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Report to the Ranking Minority Member, Committee on Health, Education, 
Labor, and Pensions, U.S. Senate:

United States Government Accountability Office:

General Accounting Office:

GAO:

August 2004:

PENSION PLANS:

Additional Transparency and Other Actions Needed in Connection with 
Proxy Voting:

GAO-04-749:

GAO Highlights:

Highlights of GAO-04-749, a report to the Ranking Minority Member, 
Committee on Health, Education, Labor, and Pensions, United States 
Senate

Why GAO Did This Study:

In 1998, about 100 million Americans were covered in private pension 
plans with assets totaling about $4 trillion. The retirement security 
of plan participants can be affected by how certain issues are voted 
on during company stockholders meetings. Fiduciaries, having 
responsibility for voting on such issues on behalf of some plan 
participants (proxy voting), are to act solely in the interest of 
participants. Recent corporate scandals reveal that fiduciaries can be 
faced with conflicts of interest that could lead them to breach this 
duty. Because of the potential adverse effects such a breach may have 
on retirement plan assets, we were asked to describe (1) conflicts of 
interest in the proxy voting system, (2) actions taken to manage them, 
and (3) DOL’s enforcement of proxy voting requirements.

What GAO Found:

Conflicts of interest in proxy voting can occur because various 
business relationships exist, which can influence a fiduciary’s vote. 
When a portion of a company’s pension plan assets are invested in its 
own company stock, the internal proxy voter may be particularly 
vulnerable to conflicts of interest because management has an enhanced 
ability to directly influence their voting decisions. Although 
situations representing conflicts will occur, limited disclosure of 
proxy voting guidelines and votes may make proxy voting more vulnerable 
to such conflicts. Because of limited transparency, concerned parties 
do not have the information needed to raise questions regarding whether 
proxy votes were cast solely in the interest of plan participants and 
beneficiaries.

Some plan fiduciaries and the Securities and Exchange Commission (SEC) 
have taken steps to help manage conflicts of interest in proxy voting. 
Specifically, some plans voluntarily maintain detailed proxy voting 
guidelines that give proxy voters clear direction on how to vote on 
certain issues. The SEC has imposed new proxy voting regulations on 
mutual funds and investment advisers, requiring that specific language 
be included in the fund’s guidelines on how fiduciaries will handle 
conflicts of interest. Some plan fiduciaries voluntarily make their 
guidelines available to participants and the public. In addition, some 
plans voluntarily disclose some or all of their proxy votes to 
participants and the public. Some plans also voluntarily put additional 
procedures in place to protect proxy voters from conflicts of interest 
in order to avoid breaches of fiduciary duty. For example, some plan 
sponsors hire independent fiduciaries to manage employer stock in their 
pension plans and vote the proxies associated with those stock. Plans 
may also hire proxy-voting firms to cast proxies to ensure that they 
are made solely in the interest of participants and beneficiaries.

DOL’s enforcement of proxy voting requirements has been limited for 
several reasons. First, participant complaints about voting conflicts 
are infrequent, at least in part, because votes cast by a plan 
fiduciary or proxy voter generally are not disclosed; therefore, 
participants and others are not likely to have information they need 
to raise questions regarding whether a vote has been cast solely in 
their interest. Second, for DOL, the Employee Retirement Income 
Security Act of 1974 presents legal challenges for bringing cases such 
that it is often difficult to obtain evidence that the fiduciary was 
influenced in his or her voting by something other than the sole 
interests of plan participants. Finally, even if such evidence existed, 
monetary damages are difficult to value and fines are difficult to 
impose. And, DOL has no statutory authority to impose a penalty 
without first assessing damages and securing a monetary recovery. In 
part, because of these challenges, DOL has devoted few resources to 
enforcing proxy voting by plans. 

