Report to the Ranking Minority 

Member, Committee on Health, 

Education, Labor, and Pensions, 

U.S. Senate 

United States Government Accountability Office

GAO

August 2004 PENSION PLANS

Additional 

Transparency and 

Other Actions Needed 

in Connection with 

Proxy Voting 

GAO-04-749 
www.gao.gov/cgi-bin/getrpt?GAO-04-749.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Barbara 

Bovbjerg at (202) 512-7215 or 

bovbjergb@gao.gov.. 

Highlights of GAO-04-749, a report to the 

Ranking Minority Member, Committee on 

Health, Education, Labor, and Pensions, 

United States Senate 

August 2004

PENSION PLANS

Additional Transparency and Other 

Actions Needed in Connection with Proxy 

Voting 

Conflicts of interest in proxy voting can occur because various business 

relationships exist, which can influence a fiduciary’s vote. When a portion of 

a company’s pension plan assets are invested in its own company stock, the 

internal proxy voter may be particularly vulnerable to conflicts of interest 

because management has an enhanced ability to directly influence their 

voting decisions. Although situations representing conflicts will occur, 

limited disclosure of proxy voting guidelines and votes may make proxy 

voting more vulnerable to such conflicts. Because of limited transparency, 

concerned parties do not have the information needed to raise questions 

regarding whether proxy votes were cast solely in the interest of plan 

participants and beneficiaries. 

Some plan fiduciaries and the Securities and Exchange Commission (SEC) 

have taken steps to help manage conflicts of interest in proxy voting. 

Specifically, some plans voluntarily maintain detailed proxy voting 

guidelines that give proxy voters clear direction on how to vote on certain 

issues. The SEC has imposed new proxy voting regulations on mutual funds 

and investment advisers, requiring that specific language be included in the 

fund’s guidelines on how fiduciaries will handle conflicts of interest. Some 

plan fiduciaries voluntarily make their guidelines available to participants 

and the public. In addition, some plans voluntarily disclose some or all of 

their proxy votes to participants and the public. Some plans also voluntarily 

put additional procedures in place to protect proxy voters from conflicts of 

interest in order to avoid breaches of fiduciary duty. For example, some plan 

sponsors hire independent fiduciaries to manage employer stock in their 

pension plans and vote the proxies associated with those stock. Plans may 

also hire proxy-voting firms to cast proxies to ensure that they are made 

solely in the interest of participants and beneficiaries.

DOL’s enforcement of proxy voting requirements has been limited for 

several reasons. First, participant complaints about voting conflicts are 

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

voter generally are not disclosed; therefore, participants and others are not 

likely to have information they need to raise questions regarding whether a 

vote has been cast solely in their interest. Second, for DOL, the Employee 

Retirement Income Security Act of 1974 presents legal challenges for 

bringing cases such that it is often difficult to obtain evidence that the 

fiduciary was influenced in his or her voting by something other than the 

sole interests of plan participants. Finally, even if such evidence existed, 

monetary damages are difficult to value and fines are difficult to impose. 

And, DOL has no statutory authority to impose a penalty without first 

assessing damages and securing a monetary recovery. In part, because of 

these challenges, DOL has devoted few resources to enforcing proxy voting 

by plans. 

In 1998, about 100 million 

Americans were covered in private 

pension plans with assets totaling 

about $4 trillion. The retirement 

security of plan participants can be 

affected by how certain issues are 

voted on during company 

stockholders meetings. Fiduciaries, 

having responsibility for voting on 

such issues on behalf of some plan 

participants (proxy voting), are to 

act solely in the interest of 

participants. Recent corporate 

scandals reveal that fiduciaries can 

be faced with conflicts of interest 

that could lead them to breach this 

duty. Because of the potential 

adverse effects such a breach may 

have on retirement plan assets, we 

were asked to describe (1) 

conflicts of interest in the proxy 

voting system, (2) actions taken to 

manage them, and (3) DOL’s 

enforcement of proxy voting 

requirements. 

GAO recommends that Congress 

consider amending ERISA to 

require fiduciaries to (1) develop 

proxy-voting guidelines, (2) 

disclose guidelines and votes 

annually, and (3) appoint an

independent fiduciary to vote the 

company’s own stock in its pension 

plan in certain instances. GAO 

recommends that DOL conduct 

another proxy enforcement study, 

and enhance coordination of 

enforcement strategies with SEC. 

DOL generally disagreed with our 

recommendations, but we believe 

that additional transparency and 

enhanced enforcement are needed. 
Page i GAO-04-749 Proxy Voting 

Letter 1

Results in Brief 3

Background 5

Business Relationships and Limited Disclosure of Votes Can Make 

Proxy Voting Vulnerable to Conflicts 8

Some Plan Fiduciaries Have Taken Actions to Manage Conflicts 16

The Department of Labor’s Related Enforcement Efforts Have 

Been Limited 22

Conclusions 28

Matters for Congressional Consideration 29

Recommendations for Executive Action 30

Agency Comments and Our Evaluation 30

Appendix I Scope and Methodology 34 

Obtaining Total Number of Employer Securities Held in the 

Company’s Own Pension and Welfare Benefit Plans 35

Obtaining the Total Number of Shares Outstanding for Selected 

Fortune 500 Companies 36

Obtaining the Closing Price for Our Fortune 500 Companies 36

Computing the Number of Voting Shares Held in Fortune 500 

Company Pension and Welfare Benefit Plans 37

Appendix II Comments from the Department of Labor 38 

Appendix III GAO Contacts and Staff Acknowledgments 40 

Contacts 40

Staff Acknowledgments 40

Table 

Table 1: Summary of the Department of Labor’s Proxy Projects 27

Contents 
Page ii GAO-04-749 Proxy Voting 

Abbreviations

AMEX American Stock Exchange 

DeAM Deutsche Bank Asset Management 

DeIB Deutsche Bank’s Investment Banking 

DOL Department of Labor 

EBSA Employee Benefits Security Administration 

EIN Employer Identification Number 

ERISA Employee Retirement Income Security Act of 1974 

ESOP employee stock ownership plan 

HP Hewlett-Packard 

IB Interpretive Bulletin 

IMs investment managers 

NASDAQ National Securities Dealers Stock Exchange 

NYSE New York Stock Exchange 

SARs summary annual reports 

SEC Securities Exchange Commission 

SPDs summary plan descriptions 

TAQ Trade and Quote 

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Page 1 GAO-04-749 Proxy Voting 

August 10, 2004 

The Honorable Edward M. Kennedy 

Ranking Minority Member 

Committee on Health, Education, Labor, and Pensions 

United States Senate 

Dear Senator Kennedy: 

Pensions are an important source of income for millions of retirees, and 

the federal government has encouraged private employers to sponsor and 

maintain private pension and retirement savings plans for their employees. 

In 1998, about 100 million workers and retirees were covered in private 

defined benefit1

 or defined contribution2 pension plans with assets totaling 

about $4 trillion. In 2001, pension plans, as a whole, owned about 20 

percent of the total corporate equity issued by U.S. companies, with 

private pension funds owning about 59 percent of that amount.3

 As 

shareholders, pension plans have certain rights, including the right to vote 

on certain corporate governance matters. Some matters such as the 

election of directors, executive compensation packages, and mergers and 

acquisitions are significant voting items that may affect long-term share 

value, while other matters may not. While they may vote in person, 

fiduciaries typically do not attend the annual meetings in which corporate 

policies are voted. Instead, they usually submit ballots prior to the 

meeting, generally via mail or online instructions. This is called proxy 

voting. According to the Department of Labor’s (DOL’s) interpretation of 

the Employee Retirement Income Security Act (ERISA) of 1974, with these 

 1

A defined benefit plan promises to provide a benefit that is generally based on an 

employee’s salary and years of service. Defined benefit plans use a formula to determine 

the ultimate pension benefit that participants are entitled to receive. The employer, as plan 

sponsor, is responsible for making contributions that are sufficient for funding the 

promised benefit, investing and managing the plan assets, and bearing the investment risk. 

2

Under defined contribution plans, employees have individual accounts to which the 

employee, employees, or both make periodic contributions. Defined contribution plan 

benefits are based on the contributions to and investment returns (gains and losses) on 

individual accounts. In a defined contribution plan, the employee bears the risk and often 

controls, at least in part, how his or her individual account assets are invested. 

3

These data are according to the flow of funds data issued on March 2004 from the Federal 

Reserve Board. Mutual funds own about 18 percent of total corporate equity, while 

households directly own about 39 percent. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-04-749 Proxy Voting 

voting rights, fiduciaries are required to cast votes solely in the interest of 

plan participants and beneficiaries.4

The retirement security of these plan participants can be affected by how 

certain issues are voted on during company stockholder meetings and, 

therefore, relies on fiduciaries acting solely in the interest of pension plan 

participants and beneficiaries. However, recent corporate scandals have 

highlighted the fact that fiduciaries are faced with conflicts of interest that 

could lead them to breach their responsibility to act solely on behalf of 

participants. For example, in 2002, the Securities Exchange Commission 

(SEC) investigated whether a vote cast in favor of a merger between 

Hewlett-Packard (HP) and Compaq by Deutsche Bank Asset Management 

(DeAM), a large asset manager with the fiduciary responsibility for voting 

proxies, was influenced by a conflict of interest. The SEC found that a 

material conflict of interest was created when DeAM failed to disclose to 

its advisory clients that Deutsche Bank’s Investment Banking (DeIB) 

division was working for HP on the merger and had intervened in DeAM’s 

proxy process on behalf of HP. 

Because of conflicts of interest in the proxy voting system and the 

potential adverse effects of such conflicts on the retirement security of 

Americans, you asked us to describe (1) conflicts of interest in proxy 

voting, (2) actions taken by plans and plan fiduciaries to manage conflicts 

of interest, and (3) DOL’s enforcement of proxy voting requirements. 

To determine what conflicts exist in proxy voting, we conducted face-toface and telephone interviews which included officials at DOL’s Employee 

Benefits Security Administration (EBSA) and at SEC, securities and proxy 

voting industry professionals, officials of public and private pension plans, 

ERISA attorneys, asset managers, and proxy voting firms, research 

organizations, and proxy solicitors. We asked 25 shareholder activist 

professionals, academics, and economists to respond to a series of 

questions for a written reply and received 14 responses. To determine the 

 4

A plan fiduciary includes a person who has discretionary control or authority over the 

management or administration of the plan, including the management of plan assets. Any 

person who makes investment decisions with respect to a qualified employee benefit plan’s 

assets is generally a fiduciary. The duties the person performs for the plan rather than their 

title or office determines whether that person is a plan fiduciary. Unless otherwise 

indicated, in this report we use the term fiduciary or plan fiduciary as those persons who 

have the responsibility for voting proxies. Plan fiduciaries have a responsibility to vote 

proxies on issues, including those that may affect the value of the shares in the plan’s 

portfolio. 
Page 3 GAO-04-749 Proxy Voting 

extent to which certain companies’ pension plans hold proxy voting power 

within the plan sponsor, we analyzed plan financial information filed 

annually (Form 5500 data) with DOL’s EBSA. We analyzed data for the 

Fortune 500 companies for plan year 2001, which was the most recent year 

for which complete plan-specific data were available. To determine what 

safeguards fiduciaries have put in place to manage conflicts of interest, we 

reviewed proxy voting guidelines and interviewed a number of public and 

private pension plan sponsors, asset managers, proxy voting firm 

representatives, and other experts. To determine DOL’s enforcement 

efforts in this area, we reviewed DOL enforcement material and previously 

issued GAO reports on DOL’s enforcement program and interviewed 

officials at EBSA. 

