Pension Plans: Additional Transparency and Other Actions Needed in Connection with Proxy Voting
Published: 2004-08-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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 benefit or defined contribution 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. 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  voting rights, fiduciaries are required to cast votes solely in the interest of  plan participants and beneficiaries.
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-to- face 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  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.
subsections: section_title: Background
paragraphs: 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,  which may have influenced the proxy voter’s vote cast by DeAM about a  merger between HP and Compaq Computer Corporation.
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. 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  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.
section_title: Business Relationships and Limited Disclosure of Votes Can Make Proxy Voting Vulnerable to Conflicts
paragraphs: 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.
subsections: section_title: Fiduciary’s Business Associations Can Create Conflicts of Interest
paragraphs: 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, 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  accordance with the wishes of the company’s senior management. 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.
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. 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.
Because company management could influence the fiduciary responsible  for voting the proxies related to the company’s own stock, management  may have a significant amount of influence over the outcome of a proxy  contest. 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 plans 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.
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  voting the proxies on the HP stock owned by its advisory clients without  first disclosing the conflict.
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.
section_title: Limited Disclosure May Make Proxy Voting Vulnerable to Conflicts of Interest
paragraphs: 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. Fiduciaries are not required to publicly  disclose proxy voting guidelines and votes, though the plan would be  required to make any written proxy voting guidelines available to  participants upon request. 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. 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  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. 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 advisers exercising proxy  voting authority over client securities adopt and implement proxy voting  policies and procedures for voting clients’ proxies. 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  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. 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.  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.
section_title: Some Plan Fiduciaries Have Taken Actions to Manage Conflicts
paragraphs: 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.
subsections: section_title: Some Fiduciaries Have Developed Detailed Proxy- Voting Guidelines to Manage Conflicts
paragraphs: 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.
Detailed guidelines reduce ambiguity in the proxy voting process by  providing direction to help fiduciaries determine how to vote. For  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  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.
section_title: Some Fiduciaries Disclose Proxy Votes, Providing Greater Incentive to Vote Appropriately
paragraphs: 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. 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  disclosure, stated that the overall costs of disclosure are reasonable. 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. 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  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.
section_title: Some Fiduciaries Have Voluntarily Taken Additional Steps to Manage Conflicts of Interest
paragraphs: 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  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.
section_title: The Department of Labor’s Related Enforcement Efforts Have Been Limited
paragraphs: 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.  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.
subsections: section_title: Identifying and Proving Breaches in the Proxy Voting System Is Difficult
paragraphs: 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. DOL also uses the Annual  Returns/Reports of Employee Benefit Plans (Form 5500 Returns) to  identify potential issues for investigation. 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  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 self- interest, 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.
section_title: Monetary Damages Are Difficult to Value and Penalties Are Difficult to Impose
paragraphs: 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 Hewlett- Packard 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.
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.  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. 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.
section_title: As a Result of Challenges, DOL Has Devoted Few Resources to Proxy Voting Issues
paragraphs: 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, 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,  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.
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. However, proxy voting practices may be examined  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.
section_title: Conclusions
paragraphs: 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  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.
section_title: Matters for Congressional Consideration
paragraphs: 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  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.
section_title: Recommendations for Executive Action
paragraphs: 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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
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  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.
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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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.
subsections: section_title: Obtaining Total Number of Employer Securities Held in the Company’s Own Pension and Welfare Benefit Plans
paragraphs: 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. 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. To do so, we matched each  Fortune 500 company to their pension plans on the basis of their  Employer Identification Numbers (EINs).
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  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. 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.
section_title: Obtaining the Total Number of Shares Outstanding for Selected Fortune 500 Companies
paragraphs: 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.
section_title: Obtaining the Closing Price for Our Fortune 500 Companies
paragraphs: 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  the TAQ data with data provided by NADAQ, Yahoo! Finance, and other  publicly available stock data sources.
section_title: Computing the Number of Voting Shares Held in Fortune 500 Company Pension and Welfare Benefit Plans
paragraphs: 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.
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.
section_title: Appendix II: Comments from the Department of Labor
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: Contacts
section_title: Staff Acknowledgments
paragraphs: 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.