What GAO Recommends:

GAO recommends that Congress consider amending ERISA to require 
fiduciaries to (1) develop proxy-voting guidelines, (2) disclose 
guidelines and votes annually, and (3) appoint an independent 
fiduciary to vote the company’s own stock in its pension plan in 
certain instances. GAO recommends that DOL conduct another proxy 
enforcement study, and enhance coordination of enforcement strategies 
with SEC. DOL generally disagreed with our recommendations, but we 
believe that additional transparency and enhanced enforcement are 
needed. 

www.gao.gov/cgi-bin/getrpt?GAO-04-749.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Barbara Bovbjerg at 
(202) 512-7215 or bovbjergb@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Business Relationships and Limited Disclosure of Votes Can Make Proxy 
Voting Vulnerable to Conflicts:

Some Plan Fiduciaries Have Taken Actions to Manage Conflicts:

The Department of Labor's Related Enforcement Efforts Have Been 
Limited:

Conclusions:

Matters for Congressional Consideration:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: Scope and Methodology:

Obtaining Total Number of Employer Securities Held in the Company's Own 
Pension and Welfare Benefit Plans:

Obtaining the Total Number of Shares Outstanding for Selected Fortune 
500 Companies:

Obtaining the Closing Price for Our Fortune 500 Companies:

Computing the Number of Voting Shares Held in Fortune 500 Company 
Pension and Welfare Benefit Plans:

Appendix II: Comments from the Department of Labor:

Appendix III: GAO Contacts and Staff Acknowledgments:

Contacts:

Staff Acknowledgments:

Table:

Table 1: Summary of the Department of Labor's Proxy Projects:

Abbreviations:

AMEX: American Stock Exchange:

DeAM: Deutsche Bank Asset Management:

DeIB: Deutsche Bank's Investment Banking:

DOL: Department of Labor:

EBSA: Employee Benefits Security Administration:

EIN: Employer Identification Number:

ERISA: Employee Retirement Income Security Act of 1974:

ESOP: employee stock ownership plan:

HP: Hewlett-Packard:

IB: Interpretive Bulletin:

IMs: investment managers:

NASDAQ: National Securities Dealers Stock Exchange:

NYSE: New York Stock Exchange:

SARs: summary annual reports:

SEC: Securities Exchange Commission:

SPDs: summary plan descriptions:

TAQ: Trade and Quote:

United States Government Accountability Office:

Washington, DC 20548:

August 10, 2004:

The Honorable Edward M. Kennedy: 
Ranking Minority Member: 
Committee on Health, Education, Labor, and Pensions: 
United States Senate:

Dear Senator Kennedy:

Pensions are an important source of income for millions of retirees, 
and the federal government has encouraged private employers to sponsor 
and maintain private pension and retirement savings plans for their 
employees. In 1998, about 100 million workers and retirees were covered 
in private defined benefit[Footnote 1] or defined contribution[Footnote 
2] pension plans with assets totaling about $4 trillion. In 2001, 
pension plans, as a whole, owned about 20 percent of the total 
corporate equity issued by U.S. companies, with private pension funds 
owning about 59 percent of that amount.[Footnote 3] As shareholders, 
pension plans have certain rights, including the right to vote on 
certain corporate governance matters. Some matters such as the election 
of directors, executive compensation packages, and mergers and 
acquisitions are significant voting items that may affect long-term 
share value, while other matters may not. While they may vote in 
person, fiduciaries typically do not attend the annual meetings in 
which corporate policies are voted. Instead, they usually submit 
ballots prior to the meeting, generally via mail or online 
instructions. This is called proxy voting. According to the Department 
of Labor's (DOL's) interpretation of the Employee Retirement Income 
Security Act (ERISA) of 1974, with these voting rights, fiduciaries are 
required to cast votes solely in the interest of plan participants and 
beneficiaries.[Footnote 4]

The retirement security of these plan participants can be affected by 
how certain issues are voted on during company stockholder meetings 
and, therefore, relies on fiduciaries acting solely in the interest of 
pension plan participants and beneficiaries. However, recent corporate 
scandals have highlighted the fact that fiduciaries are faced with 
conflicts of interest that could lead them to breach their 
responsibility to act solely on behalf of participants. For example, in 
2002, the Securities Exchange Commission (SEC) investigated whether a 
vote cast in favor of a merger between Hewlett-Packard (HP) and Compaq 
by Deutsche Bank Asset Management (DeAM), a large asset manager with 
the fiduciary responsibility for voting proxies, was influenced by a 
conflict of interest. The SEC found that a material conflict of 
interest was created when DeAM failed to disclose to its advisory 
clients that Deutsche Bank's Investment Banking (DeIB) division was 
working for HP on the merger and had intervened in DeAM's proxy process 
on behalf of HP.

