serves 

as a helpful reference point when 

considering the additional burden from 

this rule. 

Table 3 shows total plan costs from 

BrightScope; plan cost information is 

based on categories of plans with assets 

less than $1 million, between $1 million 

and $10 million, and between $10 

million and $50 million. The 

Department provides as the impact of 

the rule the additional cost plans will 

incur as a percent of plan assets, using 

the median asset value of each category, 

to illustrate how the rule is likely to 

affect plans with different amounts of 

assets. As seen in the table below, the 

estimated burden in the first year will 


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138 2 U.S.C. 1501 et seq. (1995). 

increase the costs significantly for small 

plans with minimal assets. The cost in 

subsequent years is negligible—less 

than one percent of plan assets for even 

the smallest size category and for most 

plans less than 0.25 percent of plan 

assets. 

TABLE 3—TOTAL FIRST YEAR PLAN COST AS A PERCENT OF PLAN ASSETS FOR PLANS WITH LESS THAN 100 

PARTICIPANTS

Plan assets 

Number of plans a

Beginning 

median total 

plan cost b

(percent) 

Additional 

plan cost 

from the rule c

Defined 

benefit 

Defined 

contribution Percent of 

mid-point in 

asset range 

$1–24K ............................................................................................................. 12 1,750 1.24 d 7.500 

$25–49K ........................................................................................................... 8 1,072 1.24 d 2.368 

$50–99K ........................................................................................................... 37 1,716 1.24 d 1.200 

$100–249K ....................................................................................................... 188 3,638 1.24 d 0.514 

$250–499K ....................................................................................................... 300 4,124 1.24 d 0.240 

$500K–999K .................................................................................................... 433 5,095 1.24 d 0.120 

$1 Million to $10 Million ................................................................................... 547 6,458 1.05 0.018 

$10 Million to $50 Million ................................................................................. 202 2,818 0.78 0.003

a Calculated as five percent of plans in each asset range, based on data from the 2018 Form 5500 for the distribution of pension plans with 

fewer than 100 participants by type of plan and plan assets. As the Form 5500 does not allow a determination of which small plans has stock, 

the actual size distribution is unknown. The population distribution is used. bTotal plan cost is BrightScope’s measure of the total cost of operating the 401(k) plan and includes asset-based investment management 

fees, asset-based administrative and advice fees, and other fees (including insurance charges) from the Form 5500 and audited financial statements of ERISA-covered 401(k) plans. Total plan cost is computed only for plans with sufficiently complete information. The sample is 53,856 

plans with $4.4 trillion in assets. BrightScope audited 401(k) filings generally include plans with 100 participants or more. Plans with fewer than 

four investment options or more than 100 investment options are excluded from BrightScope audited 401(k) filings for this analysis. The data 

does not include DB plans, but due to lack of comparable data it is applied to DB plans as a proxy for their plan costs. Source: BrightScope, ICI. 

‘‘The BrightScope/ICI Defined Contribution Plan Profile: a Close Look at 401(k) Plans, 2017.’’ (August 2020). cThe Department estimates that additional plan cost from the rule will be $899.94. The Department applied this fixed cost as a percent of midpoint in each asset range. dBrightScope did not differentiate between plans with less than $1 million in assets; however, as most of the small plans have less than $1 

million in assets, the Department applied this broader estimate to smaller sub-sets of assets to illustrate how small plans are likely to affected by 

the rule. 

The Department believes that this is 

likely an overestimate of the costs faced 

by small plans, as small plans are likely 

to rely on service providers. The 

Department believes these service 

providers offer economies of scale in 

meeting the requirements of the final 

rule; however, the Department does not 

have data that would allow it to 

estimate the number of service 

providers acting in such a capacity for 

these plans. 

The time required to make necessary 

changes to compliance policies and 

procedures in response to the rule may 

vary widely between plans, the 

Department believes the requirements in 

the final rule closely resemble existing 

prior guidance and industry best 

practices. The Department believes that, 

on average, the marginal cost to meet 

the additional requirements regulation, 

outside of existing fiduciary duties, will 

be small because the required activities 

are reflected in common practice and 

the requirements are similar to prior 

guidance. Further, plan fiduciaries 

would be able to conserve plan assets by 

refraining from researching and voting 

on proposals that they prudently 

determine do not have a material effect 

on the value of the plan’s investment. 