We conducted our work between April 2003 and May 2004 in accordance 

with generally accepted government auditing standards. See appendix I for 

more information on our scope and methodology. 

Experts we interviewed said that conflicts of interest exist in proxy voting 

and occur because of the various business relationships that may 

influence a proxy voter’s vote. These experts also said that conflicts can 

exist in situations when an employee of the plan sponsor votes proxies—

internally—or by a person or entity outside of the plan—externally. When 

a portion of a company’s pension plan assets are invested in its own 

company stock, the internal proxy voter may be particularly vulnerable to 

conflicts of interest because management has the ability to directly 

influence voting decisions. For the external proxy voter, a variety of 

conflicts may arise due to business relationships. For example, when the 

external proxy voter is an investment manager that is part of a larger 

corporation that provides a variety of services, business relationships 

between branches of the corporation and the plan sponsor may influence 

the investment manager’s proxy voting decisions. Consistent with current 

DOL requirements, proxy votes and guidelines are disclosed to the plan. 

Proxy voters are not required to publicly disclose proxy voting guidelines 

and votes, though plans are required to make voting guidelines available to 

participants upon request. Although conflicts will exist, limited disclosure 

may make proxy voters more vulnerable to such conflicts. Because of this 

limited transparency, concerned parties do not have the information 

needed to raise questions regarding whether proxy votes were cast in the 

sole interest of plan participants and beneficiaries. 

Some plan fiduciaries and SEC have taken steps to help manage conflicts 

of interest in proxy voting. Some plans voluntarily maintain detailed 

Results in Brief 
Page 4 GAO-04-749 Proxy Voting 

proxy-voting guidelines that give proxy voters clear direction on how to 

vote on certain issues. SEC has imposed new proxy voting regulations on 

mutual funds and investment advisers requiring that specific language be 

included in policies and procedures on how fiduciaries will handle 

conflicts of interest. In addition, some plan fiduciaries voluntarily make 

their guidelines available to participants and the public. Furthermore, 

some plans voluntarily disclose to participants and the public how they 

voted on some or all of the issues in which they voted. Similarly, SEC now 

requires mutual funds to publicly disclose all proxy votes and policies and 

procedures. Some plans voluntarily put additional procedures in place to 

protect proxy voters from conflicts of interest that may lead to breaches of 

fiduciary duty. For example, some plans have a rule that, in the event that 

an attempt is made to influence a proxy vote, the voting responsibility on 

that issue moves from the proxy voter to a committee. Some plan sponsors 

have hired independent fiduciaries to manage employer stock in their 

pension plans. Plans may also hire an independent proxy voter or proxyvoting firm to cast proxy votes to ensure that they are solely in the interest 

of plan participants. 

DOL’s enforcement of proxy voting requirements has been limited for 

several reasons. First, participant complaints about voting conflicts are 

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

voter generally are not disclosed. Therefore, plan participants and others 

are not likely to have the information they need to raise questions 

regarding whether a vote has been cast solely in their interest. Second, 

ERISA presents legal challenges for prosecuting proxy voting cases. 

Specifically, it is often difficult to obtain evidence that the plan fiduciary 

was influenced in his or her voting by something other than the interests 

of plan participants because, among other things, the fiduciary’s vote is 

based on judgment. Finally, even if such evidence existed, monetary 

damages are difficult to value and, because the department has no 

statutory authority to impose a penalty without assessing damages, 

fiduciary penalties are difficult to impose. In part, because of these 

challenges and its limited resources, DOL has devoted few resources to 

enforcing proxy voting practices by fiduciaries. For example, the agency 

conducted three enforcement studies between 1988 and 1996 to determine 

the level of compliance with proxy voting requirements among select 

fiduciaries. According to DOL, as a result of these proxy reviews, they 

found improvements over time within the proxy voting system as the 

number of voting fiduciaries and plan administrators who voted and 

established proxy voting guidelines increased. The department has not 

conducted similar reviews in recent years. DOL officials told us that they 

believe that proxy voters are generally in compliance, they receive few 
Page 5 GAO-04-749 Proxy Voting 

complaints and that with limited resources they focus instead on other 

priority areas, which may result in identifying violations that can be 

corrected. Furthermore, DOL officials said that they do not have specific 

investigations focused on proxy voting, and they do not allocate many 

resources to this issue. 

This report contains Matters for Congressional Consideration to improve 

the disclosure of proxy voting guidelines and votes and the independence 

of fiduciaries voting proxies in certain circumstances. The report also 

contains recommendations for executive agency action to improve 

oversight and enforcement in this area. In its response to our draft report, 

DOL generally disagreed with our matters for congressional consideration 

and recommendations, saying that conflicts of interest affecting pension 

plans are not unique to proxy voting and that requiring independent 

fiduciaries and increased disclosures would increase costs and discourage 

plan formation. While we acknowledge that fiduciaries face conflicts 

beyond proxy voting issues and that DOL has limited statutory authority 

related to proxy voting, we believe that additional transparency and an 

enhanced enforcement presence are needed. 

ERISA established the broad fiduciary requirements related to private 

pension plans and was designed to protect the pension and welfare benefit 

rights of workers and their beneficiaries. The act requires a plan fiduciary 

to act “...solely in the interest of plan participants and beneficiaries and 

for the exclusive purpose of providing benefits” to them and to act “...with 

the care, skill, prudence, and diligence under the circumstances then 

prevailing that a prudent man acting in a like capacity and familiar with 

such matters would use.” Failure to act in accordance with these 

requirements might constitute a breach of fiduciary duty. Breaches of the 

fiduciary duty to act solely in the interest of plan participants and 

beneficiaries with respect to proxy voting could arise when a fiduciary has 

a conflict of interest. Conflicts of interest occur in a variety of ways in 

proxy voting. Conflicts occur when a plan fiduciary or proxy voter has 

either business or personal interests that compete with the interests of 

participants. When conflicts are not appropriately managed, they could 

lead to a breach of fiduciary responsibility or, at least, may raise concern 

that a breach has occurred. For example, an SEC investigation showed 

that DeIB division had an undisclosed business relationship with HP, 

Background 
Page 6 GAO-04-749 Proxy Voting 

which may have influenced the proxy voter’s vote cast by DeAM about a 

merger between HP and Compaq Computer Corporation.5

ERISA’s fiduciary requirements apply to plan sponsors, trustees, 

managers, and others who act as fiduciaries. These requirements do not 

explicitly address proxy voting; however, DOL—having responsibility for 

the investigation and enforcement of violations of ERISA, which includes 

provisions related to fiduciary responsibility—has stated that the fiduciary 

act of managing plan assets that are shares of corporate stock generally 

includes the voting of proxies pertaining to those shares of stock. The 

provisions of ERISA were enacted to address public concerns that funds 

of private employee benefit plans were being mismanaged and abused. 

DOL can take several actions to correct fiduciary violations it identifies. 

These include acceptance of voluntary fiduciary agreements to implement 

corrective actions, initiation of civil litigation in federal district court, and 

referral of certain violations to other enforcement agencies. 

On the matter of proxy voting, DOL has issued several letters and bulletins 

discussing the duties of pension plan fiduciaries. For example, the “Avon 

Letter,” released in 1988, stated that the voting of a proxy is a fiduciary 

duty and that the responsibility for voting falls on the plan’s trustee unless 

otherwise delegated.6

 Through its “ISS letter,” issued in 1990, among other 

things, DOL stated that with respect to monitoring activities, that the plan 

fiduciary, in order to carry out his or her fiduciary responsibilities, must be 

able to periodically review voting procedures and actions taken in 

individual situations so that a determination can be made whether the 

investment manager is fulfilling its fiduciary responsibility. Furthermore, 

DOL issued Interpretive Bulletin (IB) 94-2 in 1994, which clarified the 

guidance in the previous two letters and also stressed the importance of 

statements of investment policy, including voting guidelines. While DOL 

said that maintenance of such statements of investment policy are 

 5

SEC brought an enforcement action against Deutsche Bank Asset Management in 

connection with its voting of client proxies for the HP-Compaq merger transaction and 

imposed a $750,000 penalty. The fine was imposed for not disclosing a conflict. SEC action 

found that DeAM violated its fiduciary duty to act solely in the best interests of its advisory 

clients by voting the proxies on the HP stock owned by its advisory clients without first 

disclosing the conflict. 

6

The Deputy Assistant Secretary of the Pension Welfare Benefits Administration (PWBA 

now known as EBSA) issued the Avon letter to Mr. Helmuth Fandl, Chairman of the 

Retirement Board of Avon Products, Inc., on February 23, 1988. Current U.S. Comptroller 

General David M. Walker was the Assistant Secretary of Labor for the PWBA from 1987 to 

1989. 
Page 7 GAO-04-749 Proxy Voting 

consistent with ERISA, DOL officials said that they do not have the 

statutory authority to require plans to maintain such statements. 

SEC, under the Investment Company Act of 1940, regulates companies, 

including mutual funds, that engage primarily in certain operations, such 

as investing, reinvesting, and trading in securities, and whose own 

securities are offered to the investing public. A primary mission of SEC is 

to protect investors and maintain the integrity of the securities markets 

through disclosure and enforcement. Employees in participant-directed 

pension plans might be given the choice of investing in securities, 

including employer securities, as well as a variety of mutual funds. 

Because plan participants may have such investment options, securities 

law protections applicable to investors are relevant to plan participants. In 

addition, some pension plans use investment managers to oversee plan 

assets and these managers may be subject to securities laws. 

Congress previously studied the issue of DOL’s enforcement and proxy 

voting. In the 1980s, reports emerged that fiduciaries were not voting their 

proxies or that conflicts of interest may have influenced the decisions of 

some plan fiduciaries. The Congress consequently became concerned 

about whether fiduciaries were fulfilling their responsibility to protect the 

interests of pension plan participants and beneficiaries. Because ERISA 

does not specifically lay out what the fiduciary responsibility is regarding 

proxy voting, many fiduciaries were thought to be unclear about their 

responsibility to vote proxies and maintain voting guidelines. This was 

cited as one of the major factors that led the Subcommittee on Oversight 

of Government Management, Senate Committee on Governmental Affairs, 

to conduct an investigation of and hold hearings in 1986 on DOL’s 

enforcement of ERISA. Among other things, the Subcommittee concluded 

that disclosure of proxy votes would facilitate the DOL’s enforcement 

efforts by providing the agency and other interested parties with much 

needed information. DOL officials believe that the agency does not have 

the statutory authority to require plan fiduciaries to publicly disclose their 

proxy votes and guidelines. 
Page 8 GAO-04-749 Proxy Voting 

Some experts we interviewed said that conflicts of interest exist in the 

proxy voting system and limited disclosure makes proxy voting vulnerable 

to conflicts of interest. Conflicts of interest occur because of the various 

business relationships that may influence a plan fiduciary’s or proxy 

voter’s vote. For example, when a company provides investment advisory 

services for a company-sponsored pension plan and also provides 

investment banking services to the company sponsoring that pension plan. 

