Institute for Pension Fund Integrity advisory board members and former pension fund officials have submitted comment letters on a proposed regulation by the Department of Labor concerning the role of proxy advisory firms in ERISA pension investment. If it is put into place, the rule would have a significant impact on the reach of proxy voting, the power that proxy advisory firms have on pension investment decisions, and the extent to which politicized decision making has undermined the fiduciary obligations of pension fund managers.
Coming in the wake of the Department’s recent proposed rule on environmental, social, and governance (ESG) investments, as well as guidance from the Securities and Exchange Commission, this new rule reinforces the principle that fiduciaries can consider proxy decisions based only on economic considerations and not on “unrelated objectives.” The proposal rightly also takes aim at the costs of the proxy advisory decision process – costs that are ultimately borne by the ERISA pension beneficiaries.
IPFI President and former Connecticut State Treasurer Christopher Burnham states in his letter that “One of the most significant aspects of the proposed rule is the fact that plan fiduciaries will no longer have to vote on all proxy matters – specifically, that ‘fiduciaries must not vote in circumstances where plan assets would be expended on shareholder engagement activities that do not have an economic impact on the plan.’ … 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.”
IPFI Advisory Board member and former Ohio State Treasurer Ken Blackwell notes that “The proposed rule seeks to address the outsized roles that proxy advisory firms have in investment decisions and examine whether their recommendations are always economically beneficial to pensioners. The proxy system has long been taken advantage of by those without fiduciary responsibilities, preventing sound advice from reaching the nation’s pension and investment funds and retail shareholders.”
Beyond the scope of the proposed rule, IPFI believes that more action should be taken to address the outstanding issue of robo-voting and the negative impact that it has had for pension beneficiaries – the process by which asset managers and other investors automatically vote in line with the recommendations provided to them by proxy advisory firms. While many major institutional investors do spend considerable resources evaluating proposals from management and shareholders, this is certainly not the case overall. An overwhelming number of fund managers have outsourced the oversight and decision-making process to proxy advisors. Specifically, IPFI’s board members recommended that the Department of Labor prohibit robo-voting in controversial and contested matters or for ESG-related shareholders proposals that do not prioritize pecuniary objectives for pension beneficiaries.
Board member and former New York State AFL CIO Board Vice President Richard Brower notes that “one powerful option could be to place stronger limits on robo-voting in instances where there is a contested proxy firm recommendation…If there is no contestation, proxy voting may go forward unimpeded. Ultimately, the goal should be to provide pension beneficiaries with all of the insight they need into how their money is managed, while simultaneously finding avenues for cost-savings when available.”
The Institute for Pension Fund Integrity believes that ERISA standards must be modernized in order to set in stone the underlying fiduciary principles that have been the cornerstone of responsible pension management. While individual investors, endowments, and corporations should be free to pursue whatever investment strategy they see fit based on their needs, the unique nature of pension funds requires that fund managers steer clear of any political agenda.
The Department of Labor should be applauded for taking this necessary step toward clarifying and correcting guidance on the fiduciary obligations of pension fund managers as far as their relationship with proxy advisory firms is concerned, and it is our hope that leaders in business, finance, and public policy will voice their support for this initiative.
Click here to read the comment letter by IPFI President and former Connecticut State Treasurer Christopher Burnham.
Click here to read the comment letter by IPFI Advisory Board member and former Ohio State Treasurer Ken Blackwell.
Click here to read the comment letter by IPFI Advisory Board member and former New York State AFL CIO Board Vice President Richard Brower.