Because of conflicts of interest in the proxy voting system and the 
potential adverse effects of such conflicts on the retirement security 
of Americans, you asked us to describe (1) conflicts of interest in 
proxy voting, (2) actions taken by plans and plan fiduciaries to manage 
conflicts of interest, and (3) DOL's enforcement of proxy voting 
requirements.

To determine what conflicts exist in proxy voting, we conducted face-
to-face and telephone interviews which included officials at DOL's 
Employee Benefits Security Administration (EBSA) and at SEC, securities 
and proxy voting industry professionals, officials of public and 
private pension plans, ERISA attorneys, asset managers, and proxy 
voting firms, research organizations, and proxy solicitors. We asked 25 
shareholder activist professionals, academics, and economists to 
respond to a series of questions for a written reply and received 14 
responses. To determine the extent to which certain companies' pension 
plans hold proxy voting power within the plan sponsor, we analyzed plan 
financial information filed annually (Form 5500 data) with DOL's EBSA. 
We analyzed data for the Fortune 500 companies for plan year 2001, 
which was the most recent year for which complete plan-specific data 
were available. To determine what safeguards fiduciaries have put in 
place to manage conflicts of interest, we reviewed proxy voting 
guidelines and interviewed a number of public and private pension plan 
sponsors, asset managers, proxy voting firm representatives, and other 
experts. To determine DOL's enforcement efforts in this area, we 
reviewed DOL enforcement material and previously issued GAO reports on 
DOL's enforcement program and interviewed officials at EBSA.

We conducted our work between April 2003 and May 2004 in accordance 
with generally accepted government auditing standards. See appendix I 
for more information on our scope and methodology.

Results in Brief:

Experts we interviewed said that conflicts of interest exist in proxy 
voting and occur because of the various business relationships that may 
influence a proxy voter's vote. These experts also said that conflicts 
can exist in situations when an employee of the plan sponsor votes 
proxies--internally--or by a person or entity outside of the plan--
externally. When a portion of a company's pension plan assets are 
invested in its own company stock, the internal proxy voter may be 
particularly vulnerable to conflicts of interest because management has 
the ability to directly influence voting decisions. For the external 
proxy voter, a variety of conflicts may arise due to business 
relationships. For example, when the external proxy voter is an 
investment manager that is part of a larger corporation that provides a 
variety of services, business relationships between branches of the 
corporation and the plan sponsor may influence the investment manager's 
proxy voting decisions. Consistent with current DOL requirements, proxy 
votes and guidelines are disclosed to the plan. Proxy voters are not 
required to publicly disclose proxy voting guidelines and votes, though 
plans are required to make voting guidelines available to participants 
upon request. Although conflicts will exist, limited disclosure may 
make proxy voters more vulnerable to such conflicts. Because of this 
limited transparency, concerned parties do not have the information 
needed to raise questions regarding whether proxy votes were cast in 
the sole interest of plan participants and beneficiaries.

Some plan fiduciaries and SEC have taken steps to help manage conflicts 
of interest in proxy voting. Some plans voluntarily maintain detailed 
proxy-voting guidelines that give proxy voters clear direction on how 
to vote on certain issues. SEC has imposed new proxy voting regulations 
on mutual funds and investment advisers requiring that specific 
language be included in policies and procedures on how fiduciaries will 
handle conflicts of interest. In addition, some plan fiduciaries 
voluntarily make their guidelines available to participants and the 
public. Furthermore, some plans voluntarily disclose to participants 
and the public how they voted on some or all of the issues in which 
they voted. Similarly, SEC now requires mutual funds to publicly 
disclose all proxy votes and policies and procedures. Some plans 
voluntarily put additional procedures in place to protect proxy voters 
from conflicts of interest that may lead to breaches of fiduciary duty. 
For example, some plans have a rule that, in the event that an attempt 
is made to influence a proxy vote, the voting responsibility on that 
issue moves from the proxy voter to a committee. Some plan sponsors 
have hired independent fiduciaries to manage employer stock in their 
pension plans. Plans may also hire an independent proxy voter or proxy-
voting firm to cast proxy votes to ensure that they are solely in the 
interest of plan participants.