Although conflicts will exist, limited disclosure makes proxy voting 

vulnerable to them. Because of this lack of transparency, participants do 

not have the information needed to raise questions regarding whether 

proxy votes were cast solely in their interest. 

Business associations between a proxy voter and any entity that may 

influence their vote presents a conflict of interest. Some experts we 

interviewed explained that these associations may form whether proxies 

are internally or externally managed because company management has 

direct access to the proxy voter who is either an employee, in the case of 

internally voted proxies, or is a service provider, in the case of externally 

voted proxies. 

When a portion of a company’s pension plan assets are invested in its own 

company stock, the proxy voter may be particularly vulnerable to conflicts 

of interest because management has the ability to directly influence its 

voting decisions and, since company stock held in the company’s own 

pension plan is typically managed internally,7

 the proxy voter may at times 

be more concerned about their own interests. While ERISA states that 

fiduciaries must act solely in the interest of pension plan participants, 

there is no requirement that an independent fiduciary be appointed to 

provide additional protections for participants with company stock in their 

pension plans. 

Several experts explained that conflicts of interest that occur in this type 

of arrangement are considerably problematic. For example, one expert 

said that since proxy voting and other decisions relating to company stock 

are much more likely to be handled in-house, votes may be cast in 

 7

The named fiduciary could also delegate the proxy voting responsibility to a trustee bank, 

third-party proxy voting firm, or an independent fiduciary. 

Business 

Relationships and 

Limited Disclosure of 

Votes Can Make 

Proxy Voting 

Vulnerable to 

Conflicts 

Fiduciary’s Business 

Associations Can Create 

Conflicts of Interest 
Page 9 GAO-04-749 Proxy Voting 

accordance with the wishes of the company’s senior management.8 In such 

cases, the company’s management may not consider the best interest of 

plan participants and beneficiaries independently from management’s 

opinion of what is best for the company. The Enron case provides an 

example of how management’s own concerns may come before that of 

participants and beneficiaries.9

In addition, some experts said that when proxies are internally managed, 

the proxy vote may be influenced by the fiduciary’s own personal 

concerns, particularly in instances when casting a vote solely in the 

interests of plan participants and beneficiaries means voting against 

company management. Specifically, if the plan fiduciary is a lawyer, 

investment analyst, or a member of the management team for the 

company, their proxy vote on management proposals such as a merger 

and acquisition or for individuals they have chosen to serve on the board 

of directors could be influenced by concerns about their personal 

standing, or job security, in the company. A few experts said that a 

fiduciary in this situation is not likely to vote against a management 

proposal such as an executive compensation package because of their 

own personal concerns. Additionally, DOL officials said that conflicts for 

an internal fiduciary could arise when the company is experiencing 

problems, which, if publicly known, would cause stock value to decline. In 

order to protect participants, fiduciary duty might require the fiduciary to 

publicly disclose the information to participants and other shareholders 

and sell shares of the company stock. Insider trading rules would, 

however, prevent the fiduciary from taking action on nonpublic 

information.10 However, making this information public could cause a 

rapid decline in share value as investors sell off their shares of stock, 

thereby, potentially harming the company and the fiduciary’s own 

personal standing in the firm. 

 8

Defined benefit plans may not acquire any qualifying employer security or qualifying 

employer real property in excess of 10 percent of fair market value of the plan’s assets. 

Defined contribution plans are generally exempt from the 10 percent limitation. 

9

The DOL sued Enron, corporate directors, and the administrative committee on June 26, 

2003, for violating ERISA. The suit alleges that certain company and plan officials failed to 

consider the prudence of Enron stock as an appropriate investment for the retirement 

plans and did nothing to protect the workers and retirees from extensive losses. The 

former corporate executive was also charged with misrepresenting Enron’s financial 

condition to employees and plan officials and encouraging them to buy the stock. 

10Insider trading rules state that a person or entity may not sell or buy stock based on 

information that is not publicly available. 
Page 10 GAO-04-749 Proxy Voting 

Because company management could influence the fiduciary responsible 

for voting the proxies related to the company’s own stock,11 management 

may have a significant amount of influence over the outcome of a proxy 

contest.12 In order to assess the influence management could have in a 

proxy contest, we conducted an analysis of Fortune 500 companies. (See 

appendix I for further information on our methodology.) In our analysis, 

we compared the number of voting shares of company stock held in a 

company’s pension plans13 to the total voting shares held in the market. 

About 272 of the Fortune 500 companies that reportedly had their own 

company stock in their pension plans and in separate accounts, such as 

master trust agreements held over $210 billion in employer securities in 

plan year 2001. Of those companies, 27 percent held at least 5 percent or 

more of company stock in their company’s pension and benefit plans, 

while another 26 percent held between 2 and 5 percent. None of the 

Fortune 500 firms we analyzed held more than 21 percent of the total 

voting power of their company’s stock in their pension and welfare benefit 

plans, while 47 percent held less than 2 percent of company stock in their 

company’s pension and benefit plans. 

 11Management also has access to other proxy voters—employees who participate in the 

company’s pension plan which has company stock as an investment choice in their 401(k) 

plan or if the plan sponsor offers an Employee Stock Ownership Plan (ESOP). The plan 

fiduciary is responsible for voting unallocated stock and stock allocated to pension plan 

participants that has not been voted. Unallocated shares of stock are those that have not 

been distributed and are held by the company in a suspense account. Allocated shares of 

stock are those shares that have been both distributed to the employees of the company’s 

pension plan and to outside investors (e.g., by institutional investors such as other pension 

plans and mutual funds, or individual investors). How the fiduciary must vote those stock 

is outlined in the plan documents. The directions provided in the plan documents may 

include voting by the trustee in accordance with fiduciary principles, voting by the trustee 

to mirror the vote for directed shares, and refraining from voting the shares on the 

assumption that the employee intended to cast a no vote. 

12For defined benefit plans, plan assets are typically institutionally managed by an external 

asset manager. The external asset manager also has the responsibility to vote the proxies 

unless that responsibility is retained by the plan trustees. For defined contribution plans, 

pension plan participants may have the responsibility to vote the proxies for the shares of 

their own company’s stock in their 401(k) plan account. This called pass through voting, 

which is required for a plan to receive Section 404(c) relief with respect to the investment 

in company stock. It is at the plan’s discretion to permit pass thru voting to participants, 

though most defined contribution plans are designed to comply with Section 404(c). 

13This includes company stock held in defined contribution plans (including ESOPs) and 

defined benefit plans, or indirectly through certain trusts, accounts, and other investment 

arrangements. This also includes allocated and unallocated stock. 
Page 11 GAO-04-749 Proxy Voting 

While the results showed that the pension and welfare benefit plans of the 

Fortune 500 companies we analyzed were not holding large percentages of 

the total voting power of a company’s shares, these findings may still be 

significant. For example, in a contentious proxy contest such as a merger 

and acquisition where 51 percent of outstanding shares is needed to 

complete the merger, a company whose pension assets comprise just 

2 percent of the total stock issued by a company might act as the deciding 

vote if the proxy contest is close. In this case, how the plan fiduciary or 

proxy voter casts its vote could make the difference between 49 percent 

and 51 percent—that is, the difference between the merger being approved 

or rejected. Some of the largest and most influential pension plans 

typically hold no more than 1 to 2 percent of any one company’s shares in 

their plan’s investment portfolios. As such, a Fortune 500 company whose 

pension plans holds more than 1 or 2 percent of its own company stock 

could give them an advantage in a proxy contest. 

When the fiduciary is not an employee of the plan sponsor—that is, he or 

she is external to the company—-experts explained that a variety of 

different types of conflicts might also arise because of business 

associations. For example, when the proxy voter is an investment manager 

that is part of a larger corporation that provides a variety of services, 

experts said that business relationships between the company’s other 

branches and the plan sponsor might influence the investment manager’s 

voting decisions. These relationships may influence the proxy voter to 

vote with the plan sponsor’s management, particularly if the proxy voter 

wishes to maintain business relationships with the plan sponsor or create 

an opportunity for future business relationships. For instance, some 

experts we interviewed contend that DeAM division—the proxy voter in 

this case—was influenced by a business relationship between DeIB 

division and their mutual client, HP. SEC records reveal that DeAM 

reversed its vote to vote in favor of HP’s merger after the investment 

banking division set up a meeting between the proxy voter and HP 

management. SEC found that, unbeknownst to DeAM’s advisory clients, 

DeIB was working for HP on the merger and had intervened in DeAM’s 

proxy process on behalf of HP. This created a material conflict of interest 

for DeAM, which has a fiduciary duty to act solely in the interests of its 

advisory clients. The SEC action found that DeAM violated this duty by 
Page 12 GAO-04-749 Proxy Voting 

voting the proxies on the HP stock owned by its advisory clients without 

first disclosing the conflict.14

While some experts we interviewed said that they believe most plan 

fiduciaries vote solely in the interest of participants and beneficiaries, 

others said that some fiduciaries might prioritize other interests when 

casting their votes. For example, a few experts said that fiduciaries are 

taking their proxy voting responsibility seriously and voting appropriately. 

Other experts we interviewed said that the proxy voting decisions of some 

external asset managers are often influenced by short-term quarterly 

returns on assets rather than on voting patterns that support long-term 

goals that benefit shareholders and participants. Some experts we 

interviewed also said that some external asset managers believe that they 

are retained and compensated because of superior investment 

performance and not because of how they vote proxies. Last, some 

experts said that there are only downsides to devoting resources to proxy 

voting. 

Experts we interviewed said that the limited disclosure might create 

inappropriate incentives and result in inadequate accountability, which 

may make proxy voting especially vulnerable to conflicts of interest. Proxy 

votes, in some cases, may not be monitored by the plan fiduciary and are 

not routinely disclosed to the public, two actions that could help ensure 

that fiduciaries cast votes solely in the interest of pension participants. 

Limited disclosure and lack of adequate monitoring of proxy voting 

practices by plans hinders accountability for how votes are cast. 

Consistent with current DOL requirements, votes are disclosed to the 

appropriate plan fiduciaries.15 Fiduciaries are not required to publicly 

disclose proxy voting guidelines and votes, though the plan would be 

 14SEC found that DeAM violated Section 206(a) of the Investment Advisers Act of 

1940 by failing to disclose to its clients any material fact about a potential or actual conflict 

of interest that may affect its unbiased service to its clients. 

