Apparently concerned that its previous guidance on the matter of social investing hadn’t been sufficient to overcome fiduciary resistance, the Labor Department has issued new guidance on the matter.

The guidance was broader than that, of course – the DOL’s “Interpretive Bulletin Relating to the Exercise of Shareholder Rights and Written Statements of Investment Policy, including Proxy Voting Policies or Guidelines” was intended to clarify the agency’s “longstanding position is that the fiduciary act of managing plan assets which are shares of corporate stock includes decisions on the voting of proxies and other exercises of shareholder rights.”

Missed Understandings?

In its latest Interpretative Bulletin, the Labor Department said that it was concerned that in the eight years since its publication, the changes made to the initial Interpretative Bulleting on the subject (IB 94-2) by IB 2008-2 “have been misunderstood and may have worked to discourage ERISA plan fiduciaries who are responsible for the management of shares of corporate stock from voting.” In particular, the DOL said it was “concerned that IB 2008-2 has been read by some stakeholders to articulate a general rule that broadly prohibits ERISA plans from exercising shareholder rights, including voting of proxies, unless the plan has performed a cost-benefit analysis and concluded in the case of each particular proxy vote or exercise of shareholder rights that the action is more likely than not to result in a quantifiable increase in the economic value of the plan’s investment.”

Additionally, on the same day in 2008, the DOL issued Interpretive Bulletin 2008-1 (IB 2008-1) to update Interpretive Bulletin 94-1 (IB 94-1), which addressed issues regarding fiduciary consideration of investments and investment strategies that take into account environmental, social and governance (ESG) factors. And in the newest IB, the Labor Department acknowledged an additional concern that “despite the guidance on ESG issues the Department recently provided in IB 2015-1, statements in IB 2008-2 may cause confusion as to whether or how a plan fiduciary may consider ESG issues in connection with proxy voting or undertaking other shareholder engagement activities.”

Out of Step?

More specifically, in the newest IB, the Labor Department said that it was concerned that the changes to IB 94-2 in IB 2008-2 are “out of step with important domestic and international trends in investment management and have the potential to dissuade ERISA fiduciaries from exercising shareholder rights, including the voting of proxies, in areas that are increasingly being recognized as important to long-term shareholder value.” In response, the Labor Department decided to withdraw IB 2008-2 and replace it with Interpretive Bulletin 2016-1 which it said reinstates the language of IB 94-2 with minor updates.

In the IB, the Labor Department notes that fiduciaries may engage in other shareholder activities “intended to monitor or influence corporate management where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after taking into account the costs involved.” The bulletin observed that active monitoring and communication may be carried out through a variety of methods including by means of correspondence and meetings with corporate management as well as by exercising the legal rights of a shareholder.

Enhancing Value

While the DOL noted that ERISA does not permit fiduciaries to subordinate the economic interests of participants and beneficiaries to unrelated objectives in voting proxies or in exercising other shareholder rights, it pointed out that a reasonable expectation of enhancing the value of the plan’s investment through shareholder activities may exist in various circumstances, for example, where plan investments in corporate stock are held as long-term investments or where a plan may not be able to easily dispose of those investments.

Matters falling within the categories of “active monitoring and communication activities” would include things like governance structures and practices, particularly those involving board composition, executive compensation, transparency and accountability in corporate decision-making, responsiveness to shareholders, the corporation’s policy regarding mergers and acquisitions, the extent of debt financing and capitalization, the nature of long-term business plans including plans on climate change preparedness and sustainability, governance and compliance policies and practices for avoiding criminal liability and ensuring employees comply with applicable laws and regulations, the corporation’s workforce practices (e.g., investment in training to develop its work force, diversity, equal employment opportunity), policies and practices to address environmental or social factors that have an impact on shareholder value, and other financial and non-financial measures of corporate performance.


The IB notes that compliance with the duty to monitor necessitates proper documentation of the activities that are subject to monitoring, and that in turn means that the investment manager or other fiduciary responsible for voting would be required to maintain accurate records as to proxy voting, and that those voting records must enable the named fiduciary to review not only the investment manager’s voting procedure with respect to plan-owned stock, but also to review the actions taken in individual proxy voting situations.

For plans that have an investment policy, the IB notes that a “statement of proxy voting policy would be an important part of any comprehensive statement of investment policy,” specifically a written statement that “provides the fiduciaries who are responsible for plan investments with guidelines or general instructions concerning various types or categories of investment management decisions, which may include proxy voting decisions as well as policies concerning economically targeted investments or incorporating environmental, social or governance (ESG) factors in investment policy statements or integrating ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among equivalent investments.”

Source: Napa Net