John Papahronis

The IRS has recently issued to document vendors opinion letter approvals for updated pre-approved defined contribution plan documents.  This starts the next cycle of required defined contribution plan document restatements.   If you are an employer that currently sponsors a 401(k) plan, profit sharing plan, money purchase plan or ESOP, and the plan document is currently on an IRS pre-approved document, you will need to restate your plan document on a newly approved document on or before July 31, 2022.

Rolling these new documents out to plan sponsors is of course a big undertaking for retirement plan document vendors, and they will be attacking this task in a very systematic way in the coming months so that their adopting employers can meet the deadline. The document vendors play the primary role in the plan restatement process. They will notify plan sponsors when their plan restatement process is scheduled and give plan sponsors a time period to review draft documents with legal counsel, obtain board of director approval, and execute and return the documents.  The documents will include the restated plan and usually an updated service agreement.

It is important to keep in mind that the plan sponsor/employer needs to be on top of the process.   The plan sponsor is responsible for reviewing, approving and adopting the restatement.  The document vendor will usually not accept responsibility for the timely completion of this process or the accuracy and correctness of the documents. Drafting mistakes are not uncommon, so it is critical for employer to not treat the restatement draft as a perfunctory “sign and return” task.   The plan sponsor should carefully review the draft to make sure that it is accurate. This process is also an opportunity to compare the plan provisions with the actual administration of the plan and to consider plan design changes.  When you receive the draft documents from your document vendor, we strongly urge you to devote adequate time and attention to getting this important task completed.

On September 4, 2020, the Department of Labor (“DOL”) published a proposed regulation addressing the proxy voting responsibilities of retirement plan fiduciaries and exercises of other shareholder rights.  The proposed rule would affect any employee benefit plan that owns equity securities that require voting, which can include defined benefit plans, defined contribution plans, and even some welfare benefit plans.  If the proposed rule is promulgated in its current form, it would materially change the fiduciary practices and recordkeeping requirements for such plans.

The DOL’s longstanding view has been that proxy voting is a fiduciary obligation that is part of managing plan assets, and the general view has been that the plan fiduciaries may not simply choose to not vote proxies.  Under the proposed regulation, a fiduciary must vote a proxy when the issue could have an economic impact on the plan but must not vote a proxy where the matter would not have an economic impact on the plan.  The DOL’s rationale is that the expenditure of plan resources is generally warranted only when the proposals have a meaningful bearing on share value or when plan fiduciaries have determined that the interests of the plan are not aligned with the positions of a company’s management.  It is important to note that application of this new standard would have a significant impact on the voting of proxies on shareholder proposals dealing with economic, social and governance issues because it would be difficult to demonstrate that those types of proposals have an economic impact on the plan.

In order to assist fiduciaries to comply with the difficulty of determining a proxy vote’s economic impact on a plan, the proposed regulation would allow fiduciaries to establish certain “permitted practices” in their proxy voting policy.  For example, a permitted practice may include voting proxies only on specific types of proposals that the fiduciary has prudently determined are likely to have a significant impact on the value of the plan’s investment, such as corporate mergers and acquisitions, corporate repurchases of shares and contested elections for directors. If the plan fiduciary has delegated responsibility for voting proxies to an investment manager or other service provider, the proposed regulation would require the fiduciary to ensure and document that the investment manager or service provider satisfies the conditions of the rule.

Because the DOL’s proposal is not final, it does not require plan fiduciaries to take any action at this time.  However, we recommend that plan fiduciaries continue to monitor this issue for future developments.