15According to the January 1990 interpretive letter to the Institutional Shareholder Services 

Inc., DOL advised that the named fiduciary must be able to comprehensively monitor proxy 

voting activities of the investment (or asset) manager so as to make an informed 

determination as to whether the investment manager has met its fiduciary obligations. 

Thus, the named fiduciary must have access to, and the investment manager must maintain 

accurate records of, the investment manager’s voting procedure and actions taken in 

specific cases. 

Limited Disclosure May 

Make Proxy Voting 

Vulnerable to Conflicts of 

Interest 
Page 13 GAO-04-749 Proxy Voting 

required to make any written proxy voting guidelines available to 

participants upon request.16 Hence, only plans have easy access to the 

information that allows them to monitor how proxy voters are voting. 

However, not all plans have the resources to devote to such monitoring; 

therefore, the attention given to the proxy voting responsibility can vary 

greatly by plan. Some large plans devote a significant amount of expertise 

and resources to proxy voting while other plans may not. Furthermore, a 

few experts said that in many cases where the proxy voting responsibility 

is delegated externally, the plan provides limited to no review of how the 

proxies were voted. 

Experts we interviewed said that limited disclosure might provide 

incentives for fiduciaries to cast their votes according to their own 

interests. These experts also said that publicly disclosing proxy votes 

could help discourage voting that is inconsistent with participants’ 

interests. For example, a few experts believed that the economic 

incentives for fiduciaries to vote with management could be significant 

enough, and the potential for penalties as a fiduciary weak enough, to 

make voting with management hard to resist.17 Several experts explained 

that since breaches of fiduciary duty are very difficult to uncover, limited 

transparency prevents participants and others from raising questions 

regarding whether votes were made solely in the interest of participants. 

They also contend that increased transparency provided by public 

disclosure may provide participants, regulators, and others with more 

comprehensive information needed to hold fiduciaries and corporations 

accountable for their actions. In this regard, SEC concluded that shedding 

light on mutual fund proxy voting could illuminate potential conflicts of 

interest and discourage voting that is inconsistent with fund shareholders’ 

best interests. 

SEC’s new disclosure rules for mutual funds and investment advisers may 

provide a limited benefit to some pension plan participants, while the new 

rule for investment advisers may also benefit pension plans whose proxies 

are voted externally. In 2003, SEC issued a final rule requiring mutual 

 16See DOL Interpretive Bulletin 94-2 and a March 20, 1997 interpretive letter to Kirkland & 

Ellis with respect to the scope of the disclosure requirements of Section 104(b)(4). 

17Voting with management is not necessarily against the interests of participants and 

beneficiaries. In some cases, voting in favor of a management proposal would benefit 

participants. As with any proxy decision, the vote should be based on analysis and should 

be made solely in the interest of participants. 
Page 14 GAO-04-749 Proxy Voting 

funds to publicly disclose their proxy votes on an annual basis and to 

adopt and disclose proxy voting policies and procedures to shareholders. 

However, this rule may provide some benefit for pension plan participants 

in defined contribution plans. Specifically, pension plan participants who 

invest their defined contribution dollars in mutual funds might find proxy 

voting results cast by investment managers of their funds on the web site 

of the mutual fund provider. On the other hand, defined benefit plan 

participants may receive little benefit from this rule if defined benefit 

plans invest few assets in mutual funds.18 Furthermore, SEC’s new 

disclosure rule for investment advisers requires investment advisers to 

inform their clients how they can obtain information on how the clients’ 

securities were voted. However, this rule may provide little benefit to plan 

participants in defined contribution and defined benefit plans since this 

ruling requires disclosure to the plan as the client and not to plan 

participants. 

SEC’s new disclosure rule for investment advisers may also provide 

protections beyond those provided by ERISA for private pension plans 

whose proxies are voted externally. SEC’s new disclosure rule for 

investment advisers may provide requirements that are either not 

specifically stated or covered in DOL interpretations of ERISA. For 

example, SEC requires, in part, that investment advisers19 exercising proxy 

voting authority over client securities adopt and implement proxy voting 

policies and procedures for voting clients’ proxies.20 ERISA, on the other 

hand, does not require fiduciaries to maintain statements of investment 

policy, which includes statements of proxy voting policy. Also, SEC 

requires that voting policies and procedures must describe how the 

adviser addresses material conflicts between its interests and those of its 

 18Under defined benefit plans, the employer, as the plan sponsor, bears the investment risk 

as well as those risks associated with voting proxies. 

19This rule applies to all investment advisers registered with SEC that exercise proxy voting 

authority over client securities. 

20This new rule also requires that the written policies and procedures for voting client 

proxies must be reasonably designed to ensure that the adviser votes client securities in 

the best interests of the clients, to disclose to clients how they may obtain information 

about those policies and procedures, and to disclose to clients how they may obtain 

information on how the adviser has voted their proxies. The rule amendments also require 

advisers to maintain certain records relating to proxy voting. The rule and rule 

amendments are designed to ensure that advisers vote proxies in the best interest of their 

clients and provide clients with information about how their proxies are voted. This new 

rule also requires investment advisers to furnish a copy of written policies and procedures 

to clients upon request. 
Page 15 GAO-04-749 Proxy Voting 

clients with respect to proxy voting, while ERISA does not. SEC’s 

investment adviser rule may provide no benefit to plans that retain voting 

responsibility because it covers only investment advisers that exercise 

proxy voting authority over client securities. 

Certain changes in the retirement savings environment are making the 

need for enhanced transparency more important. For example, the shift 

from defined benefit plans to defined contribution plans increases the 

need for disclosure to plan participants.21 Because under a defined 

contribution plan participants bear the investment risk, as with 

shareholders, participants need information to be more active in 

protecting their retirement assets. SEC reported that the proposal 

generated significant comment and public interest. Of the approximately 

8,000 comment letters, the overwhelming majority supported the 

proposals and urged SEC to adopt the proposed amendments. Many 

commenters, including individual investors, fund groups that currently 

provide proxy-voting information to their shareholders, labor unions, and 

pension and retirement plan trustees, supported the proposals.22

Furthermore, one expert said that pension plans should be required to 

disclose votes and guidelines to participants because participants cannot 

switch plans the way shareholders can switch their money from one 

investment company to another. This expert further said that having 

policies such as these in place makes ERISA stronger especially given the 

impact that having their money tied up in a retirement portfolio could 

potentially have on a participant’s retirement assets. Additionally, the 

expert said that the differences between disclosures provided to 

shareholders and pension plan participants should be eliminated. 

 21DOL statistics show that the number of single employer and multiemployer defined 

benefit plans are on the decline, while the number of defined contribution plans being 

adopted is on the rise. The decline in defined benefit plans is attributed to the fact that 

fewer plans are being adopted, some employers are replacing defined benefit plans with 

defined contribution plans, and some defined benefit plans have been terminated. 

22Many fund industry members supported the proposed amendments regarding the 

disclosure of policies and procedures. However, most fund industry members opposed the 

proposed amendments that would require disclosure of a fund’s complete proxy voting 

record and disclosure of votes that are inconsistent with fund policies and procedures. 
Page 16 GAO-04-749 Proxy Voting 

To manage conflicts, some plan fiduciaries have taken special actions, 

some of which are similar to SEC requirements for mutual funds. One such 

action is the maintenance by fiduciaries of detailed proxy voting 

guidelines that give proxy voters clear direction, reducing ambiguity and 

vulnerabilities related to conflicts that may influence the voter. 

Additionally, some fiduciaries include in their guidelines information on 

what the plan does when a conflict of interest exists on a proxy vote; they 

also publicly disclose their guidelines. Some plans also disclose a record 

of all their votes cast to participants and the public. Some pension plans 

also put additional procedures and structural protections in place to help 

manage conflicts. 

To help manage conflicts, some fiduciaries use detailed proxy voting 

guidelines that they make public. However, such guidelines are not 

required by ERISA, nor does DOL give guidance to fiduciaries as to the 

level of detail and specificity that guidelines should contain. Hence, some 

plan guidelines vary widely in their level of detail and specificity and some 

provide only minimal guidance. For example, some plan officials we 

interviewed said that their guidelines instruct proxy voters to always vote 

in the best economic interest of participants, while other experts said that 

some guidelines only instruct proxy voters to vote with management but 

offer no guidance beyond this broad statement. Other plans, on the other 

hand, create detailed, up-to-date guidelines. Some plans that we reviewed, 

for example, maintain guideline documents that direct proxy voters which 

way to vote, or factors to consider in deciding which way to vote, on a 

wide range of routine and non-routine proxy issues. The issues include, 

but are not limited to, board of director elections, auditor selections, 

executive compensation, reincorporation, capital issues (such as stock 

issuance), environmental and social concerns, and mergers and 

acquisitions. In addition, some plans, according to plan officials we spoke 

with, review their guidelines on a regular basis, and update them if needed. 

This allows the guidelines to reflect new issues in corporate governance. 

For example, in 2002, one plan updated its guidelines twice to reflect new 

corporate governance issues arising from the Sarbanes-Oxley Act.23

Detailed guidelines reduce ambiguity in the proxy voting process by 

providing direction to help fiduciaries determine how to vote. For 

 23The Sarbanes-Oxley Act was passed in 2002 and contained a number of corporate 

governance and accounting provisions in response to recent corporate scandals. 

Some Plan Fiduciaries 

Have Taken Actions 

to Manage Conflicts 

Some Fiduciaries Have 

Developed Detailed ProxyVoting Guidelines to 

Manage Conflicts 
Page 17 GAO-04-749 Proxy Voting 

example, detailed guidelines may instruct a voter how to analyze an 

executive compensation vote based on a number of factors, so that the 

vote is made in what the fiduciary believes is solely in the interest of 

participants. As a result, proxy voters have clear direction on how to vote 

on a specific voting issue. For example, one plan official said that because 

their guidelines are clear, there is no confusion about how to vote on any 

proxy issue. Furthermore, a plan fiduciary or proxy voter may use detailed 

guidelines to defend against complaints about votes by demonstrating that 

a given vote was based on their guidelines and was not influenced by a 

conflict of interest. 

Some guidelines include what steps a proxy voter should take to prevent a 

fiduciary breach and ensure that the vote is made solely in the interest of 

participants when a conflict of interest exists. Similar to the recent SEC 

rule requiring mutual funds and investment advisers to disclose “the 

procedures that a mutual fund company/complex and investment advisers 

use when a vote presents a conflict....” some pension plan fiduciaries 

include such a discussion in their guidelines. For example, the guidelines 

of one plan fiduciary we examined indicate that, in the case of a conflict of 

interest, the issue is to be reported to the president and general counsel of 

the plan sponsor who decide how to proceed and ensure that a record of 

the conflict and the related vote is maintained. In addition, some 

fiduciaries provide further detail about what constitutes a conflict of 

interest. For example, one plan’s guidelines define a conflict of interest as 

being “a situation where the Proxy Analyst or Proxy Committee member, if 

voting the proxy, has knowledge of a situation where either” the plan 

fiduciary “or one of its affiliates would enjoy a substantial or significant 

benefit from casting its vote in a particular way.” 

