Mutual fund proxy voting may be one of the least scintillating topics we write about here at The Advisory Group.  It is, however, a topic about which retirement plan fiduciaries need to stay apprised.  We also receive the occasional question from our personal wealth and foundation or endowment clients, so we thought we’d demystify mutual fund proxy voting.

What is mutual fund proxy voting? 

Mutual fund proxy voting is when a mutual fund wishes to take an action that requires shareholder approval, such as modifying their prospectus, and the fund calls for a vote. Eligible shareholders may designate other parties to vote on their behalf — as proxies.  When shareholders do not vote in-person, and instead vote by mail, that is also referred to as proxy voting.

What’s new with mutual fund proxy voting? 

When mutual funds are held by retirement plans, the responsible party for shareholder voting is the plan sponsor, not plan participants. The Department of Labor (DOL) recently issued a Final Rule regarding a fiduciary’s obligation on proxy voting.  The new rule reaffirms the DOL’s long-standing position that proxy voting is a fiduciary act, and it requires fiduciaries to consider only the economic interest of the plan and its participants in making proxy voting decisions.  What’s new is that the rule clarifies that fiduciaries are not required to vote every proxy, a welcome reprieve for smaller retirement plans in particular.  

The DOL set forth a 6-part test for fiduciaries to follow when deciding whether and how to vote proxies.  The rule also creates two “safe harbor” proxy voting policies that a plan fiduciary may choose to adopt: 

  1. Limiting voting to specific types of proposals that are expected to have a material impact on the value of the investment (for example, mergers and acquisitions, dissolutions, or other significant events).  
  2. Create a policy stating that plans will not vote proxies where the plan’s interest in the investment is a sufficiently small percentage of the total that the fiduciary believes the vote will have no material effect on the investment performance.  (Refer to the ruling for specific guidelines).  

After years of confusion and misperception of the DOL’s position on the subject of proxy voting, the final rule is good news.

Should you vote your own proxies? 

Many clients often do not feel qualified or that they have the time to research and make proxy decisions themselves. If you’re a retirement plan fiduciary, we recommend evaluating the safe harbor provisions above to determine whether one of them is appropriate for your plan.

Anyone who is concerned in voting their own proxy, whether an individual, a retirement plan fiduciary,  a foundation or endowment, may find some comfort in the fact that mutual fund companies, as fiduciaries, are charged with acting in the best interests of shareholders. That said, there is some room for differences of opinion. For example, if a fund company wants to expand investment flexibility in its prospectus under their own view that it will serve investors better, some shareholders may disagree if the changes involve a material increase in investment risks.  Proxy voting is a way to share your opinion.

Our mutual fund proxy voting policy 

While most advisory firms do not vote mutual fund proxies, some will and some others will hire an outside firm to do so. The Advisory Group’s policy is not to vote proxies on behalf of clients.  We do, however, consider significant voting changes indirectly through our ongoing investment research and due diligence process. 

In our experience, proxy voting is not frequent, and often does not involve significant changes to a given mutual fund. However, if a proxy vote passes and leads our Investment Committee to have a concern about how the fund will be managed, we may replace the fund. We prefer this approach over the time and cost it would require for us to analyze and vote on all proxies, or hire a vendor to do so, because we would need to pass those costs onto clients. We are already conducting sufficient investment research as an avenue to address any concerns that arise regarding the investment manager and/or a mutual fund, that increasing fees to cover proxy voting would not be of high enough value for our clients.