Today the Department of Labor took a much-needed step toward ensuring positive, long-overdue reforms to the role that proxy advisory firms play in ERISA-backed pension fund management through their finalized rule titled, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”
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Following the rule’s release, Chris Burnham of the Institute for Pension Fund Integrity said, “this rule rightly reaffirms the fiduciary obligations that ERISA-backed pension fund managers owe to their beneficiaries and puts forward much needed reforms in an industry that for too long has neglected to serve the best interest of pensioners. Reforms to the current proxy advisory system were needed because decision making has increasingly become subject to political pressure and personal influence.”
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At the Institute for Pension Fund Integrity, we have held grave concerns over the outsized role played by proxy advisory firms in the investment decisions of pension fund managers, as well as the degree to which these decisions have veered away from the principal of fiduciary duty and a strict duty of loyalty and care to the beneficiaries from whom their hard-earned retirement savings have been entrusted.
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The two largest proxy advisory companies, Institutional Shareholder Services (ISS) and Glass Lewis, comprise a duopoly in the market. It appears to us their recommendations have moved from a strict duty of loyalty and care to one of making political-based decisions, increasingly under the guise of “ESG” considerations that certainly have an essential role in the board room, but used as a political tool in their recommendations, clearly violate fiduciary duty. Furthermore, the rise of “robo-voting,” under which asset managers, pension fund managers, and other investors automatically vote the proxy advisors’ recommendations without scrutiny, has undercut transparency and accountability in the system.
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“The rule curbs the practice of automatic voting and specifies that plan fiduciaries are no longer required to vote on all proxy matters. Perhaps most prominently, the scope of proxy voting would be narrowed so that fund fiduciaries could cast proxy votes only when they would have an economic impact on the retirement plan” Burnham said. “These are important steps toward ensuring that fund managers must solely consider factors affecting the value of a plan’s investment.”
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Beyond the re-emphasis on fiduciary duty inherent in this rule, it puts a much-needed focus on the overall costs associated with these proxy decisions. For pension beneficiaries, especially those in smaller plans who may lack the resources to pour into evaluating every proxy firm recommendation, the added convenience and lower costs stemming from this reform cannot be underestimated.
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Workers throughout the country rely on their pensions to provide a secure retirement for them and their families. All that can be done should be done to help protect and grow these stable sources of retirement funding. We applaud the Department of Labor on this much-needed rule to provide ERISA-backed pension fund beneficiaries with the transparency, accountability, and loyalty they need and deserve.