In addition to developing detailed guidelines, some plan fiduciaries 

voluntarily make their guidelines/policies and procedures available to the 

public, as SEC has required mutual funds to do. Some public pension plans 

disclose their guidelines on their Web sites, making them available not 

only for participants and beneficiaries but also the general public. The 

officials of some private plans indicated to us that they would probably 

produce a copy of their guidelines if explicitly requested by a participant, 

though they admitted that such a request is rarely, if ever, made. SEC 

addressed the issue of disclosure, when, in 2003, it began to require mutual 

funds to disclose their voting policies and procedures in their registration 

statement. Mutual fund policies and procedures are required to be 

available at no charge to shareholders upon request. Also, mutual funds 

must inform shareholders that the policies and procedures and votes are 

available through SEC’s Web site, and, if applicable, on the fund’s Web 
Page 18 GAO-04-749 Proxy Voting 

site. SEC made the case for guideline disclosure by stating that, 

“shareholders have a right to know the policies and procedures that are 

being used by a fund to vote proxies on their behalf.” Many fund industry 

members publicly supported SEC’s disclosure rule through comment 

letters sent to SEC after the rule proposal was released. Officials for one 

mutual fund company, for example, supported guideline disclosure 

because the transparency resulting from disclosure would encourage 

mutual funds to make better proxy voting decisions, which in turn could 

enhance fund performance. Also, they believed that guideline disclosure 

would deter casting proxy votes that are not in the best interest of 

shareholders. 

Some plan fiduciaries also publicly disclose their proxy votes in an 

attempt to manage conflicts of interest. We met with officials of some 

public pension plans that disclose proxy votes on their Web sites, making 

them available not only to participants and beneficiaries, but also to the 

public.24 While some public plans disclose only the votes of a few hundred 

different equities, other plans disclose all their votes. These funds present 

a list of companies and how relevant proxies for that company have been 

voted during a specified timeframe. In addition, one plan sometimes 

includes a note that briefly explains the rationale for their vote (e.g., why 

they withheld their vote for a certain director). Two plans, whose officials 

we met with, also disclose the number of shares that were voted on each 

proxy. 

In April 2003, a SEC rule went into effect requiring mutual funds to 

disclose, on an annual basis, a record of all proxy votes cast during the 

previous year. Mutual fund votes are required to be available on the fund’s 

Web site or provided at no charge to shareholders upon request. Also, 

mutual funds must inform shareholders that the votes are available 

through SEC’s Web site. SEC, in its rule release on mutual fund proxy vote 

 24A public pension plan is a pension, annuity, retirement, or similar fund or system 

maintained by a state or local government that provides a retirement benefit to the state or 

local government employee. Some of the largest pension plans in the United States such as 

the California Public Employees Retirement System and the New York City Employees 

Retirement System are public pension plans. These public plans are not governed by 

ERISA. 

Some Fiduciaries Disclose 

Proxy Votes, Providing 

Greater Incentive to Vote 

Appropriately 
Page 19 GAO-04-749 Proxy Voting 

disclosure, stated that the overall costs of disclosure are reasonable.25 The 

experience of the plans we examined that disclose their votes indicates 

that their costs are not substantial and not a serious burden because proxy 

voting is done electronically, and voting records are required to be 

maintained. 

Some experts we interviewed argue that proxy vote disclosure can benefit 

participants by giving them information on how the plan votes proxies and 

providing an incentive to the plan fiduciary or proxy voter to vote 

appropriately. Disclosure would allow plan participants to review votes 

and raise questions as to whether votes were made appropriately. The 

knowledge that participants and beneficiaries might complain to the plan 

and to others if they believe a breach of its fiduciary duty has taken place 

may encourage fiduciaries to vote appropriately to avoid such problems. 

Some experts said that participants would be overwhelmed by the 

information and would not understand what to do with it. In addition, a 

few experts have said that it is possible that, while participants might not 

have the time or the knowledge to analyze proxy votes, an investigative 

journalist might look at votes of a certain pension plan and publicly 

discuss any possible breaches they have uncovered or notify the 

appropriate authorities if any breaches are found or are suspected. 

Proxy voting disclosure may also influence the voting behavior of 

fiduciaries, as seen in the example of one large mutual fund. As reported in 

the news, one large mutual fund voted in favor of the full slate of directors 

nominated to serve on the board of directors on 29 percent of proxy 

contests in which they voted in 2003, while in 2002 the fund had voted in 

favor of the full slate in 90 percent of the contests.26 And while the fund 

had voted for 100 percent of auditor approvals in 2002, in 2003 it had voted 

for only 79 percent. Experts we interviewed said that SEC’s disclosure 

rules might have contributed to that change in behavior. Nine of 12 

respondents to our written interview support proxy vote disclosure by 

 25Opponents to vote disclosure argued against the rules largely by arguing that disclosure 

would be prohibitively costly. However, in its final rule, SEC noted that several fund groups 

that currently provide disclosure of their complete proxy voting records to their 

shareholders commented that although there are start-up costs for compliance systems, 

this cost decreases over time, and that the overall costs of the disclosure are minimal. SEC 

found arguments made by funds that are providing this disclosure to be particularly 

persuasive and continue to believe that the costs of disclosure are reasonable. 

26Ken Brown, “Vanguard Gives Corporate Chiefs A Report Card,” Wall Street Journal, 

November 10, 2003. pg. C.1. 
Page 20 GAO-04-749 Proxy Voting 

pension plan fiduciaries and many experts we spoke with also support 

proxy vote disclosure by plans. Very few respondents and experts we 

interviewed believed that disclosure of votes would not benefit pension 

plan participants. Specifically, they cited as reasons that: (1) the costs of 

disclosure outweigh any benefits to participants; (2) there is the potential 

for politicizing proxy voting; (3) disclosure may serve as a detriment to the 

investment manager’s investment strategy; and (4) participants lack 

interest in proxy voting. 

Some plan fiduciaries have voluntarily taken additional steps to help 

manage conflicts of interest that may lead to breaches of fiduciary duty, 

including implementing structural protections and special proxy voting 

procedures. For example, a few plans we reviewed structure their 

organization to separate those who cast votes from executives who make 

policy decisions about the plan. Some plans delegate the responsibility for 

proxy voting in a way that protects against fiduciary breaches. One public 

plan, for example, had external asset managers cast proxy votes, but 

decided to bring the proxy voting process in house to avoid having the 

plan’s proxies voted on both sides of an issue. By doing all voting 

internally, plan fiduciaries can provide better safeguards ensuring that 

votes are cast solely in the interest of participants and provide consistency 

to how votes were cast. 

In order to address concerns about conflicts of interests related to 

employer stock in pension plans, a few pension plan officials we 

interviewed said that their company stock is managed and proxies are 

voted by an independent fiduciary outside of the company. In other cases, 

some fiduciaries use independent proxy-voting firms for research and 

analysis or to cast proxy votes on their behalf. For example, officials from 

one plan that we met with told us that they use an outside proxy-voting 

firm to make the vote decision when a conflict exists. One asset manager, 

for example, did so during a contentious merger in which their Chief 

Executive Officer was a director of the acquiring company. Some 

fiduciaries we met with have an outside proxy-voter execute proxy votes 

based on their plan’s own guidelines. Other fiduciaries simply use outside 

proxy-voter firms to provide analysis and research, which the fiduciary 

may then use to help determine how to vote. 

Outside proxy voting firms are not without their own conflicts of interest, 

however. Some proxy-voting firms have expanded to other services. One 

firm, for example, provides a service to corporations in helping design 

proxies to improve the chances that proxy issues will succeed. A conflict 

of interest would exist when the proxy-voting firm has to vote on a proxy 

Some Fiduciaries Have 

Voluntarily Taken 

Additional Steps to 

Manage Conflicts of 

Interest 
Page 21 GAO-04-749 Proxy Voting 

that it helped create or when it must vote a proxy for the same company 

from which it received revenue for some other service. 

In addition to the structural protections some fiduciaries have put into 

place, some fiduciaries have implemented special procedures that are used 

when a conflict exists. For example, according to officials at one company 

we interviewed, if a proxy vote is to be cast not in accordance with the 

plan’s guidelines, then the vote is decided by the plan’s proxy committee, 

which is also required to note why the vote was inconsistent with plan 

guidelines. At other plans we reviewed, in the event that an attempt is 

made to influence a proxy vote, the plan’s executive committee makes the 

vote decision. Additionally, officials from one private plan said that when a 

material conflict of interest exists an independent third-party proxy voter 

is given the responsibility to determine how to vote, based on the plan’s 

guidelines. Furthermore, this plan has a “Material Conflict of Interest 

Form” which is filled out and signed by the voting analyst and a member of 

the plan sponsor’s proxy committee. This form includes information on 

the stock being voted, the issue being voted on, what the plan’s proxy 

voting guidelines indicate about that issue, details on the conflict of 

interest, and certification from the third-party proxy voter on how the vote 

was cast. In addition, at another plan, when a material conflict of interest 

exists during a proxy vote, the vote is reported to the president and 

general counsel of the plan sponsor. They decide how to address the 

situation, such as getting an outside vote recommendation or disclosing 

the existence of the conflict. A record of meeting notes and issues 

surrounding conflicts are maintained by the plan in case any questions 

arise. 
Page 22 GAO-04-749 Proxy Voting 

The Department of Labor’s enforcement of proxy voting requirements has 

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

conflicts are infrequent, at least in part, because votes cast by a fiduciary 

or proxy voter generally are not disclosed; therefore, participants and 

others are not likely to raise questions regarding whether a vote may not 

have been cast solely in their interest. In addition, for the department, 

ERISA presents legal challenges for bringing proxy voting cases.27

Specifically, because of the subjective nature of fiduciary votes, it is 

difficult to obtain evidence that would prove the plan fiduciary was 

influenced by something other than the interests of participants. 

Furthermore, even if such evidence could be obtained, monetary damages 

are difficult to value and, because the department has no statutory 

authority to impose a penalty without assessing damages, fiduciary 

penalties are difficult to impose. In part, because of these challenges, but 

also because of its limited resources, DOL’s reviews of proxy voting in 

recent years have been limited. As a result, some experts we interviewed 

do not view the department as a strong enforcement agent. 

Challenges exist in the proxy voting system that limit DOL’s ability to 

identify breaches and to prove that a fiduciary was influenced to act 

contrary to the interests of plan participants. In March 2002, we reported 

that DOL enforces ERISA primarily through targeted investigations. DOL 

determines what issues it will investigate using a multifaceted 

enforcement strategy, which ranges from responding to participant and 

others’ concerns to developing large-scale projects involving a specific 

industry, plan type, or type of violation.28 DOL also uses the Annual 

Returns/Reports of Employee Benefit Plans (Form 5500 Returns) to 

 27DOL noted, however, that it filed amicus briefs in three proxy voting cases. In O’Neill v. 