DOL's enforcement of proxy voting requirements has been limited for 
several reasons. First, participant complaints about voting conflicts 
are infrequent, at least in part, because votes cast by a plan 
fiduciary or proxy voter generally are not disclosed. Therefore, plan 
participants and others are not likely to have the information they 
need to raise questions regarding whether a vote has been cast solely 
in their interest. Second, ERISA presents legal challenges for 
prosecuting proxy voting cases. Specifically, it is often difficult to 
obtain evidence that the plan fiduciary was influenced in his or her 
voting by something other than the interests of plan participants 
because, among other things, the fiduciary's vote is based on judgment. 
Finally, even if such evidence existed, monetary damages are difficult 
to value and, because the department has no statutory authority to 
impose a penalty without assessing damages, fiduciary penalties are 
difficult to impose. In part, because of these challenges and its 
limited resources, DOL has devoted few resources to enforcing proxy 
voting practices by fiduciaries. For example, the agency conducted 
three enforcement studies between 1988 and 1996 to determine the level 
of compliance with proxy voting requirements among select fiduciaries. 
According to DOL, as a result of these proxy reviews, they found 
improvements over time within the proxy voting system as the number of 
voting fiduciaries and plan administrators who voted and established 
proxy voting guidelines increased. The department has not conducted 
similar reviews in recent years. DOL officials told us that they 
believe that proxy voters are generally in compliance, they receive few 
complaints and that with limited resources they focus instead on other 
priority areas, which may result in identifying violations that can be 
corrected. Furthermore, DOL officials said that they do not have 
specific investigations focused on proxy voting, and they do not 
allocate many resources to this issue.

This report contains Matters for Congressional Consideration to improve 
the disclosure of proxy voting guidelines and votes and the 
independence of fiduciaries voting proxies in certain circumstances. 
The report also contains recommendations for executive agency action to 
improve oversight and enforcement in this area. In its response to our 
draft report, DOL generally disagreed with our matters for 
congressional consideration and recommendations, saying that conflicts 
of interest affecting pension plans are not unique to proxy voting and 
that requiring independent fiduciaries and increased disclosures would 
increase costs and discourage plan formation. While we acknowledge that 
fiduciaries face conflicts beyond proxy voting issues and that DOL has 
limited statutory authority related to proxy voting, we believe that 
additional transparency and an enhanced enforcement presence are 
needed.

Background:

ERISA established the broad fiduciary requirements related to private 
pension plans and was designed to protect the pension and welfare 
benefit rights of workers and their beneficiaries. The act requires a 
plan fiduciary to act "…solely in the interest of plan participants and 
beneficiaries and for the exclusive purpose of providing benefits" to 
them and to act "…with the care, skill, prudence, and diligence under 
the circumstances then prevailing that a prudent man acting in a like 
capacity and familiar with such matters would use." Failure to act in 
accordance with these requirements might constitute a breach of 
fiduciary duty. Breaches of the fiduciary duty to act solely in the 
interest of plan participants and beneficiaries with respect to proxy 
voting could arise when a fiduciary has a conflict of interest. 
Conflicts of interest occur in a variety of ways in proxy voting. 
Conflicts occur when a plan fiduciary or proxy voter has either 
business or personal interests that compete with the interests of 
participants. When conflicts are not appropriately managed, they could 
lead to a breach of fiduciary responsibility or, at least, may raise 
concern that a breach has occurred. For example, an SEC investigation 
showed that DeIB division had an undisclosed business relationship with 
HP, which may have influenced the proxy voter's vote cast by DeAM about 
a merger between HP and Compaq Computer Corporation.[Footnote 5]

ERISA's fiduciary requirements apply to plan sponsors, trustees, 
managers, and others who act as fiduciaries. These requirements do not 
explicitly address proxy voting; however, DOL--having responsibility 
for the investigation and enforcement of violations of ERISA, which 
includes provisions related to fiduciary responsibility--has stated 
that the fiduciary act of managing plan assets that are shares of 
corporate stock generally includes the voting of proxies pertaining to 
those shares of stock. The provisions of ERISA were enacted to address 
public concerns that funds of private employee benefit plans were being 
mismanaged and abused. DOL can take several actions to correct 
fiduciary violations it identifies. These include acceptance of 
voluntary fiduciary agreements to implement corrective actions, 
initiation of civil litigation in federal district court, and referral 
of certain violations to other enforcement agencies.