Thus, the final rule would result in cost 

savings and other benefits for small plan 

sponsors. 

3.5. Steps the Agency Has Taken To 

Minimize the Significant Economic 

Impact on Small Entities 

As discussed above, the Department’s 

longstanding position is that the 

fiduciary duties of prudence and loyalty 

under ERISA sections 404(a)(1)(A) and 

404(a)(1)(B) apply to the exercise of 

shareholder rights, including proxy 

voting, proxy voting policies and 

guidelines, and the selection and 

monitoring of proxy advisory firms. 

These duties apply to all affected 

entities–large and small. Accordingly, 

no special actions were taken into 

consideration for small entities. 

As discussed above, after carefully 

considering comments, the Department 

was persuaded to eliminate paragraphs 

(e)(3)(i) and (ii) and adopt a more 

principle-based, less prescriptive 

approach in the final rule that will 

reduce much of the cost burden 

associated with the proposed rule. 

Paragraph (e)(3)(i) of the proposal 

provided that a plan fiduciary must vote 

any proxy where the fiduciary 

prudently determined that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved 

(including the cost of research, if 

necessary, to determine how to vote). 

Paragraph (e)(3)(ii) of the proposal 

provided that a plan fiduciary must not 

vote any proxy unless the fiduciary 

prudently determined that the matter 

being voted upon would have an 

economic impact on the plan after 

considering those factors described in 

paragraph (e)(2)(ii) of the proposal and 

taking into account the costs involved. 

This is a significant adjustment from the 

proposal that results in a less 

prescriptive, more principles-based 

approach that will reduce much of the 

cost burden associated with the 

proposed rule for all plans, including 

small plans. See the section above 

entitled ‘‘Elimination of Paragraphs 

(e)(3)(i) and (ii) from the Proposal’’ for 

a more detailed discussion of this 

change. 

4. Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 138 requires each 

federal agency to prepare a written 

statement assessing the effects of any 


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81694 Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 

federal mandate in a proposed or final 

agency rule that may result in an 

expenditure of $100 million or more 

(adjusted annually for inflation with the 

base year 1995) in any one year by state, 

local, and tribal governments, in the 

aggregate, or by the private sector. For 

purposes of the Unfunded Mandates 

Reform Act, as well as Executive Order 

12875, this final rule does not include 

any federal mandate that the 

Department expects would result in 

such expenditures by state, local, or 

tribal governments, or the private sector. 

This final rule will not result in an 

expenditure of $100 million or more in 

any one year, because the Department is 

simply restating and modernizing 

fiduciary practices related to voting 

rights and aligning its regulations to the 

extent possible with guidance issued by 

the SEC. 

5. Federalism Statement 

Executive Order 13132 outlines 

fundamental principles of federalism 

and requires federal agencies to adhere 

to specific criteria when formulating 

and implementing policies that have 

‘‘substantial direct effects’’ on the states, 

the relationship between the national 

government and states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. Federal agencies 

promulgating regulations that have 

federalism implications must consult 

with state and local officials and 

describe the extent of their consultation 

and the nature of the concerns of state 

and local officials in the preamble to the 

final rule. 

In the Department’s view, this final 

rule does not have federalism 

implications because it does not have 

direct effects on the states, the 

relationship between the national 

government and the states, or the 

distribution of power and 

responsibilities among various levels of 

government. The final rule describes 

requirements and permitted practices 

related to the exercise of shareholder 

rights under ERISA. While ERISA 

generally preempts state laws that relate 

to ERISA plans, and preemption 

typically requires an examination of the 

individual law involved, it appears 

highly unlikely that the provisions in 

this final regulation would have 

preemptive effect on general state 

corporate laws. 

Statutory Authority 

This regulation is adopted pursuant to 

the authority in section 505 of ERISA 

(Pub. L. 93–406, 88 Stat. 894; 29 U.S.C. 