Davis, 721 F.Supp. 1013, 1015 (N.D.I11. 1989), a DOL amicus brief was instrumental in 

obtaining a holding that “the voting of Plan-owned shares by the Plan’s trustees was a 

fiduciary act under ERISA, and one which the trustees were bound to exercise in the sole 

interest of the Plan participants.” DOL also filed two amicus briefs in Grindstaff v. Green,

133 F.3d 416 (6th Cir. 1998), where, over a strong dissent, the court rejected DOL’s views on 

the extent to which ERISA’s fiduciary duties attach to plan fiduciaries’ voting of plan 

shares. DOL officials said that they also filed a brief on the voting of plan shares and 

exercise of other shareholder rights on plans’ behalf in district court in Krause v. 

Columbia Quarry Co., 4:98 CV 01373 ERW (E.D. Mo.), although that case wound up being 

decided on other grounds. 

28Throughout this report, references to DOL’s regular investigations refer to those 

investigations that are not specifically aimed at detailed reviews of proxy voting practices. 

The Department of 

Labor’s Related 

Enforcement Efforts 

Have Been Limited 

Identifying and Proving 

Breaches in the Proxy 

Voting System Is Difficult 
Page 23 GAO-04-749 Proxy Voting 

identify potential issues for investigation.29 In addition, its regional 

outreach activities, while aimed primarily at educating both plan 

participants and sponsors, are used to gain participants’ help in identifying 

potential violations. 

Although DOL’s strategy includes a number of ways to target 

investigations, DOL officials consider information provided by plan 

participants and beneficiaries an integral starting point to developing 

many of its investigations. For instance, through information provided in 

summary annual reports (SARs), summary plan descriptions (SPDs), 

individual benefit statements, and other related reports, participants have 

access to financial and operational information regarding their pension 

plan and their accrued benefits. The information provided in these reports 

can help participants and beneficiaries monitor their plans and identify 

some warning signs that might alert them that possibly there is a problem 

warranting DOL’s attention. 

While participant complaints might be useful in targeting some DOL 

investigations, relying on participant complaints may not currently be the 

most effective way to identify potential proxy voting cases. Because of the 

current limited level of disclosure, DOL receives few complaints related to 

proxy voting. For instance, as previously mentioned, the SARs and other 

related reports provide plan financial and operational information; 

however, they do not contain proxy voting information such as voting 

guidelines and a record of how votes were cast. In addition, DOL officials 

told us that proxy votes and guidelines are disclosed to the plan and 

guidelines must be made available to participants and beneficiaries when 

requested. However, one expert explained that participants generally do 

not know to ask for this information. As such, they are not likely to raise 

questions about whether or not a vote was cast solely in their interest. 

Likewise, because proxy votes are not publicly disclosed, complaints to 

DOL from those outside of plan participants and beneficiaries are less 

likely to occur. 

In addition to difficulties identifying potential breaches in the proxy voting 

system, difficulties proving under ERISA that a fiduciary was influenced to 

act contrary to the interests of plan participants are also a challenge for 

DOL. Because a plan fiduciary’s vote requires judgment, determining what 

 29The Form 5500 Returns are forms that most qualified retirement plans must file annually 

with the Internal Revenue Service. 
Page 24 GAO-04-749 Proxy Voting 

influenced his or her vote can be difficult. If a plan fiduciary can provide 

his or her rationale for voting a certain way—proving that, in his or her 

opinion, proxies were voted solely in the interest of plan participants—it is 

very difficult for DOL or others to prove otherwise. Proving a fiduciary 

breach requires evidence that the plan fiduciary was influenced in the 

voting by something other than the interests of plan participants. Certain 

information—such as existing conflicts of interest between the plan 

fiduciary and some other influential party, the plan fiduciary’s own selfinterest, or the potential impact of certain votes, for instance—are 

important when trying to establish that such influence was acted upon. 

Absent this or similar information, leaks by informed parties—

whistleblowers—are likely to be the only way one might prove a breach 

actually occurred. 

Another challenge that DOL faces is that monetary damages are difficult to 

value and, therefore, penalties and other sanctions are difficult to impose. 

According to DOL, it is difficult to link a single proxy vote to damages to 

the plan participants. This is often the case because there are many 

economic variables that have an impact on share value. That is, underlying 

economic factors such as fiscal policy, monetary policy, unemployment, 

the threat of inflation, the global economy, and currency valuations are all 

major determinants of share value. Therefore, it is difficult to isolate the 

effect a single proxy vote may have had. Also, because of the potential for 

a vote to have a long-term rather than a short-term effect on share value, 

damages may not be immediately evident. 

In addition, while the research community and others have differing 

opinions about whether proxy votes have economic value, where it is 

believed that these votes do have a value, the determination of this value 

can be complicated. For example, in response to our written interview, 

most experts who responded to this question indicated that valuing proxy 

votes is a complex task, its difficulty dependent upon variables such as the 

issue being voted on and an entities’ governance structure. One 

respondent said that a case could possibly be made if a decline in the 

value of a company could be tied to the specific point in time when the 

plan fiduciary voted for a self-serving measure. However, the fiduciary’s 

vote would have to be significant enough to affect the outcome of the 

proxy contest. Using the Hewlett-Packard situation as an example, the 

respondent added that one cannot know what the value of HewlettPackard shares would have been if the merger had not gone through and 

thus one cannot calculate the difference between that value and the 

current value of the merged Hewlett-Packard/Compaq shares. 

Monetary Damages Are 

Difficult to Value and 

Penalties Are Difficult to 

Impose 
Page 25 GAO-04-749 Proxy Voting 

Additionally, others commented that, in the end, DeAM’s vote might not 

have affected the outcome of the proxy contest. 

With respect to penalties, unlike SEC, which has the authority to impose a 

penalty without first assessing and then securing monetary damages, DOL 

does not have such statutory authority and, as such, must assess penalties 

based on damages or, more specifically, the restoration of plan assets.30

Under Section 502(l), ERISA provides for a mandatory penalty (1) against 

a fiduciary who breaches a fiduciary duty under, or commits a violation of, 

Part 4 of Title I of ERISA or (2) against any other person who knowingly 

participates in such a breach or violation. This penalty is equal to 20 

percent of the “applicable recovery amount,” or any settlement agreed 

upon by the Secretary or ordered by a court to be paid in a judicial 

proceeding instituted by the Secretary. However, the applicable recovery 

amount cannot be determined if damages have not been valued. As we 

reported in 1994, this penalty can be assessed only against fiduciaries or 

knowing participants in a breach who, by court order or settlement 

agreement, restore plan assets.31 Therefore, if (1) there is no settlement 

agreement or court order or (2) someone other than a fiduciary or 

knowing participant returns plan assets, the penalty may not be assessed. 

Because DOL has never found a violation that resulted in monetary 

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

of a proxy voting investigation. 

As a result of challenges in the proxy voting system, DOL has devoted few 

resources to proxy voting over the last several years. Between 1988 and 

1996, DOL conducted three enforcement studies to determine the level of 

compliance with proxy voting requirements among select fiduciaries (see 

table 1). The first of these projects was initiated in May 1988,32 when the 

department looked at the management of plan votes from a broad range of 

investment managers, with a particular focus on certain contested issues 

considered at annual shareholders’ meetings in that year. Then in 1991, 

 30DOL can also seek removal of a fiduciary for breaches of fiduciary duty or seek other 

sanctions. 

31See U.S. General Accounting Office, Pension Plans: Stronger Labor ERISA Enforcement 

Should Better Protect Plan Participants, GAO/HEHS-94-157 (Washington, D.C.: August 8, 

1994). 

32Current U.S. Comptroller General David M. Walker was the Assistant Secretary of Labor 

for the PWBA from 1987 to 1989. The report was issued in March 1989. 

As a Result of Challenges, 

DOL Has Devoted Few 

Resources to Proxy Voting 

Issues 
Page 26 GAO-04-749 Proxy Voting 

DOL started its second project to determine how banks were fulfilling 

their responsibilities with respect to proxy voting practice. DOL looked at 

proxy voting procedures at 75 banks, covering the application of 

procedures during the 1989 or 1990 proxy season. Finally, during its last 

project, the department once again reviewed the practices of investment 

managers—12 in total—alongside 44 pension plans, with respect to 

corporate governance issues. It reviewed certain proxy votes at five 

annual shareholders’ meetings held in 1994 and general proxy voting 

polices and practices. According to DOL, overall the enforcement studies 

found that there were improvements in proxy voting practices as virtually 

all plans and investment managers in the studies voted their proxies. The 

enforcement studies also found that additional improvement is needed in 

the plans’ monitoring of investment managers to ensure that proxies are 

voted in accordance with stated policies. Furthermore, they found that 

although investment managers appear to have the records to enable clients 

to review managers’ decisions on proxy voting, few plan clients actually 

review the reports that are automatically provided to them. In the 

situations in which reports are available upon request, few plans request a 

copy. Given these findings, the department has not conducted similar 

reviews in recent years to determine current levels of compliance. DOL 

officials told us that they believe that proxy voters are generally in 

compliance, that they receive few complaints in this area, and that they 

focus most of their limited resources on other priority areas, which may 

result in identifying violations that can be corrected. 
Page 27 GAO-04-749 Proxy Voting 

Table 1: Summary of the Department of Labor’s Proxy Projects 

Years Project Scope Summary of findings 

1988 -1989 No. 1 General fiduciary compliance review of 

investment managers (IMs) with 

control over employee benefit plan 

assets subject to ERISA. 

Focused on certain contested issues 

considered at annual shareholders’ 

meetings in 1988. 

Not all investment managers who voted on behalf of employee 

benefit plans were delegated the authority to vote proxies. Instead, 

many managers assumed the duty of voting as part of their overall 

responsibilities. 

Not all managers had internal decision making procedures or written 

proxy voting guidelines in place when they voted proxies, and those 

that did often had a policy to simply vote with management. 

Managers often lacked accurate recordkeeping with regard to 

whether proxies had been received and voted. 

1991 - 1992a No. 2 Review of 75 banks’ proxy voting 

practices (covering the application of 

procedures during the 1989 or 1990 

proxy season only). 

Many banks lacked a policy that addressed the maintenance and 

retention of proxy voting records or related materials’. 

Several banks had policies to abstain from voting or not vote on 

certain issues. 

Many banks followed the “Wall Street Rule,” giving the proxy to 

management of the company or selling the shares of stock. 

1994 - 1996 No. 3 Review of practices of 12 IMs and 44 

pension plans with respect to 

corporate governance issues covered 

by Interpretive Bulletin 94-2. 

Focused on certain proxy votes at five 

annual shareholders’ meetings held in 

1994 and the general polices and 

practices with respect to proxy voting. 

Most plans delegated the authority to vote proxies to an IMs via 

written agreement. 

Most IMs received written proxy voting policies from their clients, but 

on an irregularly basis. 

Fourteen of 44 plans reviewed submitted proxy voting guidelines to 

their IMs; over half had no proxy guidelines; and 7 retained the 

authority to vote proxies. 

