GAO Calls for Pension Proxy Disclosure

September 9, 2004 ( - The Governmental Accountability Office (GAO) has recommended to the US Congress that the Employee Retirement Income Security Act (ERISA) require retirement plan fiduciaries to disclose their proxy voting records.

The GAO says more disclosure of how retirement plans vote the proxies of their investments is necessary to protect the workers these plans are meant to benefit.   Without such disclosure, plan participants do not have assurances that plan fiduciaries are voting proxies free of any conflicts of interests.

The GAO report found that conflicts of interest occur “because various business relationships exist, which can influence a fiduciary’s vote.”   Such conflicts, in turn, run contrary to ERISA protections that state fiduciaries should act not in their own interests but in the best interests of pension plan beneficiaries.  

Specifically, the GAO expressed concern about problems that arise when retirement plans with large holdings of their own company stock are required to vote these proxies.   To avoid these potential pitfalls, the GAO recommends rewording ERISA to require pension plans to appoint an “independent fiduciary” to vote a company’s stock on some pension plan issues.

In the report, the GAO calls on both Congress and the Department of Labor (DoL).   From Congress, the GAO asked for more strenuous language in ERISA requiring plan fiduciaries to disclose their votes on behalf of employees, while the GAO says the DoL needs to get tough on plan fiduciaries that are not voting proxies with the interest of participants at heart.

The report, “Pension Plans: Additional Transparency and Other Actions Needed in Connection with Proxy Voting,” was released by Senator Edward Kennedy (D – Massachusetts), who said the report “emphasizes the need for greater transparency to benefit workers by adopting voting guidelines for pension plan-held stock and requiring disclosure of how company stock is voted.”   Kennedy added the report also “advocates greater independence in the voting of such stock and recommends that the Department of Labor (DoL) regularly monitor how pension plans vote the company stock they hold.”

However, the DoL, the agency which enforces ERISA protections, is reluctant to push for such a change.   Commenting on the report, the DoL said it opposes these recommendations, pointing to the adverse affects the proposals would have on plan costs, which could ultimately discourage employers from offering these plans.

Also in the response letter, Assistant Secretary of Labor Ann Combs says ERISA does not need to be amended since it deals with potential conflicts through “high standards of fiduciary duty” and the “personal liability of fiduciaries for their decisions.”

Conflict Resolution

As ERISA currently stands, pension plans are not required to disclose their proxy voting records, even though some plans voluntarily release this information.   However, the Securities and Exchange Commission (SEC) has such a requirement for mutual funds, and last year fined Deutsche Bank AG’s investment management unit $750,000 for not disclosing a conflict of interest in its dealings with Hewlett-Packard, related to the company’s merger with Compaq (See  Deutsche Hit With $750,000 for H-P Compaq Deal Conflict ).

The SEC allegedDeAM failed to tell its clients that the company’s investment banking division was working for HP, which paid Deutsche Bank $1 million for “market intelligence” during HP’s proxy battle in its takeover of Compaq Computer, with another $1 million contingent on the deal’s success. 

Deutsche Bank agreed to pay the $750,000 fine but did not admit or deny the SEC’s findings. The firm said in a statement at the time that “even before today’s settlement, we voluntarily strengthened our policies regarding information barriers.”