1135) and section 102 of Reorganization 

Plan No. 4 of 1978 (43 FR 47713, 

October 17, 1978), effective December 

31, 1978 (44 FR 1065, January 3, 1979), 

3 CFR 1978 Comp. 332, and under 

Secretary of Labor’s Order No. 1–2011, 

77 FR 1088 (Jan. 9, 2012). 

List of Subjects in 29 CFR Parts 2509 

and 2550 

Employee benefit plans, Employee 

Retirement Income Security Act, 

Exemptions, Fiduciaries, investments, 

Pensions, Prohibited transactions, 

Reporting and recordkeeping 

requirements, Securities. 

For the reasons set forth in the 

preamble, the Department amends parts 

2509 and 2550 of subchapters A and F 

of chapter XXV of title 29 of the Code 

of Federal Regulations as follows: 

Subchapter A—General 

PART 2509—INTERPRETIVE 

BULLETINS RELATING TO THE 

EMPLOYEE RETIREMENT INCOME 

SECURITY ACT OF 1974 

■ 1. The authority citation for part 2509 

continues to read as follows: 

Authority: 29 U.S.C. 1135. Secretary of 

Labor’s Order 1–2003, 68 FR 5374 (Feb. 3, 

2003). Sections 2509.75–10 and 2509.75–2 

issued under 29 U.S.C. 1052, 1053, 1054. Sec. 

2509.75–5 also issued under 29 U.S.C. 1002. 

Sec. 2509.95–1 also issued under sec. 625, 

Pub. L. 109–280, 120 Stat. 780. 

§ 2509.2016–01 [Removed] 

■ 2. Remove § 2509.2016–01. 

Subchapter F—Fiduciary Responsibility 

Under the Employee Retirement Income 

Security Act of 1974 

PART 2550—RULES AND 

REGULATIONS FOR FIDUCIARY 

RESPONSIBILITY 

■ 3. The authority citation for part 2550 

continues to read as follows: 

Authority: 29 U.S.C. 1135 and Secretary 

of Labor’s Order No. 1–2011, 77 FR 1088 

(January 9, 2012). Sec. 102, Reorganization 

Plan No. 4 of 1978, 5 U.S.C. App. at 727 

(2012). Sec. 2550.401c–1 also issued under 

29 U.S.C. 1101. Sec. 2550.404a–1 also issued 

under sec. 657, Pub. L. 107–16, 115 Stat 38. 

Sec. 2550.404a–2 also issued under sec. 657 

of Pub. L. 107–16, 115 Stat. 38. Sections 

2550.404c–1 and 2550.404c–5 also issued 

under 29 U.S.C. 1104. Sec. 2550.408b–1 also 

issued under 29 U.S.C. 1108(b)(1). Sec. 

2550.408b–19 also issued under sec. 611, 

Pub. L. 109–280, 120 Stat. 780, 972. Sec. 

2550.412–1 also issued under 29 U.S.C. 1112. 

■ 4. Section 2550.404a–1 is amended by 

adding paragraph (e), revising paragraph 

(g), and republishing paragraph (h) to 

read as follows: 

§ 2550.404a-1 Investment duties. 

* * * * * 

(e) Proxy voting and exercise of 

shareholder rights. (1) The fiduciary 

duty to manage plan assets that are 

shares of stock includes the 

management of shareholder rights 

appurtenant to those shares, such as the 

right to vote proxies. 

(2)(i) When deciding whether to 

exercise shareholder rights and when 

exercising such rights, including the 

voting of proxies, fiduciaries must carry 

out their duties prudently and solely in 

the interests of the participants and 

beneficiaries and for the exclusive 

purpose of providing benefits to 

participants and beneficiaries and 

defraying the reasonable expenses of 

administering the plan. 