The content of the guidelines were mixed—some general, some 

quite detailed. 

All IMs tracked proxy-related items and kept written documentation 

justifying votes cast; most had written procedures to report votes to 

clients, but few did so automatically. 

Most plans did not monitor proxy voting by their IMs, about 35 

percent appeared to have performed substantive monitoring of IMs. 

Source: DOL Proxy Project Report, March 2, 1989; Speech by David George Ball, Assistant Secretary, Pension and Welfare Benefits

Administration, February 17, 1992; Proxy Project Report, February 23, 1996. 

a

Results of the second proxy project were not released in a formal report. 

DOL officials said that they typically do not conduct specific investigations 

focused on proxy voting, and they allocate few resources to this issue. 

They, instead, focus its limited resources according to their Strategic 

Enforcement Plan.33 However, proxy voting practices may be examined 

 33The primary purpose of the Strategic Enforcement Plan is to establish a general 

framework through which EBSA’s enforcement resources may be efficiently and effectively 

focused to achieve the agency’s policy and operational objectives. 
Page 28 GAO-04-749 Proxy Voting 

during their investigations of investment managers. DOL said that its 

investment management investigative guide has steps for reviewing proxy 

voting, but the investigators have discretion whether to review proxy 

voting practices. According to DOL officials, investigators receive training 

on the general fiduciary obligations of named fiduciaries and investment 

managers with respect to the voting of proxies on plan-owned stock. 

When asked how often these reviews included the examination of proxy 

voting, DOL officials responded that this information is not tracked. 

Some plan fiduciaries and industry experts that we interviewed have 

indicated that DOL lacks visibility as an enforcement agent in this area. 

For example, some experts said that DOL’s examination of proxy voting 

practices does not seem to occur routinely and that it is not clear what 

enforcement action DOL has taken in recent years related to proxy voting. 

Additionally, others have described an environment that provides little 

incentive to do what is best for participants, indicating that fiduciaries 

have no expectation that DOL will take action should they breach their 

proxy voting responsibilities. One DOL official said that the department 

has made its position on proxy voting known and issued clear guidance on 

what is required of fiduciaries. Also, given its limited statutory authority 

and resources, the department has a strategic enforcement plan, and based 

on this plan, they place their limited resources in areas that will result in 

identifying violations that can be corrected.34

The retirement security of pension plan participants is dependent on 

decisions made each day in the market place by pension plan fiduciaries. 

DOL guidance requires fiduciaries to cast proxy votes solely in the interest 

of plan participants and beneficiaries. While ERISA requires that voting 

guidelines be made available to participants upon request, ERISA does not 

require disclosure of proxy votes to participants and the public. Increased 

transparency of both proxy guidelines and votes could provide 

participants and others with information needed to monitor actions that 

affect retirement assets. Nor does ERISA require, as current SEC 

 34For example, in the area of tender offers, the Polaroid ESOP (or NationsBank) case was a 

major enforcement action brought by DOL in a case where DOL was able to show losses to 

the plan for fiduciary breach involving a failure properly to exercise shareholder rights (in 

that case, a failure to tender shares). See Harman v. NationsBank Trust Co. (Georgia) 

N.A., 126 F.3d 1354 (11th Cir. 1997), reh’g denied, 135 F.3d 1409 (11th Cir.), cert. denied, 525 

U.S. 816 (1998). Another enforcement action involving fiduciaries’ misuse of shareholder 

powers was Martin v. Feilen, 965 F.2d 660 (8th Cir. 1992), cert. denied, 506 U.S.1054 (1993) 

(involving, in part, failure of plan fiduciaries to bring a shareholder derivative action). 

Conclusions 
Page 29 GAO-04-749 Proxy Voting 

regulations do for mutual fund investment companies and investment 

advisers, that plans include in their guidelines language regarding what 

actions fiduciaries will take to respond to conflicts of interest. However, 

some plan fiduciaries have taken actions to manage conflicts of interest, 

including maintaining proxy voting guidelines and disclosing votes. 

Likewise, a few plan sponsors have hired independent fiduciaries to 

manage company stock in their pension plans. 

DOL’s role in enforcing ERISA’s fiduciary provisions, including proxy 

voting requirements, is essential to ensuring that plan fiduciaries are 

voting solely in the interest of plan participants and beneficiaries. Yet, 

DOL has faced a number of enforcement challenges, including legal 

requirements restricting its ability to assess penalties under ERISA. 

Furthermore, DOL officials said that the agency does not have the 

statutory authority to require plan fiduciaries to periodically and publicly 

disclose proxy votes and guidelines. SEC, because of its role in protecting 

all investors, including those in participant-directed retirement savings 

plans, has taken steps to increase transparency in the mutual fund 

industry. DOL’s inability to take similar steps with respect to pension plan 

fiduciaries may provide inappropriate incentives for fiduciaries not to act 

solely in the interest of plan participants when voting proxies. 

Furthermore, given both DOL and SEC goals to protect plan participants 

as investors, coordination of their efforts to achieve this goal is important. 

If the Congress wishes to better protect the interest of plan participants 

and increase the transparency of proxy voting practices by plan 

fiduciaries, it should amend ERISA to require that plan fiduciaries 

• develop and maintain written proxy-voting guidelines; 

• include language in voting guidelines on what actions the fiduciaries 

will take in the event of a conflict of interest; and 

• given SEC’s proxy vote disclosure requirements for mutual funds, 

annually disclose votes as well as voting guidelines to plan participants, 

beneficiaries, and possibly also to the public. From a practical 

perspective, this disclosure could apply to all votes, but at a minimum, 

it should include those votes that may affect the value of the shares in 

the plan’s portfolio. Such disclosures could be made electronically on 

the applicable Website. Since many plans often use multiple fiduciaries 

for voting proxies, the plan also could provide participants and others 

directions on how voting records by the various fiduciaries could be 

Matters for 

Congressional 

Consideration 
Page 30 GAO-04-749 Proxy Voting 

obtained. We believe that Congress should assure that participants 

have the right to request proxy voting records at least annually, 

consistent with their current right to request other plan documents. 

Congress should also consider amending ERISA to give the Secretary of 

Labor the authority to assess monetary penalties against fiduciaries for 

failure to comply with applicable requirements. 

Finally, Congress should consider amending ERISA to require that, at a 

minimum, an independent fiduciary be used when the fiduciary is required 

to cast a proxy vote on contested issues or make tender offer decisions in 

connection with company stock held in the company’s own pension plan. 

In our view, this independent fiduciary requirement would not affect votes 

by a participant in an eligible individual account plan. 

To improve oversight and enforcement of proxy voting, we recommend 

that the Secretary of Labor direct the Assistant Secretary of EBSA to 

increase the Department’s visibility in this area by 

• conducting another enforcement study and/or taking other appropriate 

action to more regularly assess the level of compliance by plan 

fiduciaries and external asset managers with proxy voting 

requirements. Such action should include examining votes, supporting 

analysis, and guidelines to determine whether fiduciaries are voting 

solely in the interest of participants and beneficiaries, and 

• enhancing coordination of enforcement strategies in this area with 

SEC. 

We provided a draft of this report to DOL and SEC for their review and 

comment. DOL's comments are included in appendix II; SEC did not 

provide written comments. Both agencies provided technical comments, 

which we have incorporated as appropriate. In its response to our draft 

report, DOL generally disagreed with our matters for congressional 

consideration and recommendations, saying that conflicts of interest 

affecting pension plans are not unique to proxy voting and that requiring 

independent fiduciaries and increased disclosures would increase costs 

and discourage plan formation. DOL also said that the enforcement studies 

of proxy voting practices undertaken previously by the department 

provide an adequate measure of compliance in this area and, therefore, to 

undertake new such studies, with an expectation of finding no significant 

level of noncompliance, would be an inappropriate use of resources. 

Recommendations for 

Executive Action 

Agency Comments 

and Our Evaluation 
Page 31 GAO-04-749 Proxy Voting 

Our recommendations and matters for congressional consideration are 

predicated on two principles: additional transparency and enhanced 

enforcement presence. We believe that disclosing pension plans' proxy 

voting guidelines and votes makes it more likely that votes will be cast 

solely in the interest of plan participants, and that a visible enforcement 

presence by DOL helps to reinforce the public interest in this result. So 

although we agree with certain of DOL's points, we cannot agree that 

additional transparency and an enhanced enforcement presence would not 

be beneficial. Furthermore, because DOL believes that it does not have the 

authority to require proxy voting guidelines and disclosure of votes, and, 

in our view, it is important to shed more light on events such as proxy 

voting---particularly contested proxy votes---we believe Congress should 

consider amending ERISA to include such requirements. 

We acknowledge that plan fiduciaries face conflicts beyond proxy voting 

and that conflicts associated with casting a proxy vote may be no greater 

than the potential for conflicts in making other fiduciary decisions. 

However, our work and, therefore, our recommendations are focused on 

issues related to proxy voting. Furthermore, we found that DOL’s 

enforcement in this area has been limited, which may not be the case in its 

oversight of other fiduciary actions. For example, tender offer decisions 

made by fiduciaries may suffer from similar conflicts. DOL, however, has 

been able to develop investigative cases and secure positive results for 

plan participants and beneficiaries in connection with this area. However, 

DOL has not been similarly successful in developing proxy voting cases. 

Given that plan participants may be particularly vulnerable when internal 

fiduciaries vote employer stock held in the plan sponsor’s s own pension 

plan, we believe it is an appropriate safeguard to require an independent 

fiduciary be appointed to vote these proxies. We are recommending 

independent fiduciaries for certain circumstances. Furthermore, in our 

view, this independent fiduciary requirement would not affect votes by a 

participant in an eligible individual account plan. 

In disagreeing with our recommendation that Congress consider amending 

ERISA to require that an independent fiduciary be used to vote proxies for 

employer stock held in a plan sponsor’s own pension plan, DOL said that 

the Congress already considered, but did not include, an independence 

requirement for plan fiduciaries when it passed ERISA in 1974. We 

acknowledge that Congress did not require independent fiduciaries when 

it originally enacted ERISA. However, the conflicts of interest associated 

with plan holdings of company stock have received increased public 

attention in the last several years, and we believe the Congress should 
Page 32 GAO-04-749 Proxy Voting 

reconsider ERISA’s current legal requirements in connection with 

company stock. 

In response to our recommendation that DOL conduct another 

enforcement study to determine the level of compliance with proxy voting 

requirements, DOL said that it has seen no evidence of a negative change 

in the level of compliance and that another proxy enforcement study 

would absorb a considerable amount of resources. Rather than conducting 

another proxy enforcement study, DOL said that it would evaluate proxy 

voting information during its investigations in the financial services area. 

As we discuss in our report, limited statutory authority and other 

challenges are obstacles to effective DOL enforcement in this area. 

Furthermore, we understand that DOL must balance efforts in this area 

with other enforcement priorities. The statutory changes we have 

suggested, if enacted, may help DOL’s enforcement efforts in the future. 

