Compliance December 1, 2023

New DOL Proxy Voting Rules Take Effect Friday

The new rules will require managers to obtain consent for their investment policy.

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The Department of Labor completed its Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, sometimes called the ESG rule, in November 2022. The elements of the rule pertaining to shareholder rights come into effect on Friday, December 1.

The second half of the rule, which speaks to shareholder rights and proxy voting, takes effect in December. The DOL removed language from old rules that the department believed incentivized abstentions on shareholder proposals, an excision that will remove a safe harbor voting policy that limited “voting resources to types of proposals that the fiduciary has prudently determined are substantially related to the issuer’s business activities or are expected to have a material effect on the value of the investment.”

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Ruth E. Delaney, a partner in K&L Gates LLP, says the rule reiterates the principle that a fiduciary’s duty to manage plan assets includes the management of shareholder rights, including the right to vote proxies.

In the context of pooled investment vehicles, where multiple plans may be subject to proxy voting policies that conflict with the policies of other plans, the manager would be required, to the extent possible, to reconcile conflicting policies and vote proxies proportionately in accordance with each plan’s interest in the vehicle.  However, consistent with longstanding guidance, a manager may, instead, require investors to accept the manager’s own proxy voting policy as a condition of a plan’s investing in such vehicle. 

However, Delaney explains that existing investors are not grandfathered in explicitly by the rule, and managers may need to take steps to get consent from their investors to follow the manager’s proxy voting policy. Delaney says some managers have drafted negative consent forms: Investors already in those funds are assumed to have consented by saying nothing. The DOL declined to explicitly approve of or forbid this approach, according to Delaney.

Fiduciary managers have until Friday to avoid compliance issues by obtaining consent.

Delaney says the rule also permits fiduciaries to use ESG considerations when voting on shareholder proposals and when making recommendations on those votes.

Delaney adds that the rule “codifies longstanding principles” that already existed, such as the notion that fiduciary duty requires the prudent exercise of shareholder rights. Abstentions are permitted in cases where it would be prudent, such as when the voting process would be costly to the plan.

Under the rule, fiduciaries are required to “prudently select and monitor a service provider,” but this does not require them to “monitor in real time every vote.” Instead, the fiduciary must follow a prudent process in picking service providers and must ensure their activities align with their investment policy, Delaney says.

Compliance November 30, 2023

Plan Sponsors Get Clarity and Some New Questions in IRS Part-Time Eligibility Rules

The post-Thanksgiving rule proposal will require a close look and potential plan design changes in the coming weeks for employers with LTPT employees, according to experts. 

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A retirement industry trade group is calling on more time for plan sponsors to assess and implement the Internal Revenue Service’s Black Friday rule proposal on plan eligibility for long-term, part-time employees, even as attorneys and advisers rush to parse the results.

“At the risk of sounding ungrateful, our Thanksgiving holiday was interrupted on Friday when the IRS finally issued the proposed regulations outlining how plans are supposed to comply with the Long-Term Part-Time Employee rules,” wrote Ilene H. Ferenczy, managing partner in Ferenczy Benefits Law Center, in a post. “While our notes may be covered with gravy and cranberry sauce stains, we were pleased to help translate these new rules for you as soon as we could.”

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Others were less sanguine about the details of the rule proposals.

“Looks like the IRS made the SECURE Act/SECURE 2.0 provisions even more confusing than they already were, if that’s possible,” quipped Mike Webb, a senior manager at CAPTRUST, to a LinkedIn group focused on 401(k) fiduciary advice.

“IRS Delivers More Turkey on Black Friday,” Brian Graff, the CEO of the American Retirement Association, declared on LinkedIn the day the proposal came out. A few days later, the ARA sent a letter to the IRS—reported by its affiliate National Association of Plan Advisors outlet—calling the timeline “impossible” to meet for many plan sponsors, with a request for more administrative relief.

Attorneys at Seyfarth Shaw LLP were not very surprised that the IRS did not give more “transition relief,” as the rules had generally been available, and most of the clarifications were in-line with what they expected.

“Most of the guidance followed what we were hoping for, which was a couple of good clarifications,” says Diane Dygert, a partner in Seyfarth Shaw who, with Sarah Touzalin, a senior counsel with the firm, wrote a post breaking down the proposal, “The Long Wait for the Long-Term Part-Time Guidance is Over.”

Clarity, With a Side of Questions

Dygert notes one key clarification was the basic definition of an LTPT employee, which the IRS settled on as an employee who has “completed two consecutive 12-month periods during each of which the employee is credited with at least 500 hours of service.” The employee also has to be at least 21 years old by the close of the last of the 12-month working period.

Another clarification noted by Dygert was establishing that employers may continue to use the “elapsed time method” when tracking an employee’s service time. In that method, employers document the overall period of time served. Employers who measure work that way can now “breathe easier,” Dygert says, because they will not have to start counting hours.

Rules addressing vesting requirements, however, did catch Dygert and Touzalin’s attention.

The proposed rules confirm that an LTPT employee does not need to be eligible to receive employer contributions. However, if LTPT employees are eligible for employer contributions (or later become eligible for employer contributions), when it comes to vesting, those employees must be granted a year of vesting service for each 12-month period in which the employee is credited with at least 500 hours of service. That is opposed to the 1,000 hours of service requirement generally used as a minimum by plans with a vesting schedule.

“I read that and was really surprised,” says attorney Touzalin.

After SECURE 2.0 was issued, Touzalin thought the “special” 500-hour vesting rule would only apply to an LTPT employee already eligible for both employee deferrals and employer contributions. She did not expect it would also apply to LTPT employees who were ineligible for employer contributions until they subsequently worked 1,000 hours.

“This is going to be difficult to administer, since plans will need to track different vesting rules for former LTPT employees and all other eligible employees,” Touzalin says.

Dygert further noted that the proposed rules would treat “former” LTPT employees more favorably than other eligible full-time employees who have to work more than 1,000 hours of service to earn a year of vesting service.

Dygert and Touzalin are not optimistic about this provision changing when the final rules are issued. However, Seyfarth attorneys plan to raise the issue with the IRS during the public hearing in March.

No Time for Leftovers

The ARA also mentioned vesting in its letter to the IRS, stressing the administrative burden the setup will create. It was the first of three arguments the group made for providing more time for administrative setup.

The second two areas concerned the timeline for plan sponsors, third-party administrators and recordkeepers to enact the changes.

The ARA first noted that the LTPT rules, slated to go into effect for 2024, are actually live for the 2023 period for some plan sponsors because of their plan calendar design.

“It is extremely common for 401(k) plans to switch from an anniversary year computation period to a plan year computation period for eligibility determinations,” the ARA wrote. “A plan that uses a plan-year switch for eligibility computation periods could have LTPTEs entering during 2023 if it is a non-calendar year plan.”

In its third point, the organization noted that the implementation date of January 1, 2024, will mean only 25 working days for the proposed regulation to be implemented. The ARA went on to list nine steps that will need to be taken to properly institute the new rules.
“It is impossible for plan service providers to complete all these steps for all impacted plan sponsors prior to January 1, 2024,” the ARA wrote.

The IRS did not immediately respond to requests for comment on the reactions.

Public comments on the proposed rule are due by January 26, 2024, via www.regulations.gov (under REG-104194-23). A public hearing will be held on March 15 for individuals who request to speak by January 26.

 

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