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. Business Relationships and Limited Disclosure of Votes Can Make Proxy Voting Vulnerable to Conflicts

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. 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. 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. 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. As a result, proxy voters have clear direction on how to vote  on a specific voting issue. Some Fiduciaries Have Voluntarily Taken Additional Steps to Manage Conflicts of Interest

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. In other cases,  some fiduciaries use independent proxy-voting firms for research and  analysis or to cast proxy votes on their behalf. 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. 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. Because a plan fiduciary’s vote requires judgment, determining what  influenced his or her vote can be difficult. Proving a fiduciary  breach requires evidence that the plan fiduciary was influenced in the  voting by something other than the interests of plan participants. 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. Matters for Congressional Consideration

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.
Why GAO Did This Study

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.

What GAO Found

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.