Compliance December 29, 2016

DOL Updates Guidance on Proxy Voting by Benefits Plans

The update is aimed at clarifying what the law requires of fiduciaries in regards to proxy voting and shareholder engagement in employee benefits plans.
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The Department of Labor (DOL)’s Employee Benefits Security Administration (EBSA) has updated guidance for plan fiduciaries in regards to proxy voting by employee benefits plans. The DOL released Interpretive Bulletin 2016-01. This withdraws IB 2008-2 and reinstates earlier guidance related to such proxy voting. It also comes with specific updates aimed at clarifying what the law requires of plan fiduciaries.

Employee benefits plans often have large shares in publicly held companies. Therefore, the agency has long held that it is important for plan administrators to know what their responsibilities are when they vote proxies on those shares or exercise other shareholder rights. The DOL argues that existing guidance to plan fiduciaries has been out of step with domestic and international trends in investment management and has the potential to dissuade fiduciaries from exercising shareholder rights, including the voting of proxies, in areas that are increasingly being recognized as important to long-term shareholder value.

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“Plan fiduciaries can often enhance and protect the interest of plan participants and beneficiaries by responsibly exercising their rights as shareholders,” says Phyllis C. Borzi, assistant secretary of labor for Employee Benefits Security. “This guidance removes perceived impediments to the prudent management of plans’ rights as shareholders, and encourages fiduciaries to manage those rights in the best interest of plan participants and beneficiaries.”

The new bulletin reinstates earlier guidance, IB 94-2, with key updates aimed at better assisting plan fiduciaries in understanding and meeting their obligations under the Employee Retirement Income Security Act (ERISA) with respect to proxy voting and shareholder engagement. The agency was also concerned that, despite the recent guidance on economically targeted investment issues provided in IB 2015-1, statements in IB 2008-2 may cause confusion as to whether or how a plan fiduciary may consider environmental, social and governance (ESG) issues in connection with proxy voting or undertaking other shareholder engagement activities.

The interpretative bulletin will be published in an upcoming edition of the Federal Register and can also be viewed at https://www.dol.gov/sites/default/files/ebsa/2016-31515.pdf.

Administration December 28, 2016

Robo-Advisers to Expand Deeper into DC Space in 2017

Though robo-advisers were once limited to individual investors, automated technology is projected to push further into the DC industry in the coming years.

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Robo-advisers rolled into the financial services industry initially targeting individual investors, but in recent years automated advice pushed deeper into the retirement planning space with the release of a wide variety of products and services. 

A number of integrated 401(k) platforms emerged during 2016, offering personalized investment advice for large and small groups of participants; they provide plan sponsors with streamlined administration and fiduciary support. Some operate as independent platforms while others can be layered with other services. Either way, experts increasingly argue that automated investment technology can help retirement advisers and asset management firms better serve their clients.

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During a Plan Adviser National Conference (PANC) panel on robo-advice, Jeffrey Hemker, national sales manager in the retirement division at Invesco, argued that advisers stand to gain from incorporating the best parts of “robo” into their business. His firm recently adopted services from robo-adviser Jemstep, which previously served only as an automated investment platform before offering its software.  

A number of firms including Vanguard, Charles Schwab, and Fidelity have rolled out their own offerings, which combine robo-advice with the human touch. This approach to asset management may help overcome some of the challenges robo-advice critics said would prevent the technology from making a sizable impact on the retirement industry. A human adviser can call a client when the market crashes; human advisers can also help with some of the specific aspects of retirement planning that may now be too complex for algorithms, perhaps Social Security claiming strategies or managing health care costs in retirement.

Retirement plan participants can also take advantage of what affluent investors already find interesting about robo-advisers. According to research and focus group studies by Hearts& Wallets, consumers generally value key benefits from robo-advice including user-friendly interfaces, responsive design, and fee transparency.

Most robo-advisers, however, still manage rollovers into automated individual retirement accounts (IRAs) rather than assets in a 401(k). But this may change with advances in technology, changes in regulation, the growth of automated retirement plans, and an industry shift to passive investing.

Robo-advisers may face challenges as fiduciaries especially in light of the impending Department of Labor conflict of interest rule. Some industry experts, however, argue that robo-advisers can function perfectly well as fiduciaries under current Securities and Exchange Commission (SEC) rules, and even present fewer potential conflicts of interests based on their design. 

Ultimately, the key for plan sponsors and their advisers is to leverage this technology as they best see fit for their unique participants using the resources at hand.

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