Nonetheless, even with such changes, we believe that conducting reviews 

of proxy voting issues on a periodic basis is important to ensure 

compliance and increase DOL’s presence and visibility in this area. We 

acknowledge that conducting another enforcement study is just one of 

various options available to DOL to accomplish these goals and have 

altered our recommendation to be explicit on this point. However, in our 

view, any review in this area should go beyond simply determining 

whether fiduciaries cast proxy votes, and should include assessing 

whether plans are monitoring proxy voting practices by external 

investment managers and evaluating whether fiduciaries voted solely in 

the interest of plan participants and beneficiaries. 

Regarding our matter for congressional consideration that plan fiduciaries 

be required to disclose proxy voting guidelines and votes, at a minimum, 

to plan participants, DOL noted that appropriate plan fiduciaries are 

required to monitor proxy voting information and that proxy voting 

guidelines are available to participants upon request. DOL further said that 

requiring disclosure to the general public or even to all participants would 

significantly increase costs to plans. Recognizing that ERISA’s disclosure 

requirements are focused on plan participants and beneficiaries, not the 

general public, we modified our matter for congressional consideration to 

state that proxy guidelines and votes should at a minimum be disclosed to 

participants and beneficiaries. Our report addressed concerns about the 

potential costs of disclosing proxy voting guidelines and votes by 

suggesting that such information could be made available electronically. 
Page 33 GAO-04-749 Proxy Voting 

Unless you publicly announce its contents earlier, we plan no further 

distribution until 30 days after the date of this report. At that time, we will 

send copies of this report to the Secretary of Labor, the Chairman of the 

Securities and Exchange Commission, appropriate congressional 

committees, and other interested parties. We will also make copies 

available to others on request. In addition, the report will be available at 

no charge on GAO’s Web site at http://www.gao.gov. 

If you have any questions concerning this report, please contact me at 

(202) 512-7215 or George Scott at (202) 512-5932. See appendix III for 

other contributors to this report. 

Sincerely yours, 

Barbara D. Bovbjerg 

Director, Education, Workforce, 

 and Income Security Issues 
Appendix I: Scope and Methodology 

Page 34 GAO-04-749 Proxy Voting 

To determine what conflicts exist in the proxy voting system and the 

extent to which fiduciary breaches occur as a result of these conflicts, we 

interviewed officials at the Department of Labor’s Employee Benefits and 

Security Administration (DOL) and at the Securities and Exchange 

Commission (SEC). Using a standard set of questions, we conducted 

interviews with proxy voting experts, academics, economists, and 

Employee Retirement Income Security Act (ERISA) attorneys. We also 

interviewed various proxy voting experts which include academics, ERISA 

lawyers, industry experts, pension plan sponsors, asset managers, proxy 

voting firm representatives, proxy soliciting companies, and plan 

practitioners. These experts were, in part, selected from news articles 

involving abuses in the mutual fund industry, from news reports regarding 

corporate scandals such as Enron, from reported highly contested proxy 

contests, from historical articles dated back to the proxy scandals in the 

1980s and 1990s, and from recent reports in the news and SEC’s Web site 

pertaining to SEC’s proxy voting disclosure proposals. Experts were also 

selected based on published research on proxy voting, based on 

discussions with plan sponsors and industry experts, congressional 

testimony, and Congressional Research Service reports. 

To determine what safeguards fiduciaries have put in place to protect 

against breaches, we interviewed a number of public and private pension 

plan sponsors, asset managers, proxy voting firm representatives, and 

other experts. These public and private pension plans were selected for 

their promising practices based on discussions with industry experts, from 

pension industry publications and other published reports of the corporate 

governance practices of these plans. To explore the practices of internally 

managed plans, we interviewed various proxy voting experts and 

interviewed officials of the plans listed in the Pensions and Investments 

with internally managed assets. 

To determine DOL’s enforcement of proxy voting requirements, we 

interviewed officials at EBSA and reviewed DOL enforcement material and 

previously issued GAO reports on DOL’s enforcement program. 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 35 GAO-04-749 Proxy Voting 

To determine the extent to which private pension plans invested in their 

own employer securities, we obtained the total value of the employer 

stock in the company’s pension and welfare benefit plans. To do so, we 

analyzed plan financial information filed annually (Form 5500s) with the 

Internal Revenue Service and EBSA. The Form 5500 report is required to 

be submitted annually by the administrator or sponsor for any employee 

benefit plan subject to ERISA as well as for certain employers maintaining 

a fringe benefit plan. The report contains various schedules with 

information on the financial condition and operation of the plan. The total 

value of employer shares information is provided on either schedule H or 

schedule I depending on the number of participants covered by the plan. 

EBSA provided us with a copy of the 2001 electronic Form 5500 database 

for our analysis.1

 We assessed the reliability of these data for our purposes 

by evaluating the electronic records selected for analysis for outliers, 

duplicate records, and otherwise inappropriate values. Form 5500 records 

that did not meet our review standards were eliminated from our analysis. 

We decided to focus our analysis of companies with Form 5500 data to 

those corporations listed in the Fortune 500.2

 To do so, we matched each 

Fortune 5003

 company to their pension plans on the basis of their 

Employer Identification Numbers (EINs).4

We used several methods to identify EINs associated with each 

corporation. We started with a list of EINs for Fortune 500 companies that 

was purchased from Compustat (a database from Standard & Poors). To 

 1

Plan year 2001 is the most recent year for which plan-specific Form 5500 data were 

available for our review. 

2

Fortune 500 companies are those representing the 500 largest corporations that are based 

in the United States, ranked in order of revenues. The Fortune 500 list is released annually 

in April. The rankings are based on reported revenues in corporate annual reports (10Ks) 

filed in the year leading up to January 31. Therefore, only public corporations and private 

corporations that voluntarily release a 10K are included. For example, the April 2004 

Fortune 500 list is based on revenues reported between February 1, 2003, and January 31, 

2004. 

3

Not all 500 companies were included in our analysis. For example, some companies on the 

Fortune 500 are privately owned and, therefore, don’t have publicly traded stock. 

Furthermore, there are a handful of companies that were on the Fortune 500 in 2001 but 

have since gone bankrupt, or are no longer public. This often made it difficult to find the 

appropriate data for those companies and when that was the case, they were eliminated 

from the analysis. 

4

An EIN, known as a federal tax identification number, is a nine-digit number that the 

Internal Revenue Service assigns to organizations. 

Obtaining Total 

Number of Employer 

Securities Held in the 

Company’s Own 

Pension and Welfare 

Benefit Plans 
Appendix I: Scope and Methodology 

Page 36 GAO-04-749 Proxy Voting 

identify the EINs for the remaining companies, we searched the 10K 

annual filing statement for each relevant company. We then searched 

those companies whose Form 5500s reported that they held their own 

employer securities at the year’s plan end year date.5

 This resulted in a 

database for filing year 2001 containing the information of 490 

Form 5500 returns filed by 272 of the Fortune 500 companies. 

To analyze the total voting power of those 272 Fortune 500 companies on 

our list for plan year 2001, we obtained the proxy statements filed with 

SEC as form 14-A DEF for those companies. Form 14-A DEF statements 

are the final annual proxy statements sent to all shareholders of a 

corporation that detail all the issues that are to be voted on. The 

statements also list the number of shares entitled to vote on the proxy 

issues and, where applicable, the number of votes per share (e.g., some 

companies might issue different classes of preferred stock which entitle 

the owner to more than one vote per share). For each company, we 

multiplied the number of shares outstanding for each class of share by the 

number of votes entitled to that class and added up those figures for all 

classes of shares to get a reflection of total number of shareholder votes. 

We used data from the 14-A DEF statements filed as soon after the end of 

calendar year 2001, which was typically in the spring of 2002. 

We also obtained share price data from the New York Stock Exchange’s 

(NYSE) Trade and Quote (TAQ) database. We used that database to obtain 

the closing price (the price of the last transaction of the day) on the day 

indicated as the plan end of year date from the Form 5500 for each 

company. The TAQ database contains a listing of intraday transactions 

(including shares involved and the price) for all companies listed on the 

NYSE, the National Securities Dealers Stock Exchange (NASDAQ) and the 

American Stock Exchange (AMEX). To ensure the reliability of the TAQ 

price date, GAO economists previously conducted a random crosscheck of 

 5

Additionally, we included the employer securities held by master trust investment 

accounts associated with Fortune 500 benefit plans. A ‘‘master trust’’ is a trust in which 

assets of more than one plan sponsored by a single employer or by a group of employers 

under common control are held. In such cases, a benefit plan reports the value of its 

interest in the master trust account and not any employer securities held by the master 

trust. Accordingly, we included employer securities reported by master trusts accounts 

held by Fortune 500 benefit plans. 

Obtaining the Total 

Number of Shares 

Outstanding for 

Selected Fortune 500 

Companies 

Obtaining the Closing 

Price for Our Fortune 

500 Companies 
Appendix I: Scope and Methodology 

Page 37 GAO-04-749 Proxy Voting 

the TAQ data with data provided by NADAQ, Yahoo! Finance, and other 

publicly available stock data sources. 

From the 5500 data, we obtained the total value at yearend for company 

stock holdings by corporations in their pension and welfare benefit plans. 

From the TAQ database, we obtained the closing price of the stock on the 

plan yearend date. We then divided the closing price of the stock into the 

total value at yearend to get a number of voting shares held in the 

company’s pension and welfare benefit plans.6

We then divided the total votes outstanding (i.e., total number of votes 

based on available classes of stock for each of our Fortune 500 

companies) by the number of votes controlled by the pension plan to 

obtain the voting power, or the percentage of votes controlled by the 

company’s pension and welfare benefit plans. 

 6

We assumed that those shares held by the company and its pension plan(s) are common 

stock with one vote per share for computation of voting power. To the extent that 

assumption is inaccurate, our estimates for the voting power of plans in their own company 

might also be inaccurate. 

Computing the 

Number of Voting 

Shares Held in 

Fortune 500 Company 

Pension and Welfare 

Benefit Plans 
Appendix II: Comments from the Department 

of Labor 

Page 38 GAO-04-749 Proxy Voting 

Appendix II: Comments from the Department 

of Labor 
Appendix II: Comments from the Department 

of Labor 

Page 39 GAO-04-749 Proxy Voting 
Appendix III: GAO Contacts and Staff 

Acknowledgments 

Page 40 GAO-04-749 Proxy Voting 

George A. Scott, Assistant Director (202) 512-5932 

Kimberley M. Granger, Senior Economist and Analyst-in-Charge 

(202) 512-3708 

Other major contributors include Gwendolyn Adelekun, Matthew 

Rosenberg, Gene Kuehneman, Lawrance Evans, Alison Bonebrake, Derald 

Seid, Corinna Nicolaou, Michael Maslowski, Roger J. Thomas, Richard 

Burkard, and Kenneth J. Bombara. 

Appendix III: GAO Contacts and Staff 

Acknowledgments 

Contacts 

Staff 

Acknowledgments 

(130243) 
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