(ii) The fiduciary duty to manage 

shareholder rights appurtenant to shares 

of stock does not require the voting of 

every proxy or the exercise of every 

shareholder right. In order to fulfill the 

fiduciary obligations under paragraph 

(e)(2)(i) of this section, when deciding 

whether to exercise shareholder rights 

and when exercising shareholder rights, 

plan fiduciaries must: 

(A) Act solely in accordance with the 

economic interest of the plan and its 

participants and beneficiaries; 

(B) Consider any costs involved; 

(C) Not subordinate the interests of 

the participants and beneficiaries in 

their retirement income or financial 

benefits under the plan to any nonpecuniary objective, or promote nonpecuniary benefits or goals unrelated to 

those financial interests of the plan’s 

participants and beneficiaries; 

(D) Evaluate material facts that form 

the basis for any particular proxy vote 

or other exercise of shareholder rights; 

(E) Maintain records on proxy voting 

activities and other exercises of 

shareholder rights; and 

(F) Exercise prudence and diligence 

in the selection and monitoring of 

persons, if any, selected to advise or 

otherwise assist with exercises of 

shareholder rights, such as providing 

research and analysis, recommendations 

regarding proxy votes, administrative 

services with voting proxies, and 

recordkeeping and reporting services. 

(iii) Where the authority to vote 

proxies or exercise shareholder rights 

has been delegated to an investment 

manager pursuant to ERISA section 

403(a)(2), or a proxy voting firm or other 

person who performs advisory services 

as to the voting of proxies, a responsible 

plan fiduciary shall prudently monitor 

the proxy voting activities of such 

investment manager or proxy advisory 

firm and determine whether such 

activities are consistent with paragraphs 

(e)(2)(i) and (ii) and (e)(3) of this section. 


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Federal Register / Vol. 85, No. 242 / Wednesday, December 16, 2020 / Rules and Regulations 81695 

(iv) A fiduciary may not adopt a 

practice of following the 

recommendations of a proxy advisory 

firm or other service provider without a 

determination that such firm or service 

provider’s proxy voting guidelines are 

consistent with the fiduciary’s 

obligations described in paragraphs 

(e)(2)(ii)(A) through (E) of this section. 

(3)(i) In deciding whether to vote a 

proxy pursuant to paragraphs (e)(2)(i) 

and (ii) of this section, fiduciaries may 

adopt proxy voting policies providing 

that the authority to vote a proxy shall 

be exercised pursuant to specific 

parameters prudently designed to serve 

the plan’s economic interest. Paragraphs 

(e)(3)(i)(A) and (B) of this section set 

forth optional means for satisfying the 

fiduciary responsibilities under sections 

404(a)(1)(A) and 404(a)(1)(B) of ERISA 

with respect to decisions whether to 

vote, provided such policies are 

developed in accordance with a 

fiduciary’s obligations under ERISA as 

set forth in the applicable provisions of 

paragraphs (e)(2)(i) and (ii) of this 

section. Paragraphs (e)(3)(i)(A) and (B) 

of this section do not establish 

minimum requirements or the exclusive 

means for satisfying these 

responsibilities. A plan may adopt 

either or both of the following policies: 

(A) A policy to limit voting resources 

to particular types of proposals that the 

fiduciary has prudently determined are 

substantially related to the issuer’s 

business activities or are expected to 

have a material effect on the value of the 

investment. 

(B) A policy of refraining from voting 

on proposals or particular types of 

proposals when the plan’s holding in a 

single issuer relative to the plan’s total 

investment assets is below a 

quantitative threshold that the fiduciary 

prudently determines, considering its 

percentage ownership of the issuer and 

other relevant factors, is sufficiently 

small that the matter being voted upon 

is not expected to have a material effect 

on the investment performance of the 

plan’s portfolio (or investment 

performance of assets under 

management in the case of an 

investment manager). 

(ii) Plan fiduciaries shall periodically 

review proxy voting policies adopted 

pursuant to paragraph (e)(3)(i) of this 

section. 

(iii) No proxy voting policies adopted 

pursuant to paragraph (e)(3)(i) of this 

section shall preclude submitting a 

proxy vote when the fiduciary 

prudently determines that the matter 

being voted upon is expected to have a 

material effect on the value of the 

investment or the investment 

performance of the plan’s portfolio (or 

investment performance of assets under 

management in the case of an 

investment manager) after taking into 

account the costs involved, or refraining 

from voting when the fiduciary 

prudently determines that the matter 

being voted upon is not expected to 

have such a material effect after taking 

into account the costs involved. 

(4)(i)(A) The responsibility for 

exercising shareholder rights lies 

exclusively with the plan trustee except 

to the extent that either: 

(1) The trustee is subject to the 

directions of a named fiduciary 

pursuant to ERISA section 403(a)(1); or 

(2) The power to manage, acquire, or 

dispose of the relevant assets has been 

delegated by a named fiduciary to one 

or more investment managers pursuant 

to ERISA section 403(a)(2). 

(B) Where the authority to manage 

plan assets has been delegated to an 

investment manager pursuant to section 

403(a)(2), the investment manager has 

exclusive authority to vote proxies or 

exercise other shareholder rights 

appurtenant to such plan assets in 

accordance with this section, except to 

the extent the plan, trust document, or 

investment management agreement 

expressly provides that the responsible 

named fiduciary has reserved to itself 

(or to another named fiduciary so 

authorized by the plan document) the 

right to direct a plan trustee regarding 

the exercise or management of some or 

all of such shareholder rights. 

(ii) An investment manager of a 

pooled investment vehicle that holds 

assets of more than one employee 

benefit plan may be subject to an 

investment policy statement that 

conflicts with the policy of another 

plan. Compliance with ERISA section 

404(a)(1)(D) requires the investment 

manager to reconcile, insofar as 

possible, the conflicting policies 

(assuming compliance with each policy 

would be consistent with ERISA section 

404(a)(1)(D)). In the case of proxy 

voting, to the extent permitted by 

applicable law, the investment manager 

must vote (or abstain from voting) the 

relevant proxies to reflect such policies 

in proportion to each plan’s economic 

interest in the pooled investment 

vehicle. Such an investment manager 

may, however, develop an investment 

policy statement consistent with Title I 

of ERISA and this section, and require 

participating plans to accept the 

investment manager’s investment policy 

statement, including any proxy voting 

policy, before they are allowed to invest. 

In such cases, a fiduciary must assess 

whether the investment manager’s 

investment policy statement and proxy 

voting policy are consistent with Title I 

of ERISA and this section before 

deciding to retain the investment 

manager. 

(5) This section does not apply to 

voting, tender, and similar rights with 

respect to such securities that are passed 

through pursuant to the terms of an 

individual account plan to participants 

and beneficiaries with accounts holding 

such securities. 

* * * * * 

(g) Applicability date. (1) Except for 

paragraph (e) of this section, this section 

shall apply in its entirety to all 

investments made and investment 

courses of action taken after January 12, 

2021. 

(2) Plans shall have until April 30, 

2022, to make any changes to qualified 

default investment alternatives 

described in § 2550.404c–5, where 

necessary to comply with the 

requirements of paragraph (d)(2) of this 

section. 

(3) Paragraph (e) of this section 

applies on January 15, 2021. 

Fiduciaries, other than investment 

advisers subject to 17 CFR 275.206(4)– 

6, shall have until January 31, 2022, to 

comply with the requirements of 

paragraphs (e)(2)(ii)(D) and (E) of this 

section. All fiduciaries shall have until 

January 31, 2022 to comply with the 

requirements of paragraphs (e)(2)(iv) 

and (e)(4)(ii) of this section. 

(h) Severability. If any provision of 

this section is held to be invalid or 

unenforceable by its terms, or as applied 

to any person or circumstance, or stayed 

pending further agency action, the 

provision shall be construed so as to 

continue to give the maximum effect to 

the provision permitted by law, unless 

such holding shall be one of invalidity 

or unenforceability, in which event the 

provision shall be severable from this 

section and shall not affect the 

remainder thereof. 

Signed at Washington, DC. 

Jeanne Klinefelter Wilson, 

Acting Assistant Secretary, Employee Benefits 

Security Administration, Department of 

Labor. 

[FR Doc. 2020–27465 Filed 12–15–20; 8:45 am] 

BILLING CODE 4510–29–P 


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