On the matter of proxy voting, DOL has issued several letters and 
bulletins discussing the duties of pension plan fiduciaries. For 
example, the "Avon Letter," released in 1988, stated that the voting of 
a proxy is a fiduciary duty and that the responsibility for voting 
falls on the plan's trustee unless otherwise delegated.[Footnote 6] 
Through its "ISS letter," issued in 1990, among other things, DOL 
stated that with respect to monitoring activities, that the plan 
fiduciary, in order to carry out his or her fiduciary responsibilities, 
must be able to periodically review voting procedures and actions taken 
in individual situations so that a determination can be made whether 
the investment manager is fulfilling its fiduciary responsibility. 
Furthermore, DOL issued Interpretive Bulletin (IB) 94-2 in 1994, which 
clarified the guidance in the previous two letters and also stressed 
the importance of statements of investment policy, including voting 
guidelines. While DOL said that maintenance of such statements of 
investment policy are consistent with ERISA, DOL officials said that 
they do not have the statutory authority to require plans to maintain 
such statements.

SEC, under the Investment Company Act of 1940, regulates companies, 
including mutual funds, that engage primarily in certain operations, 
such as investing, reinvesting, and trading in securities, and whose 
own securities are offered to the investing public. A primary mission 
of SEC is to protect investors and maintain the integrity of the 
securities markets through disclosure and enforcement. Employees in 
participant-directed pension plans might be given the choice of 
investing in securities, including employer securities, as well as a 
variety of mutual funds. Because plan participants may have such 
investment options, securities law protections applicable to investors 
are relevant to plan participants. In addition, some pension plans use 
investment managers to oversee plan assets and these managers may be 
subject to securities laws.

Congress previously studied the issue of DOL's enforcement and proxy 
voting. In the 1980s, reports emerged that fiduciaries were not voting 
their proxies or that conflicts of interest may have influenced the 
decisions of some plan fiduciaries. The Congress consequently became 
concerned about whether fiduciaries were fulfilling their 
responsibility to protect the interests of pension plan participants 
and beneficiaries. Because ERISA does not specifically lay out what the 
fiduciary responsibility is regarding proxy voting, many fiduciaries 
were thought to be unclear about their responsibility to vote proxies 
and maintain voting guidelines. This was cited as one of the major 
factors that led the Subcommittee on Oversight of Government 
Management, Senate Committee on Governmental Affairs, to conduct an 
investigation of and hold hearings in 1986 on DOL's enforcement of 
ERISA. Among other things, the Subcommittee concluded that disclosure 
of proxy votes would facilitate the DOL's enforcement efforts by 
providing the agency and other interested parties with much needed 
information. DOL officials believe that the agency does not have the 
statutory authority to require plan fiduciaries to publicly disclose 
their proxy votes and guidelines.

Business Relationships and Limited Disclosure of Votes Can Make Proxy 
Voting Vulnerable to Conflicts:

Some experts we interviewed said that conflicts of interest exist in 
the proxy voting system and limited disclosure makes proxy voting 
vulnerable to conflicts of interest. Conflicts of interest occur 
because of the various business relationships that may influence a plan 
fiduciary's or proxy voter's vote. For example, when a company provides 
investment advisory services for a company-sponsored pension plan and 
also provides investment banking services to the company sponsoring 
that pension plan. Although conflicts will exist, limited disclosure 
makes proxy voting vulnerable to them. Because of this lack of 
transparency, participants do not have the information needed to raise 
questions regarding whether proxy votes were cast solely in their 
interest.

Fiduciary's Business Associations Can Create Conflicts of Interest:

Business associations between a proxy voter and any entity that may 
influence their vote presents a conflict of interest. Some experts we 
interviewed explained that these associations may form whether proxies 
are internally or externally managed because company management has 
direct access to the proxy voter who is either an employee, in the case 
of internally voted proxies, or is a service provider, in the case of 
externally voted proxies.

When a portion of a company's pension plan assets are invested in its 
own company stock, the proxy voter may be particularly vulnerable to 
conflicts of interest because management has the ability to directly 
influence its voting decisions and, since company stock held in the 
company's own pension plan is typically managed internally,[Footnote 7] 
the proxy voter may at times be more concerned about their own 
interests. While ERISA states that fiduciaries must act solely in the 
interest of pension plan participants, there is no requirement that an 
independent fiduciary be appointed to provide additional protections 
for participants with company stock in their pension plans.

Several experts explained that conflicts of interest that occur in this 
type of arrangement are considerably problematic. For example, one 
expert said that since proxy voting and other decisions relating to 
company stock are much more likely to be handled in-house, votes may be 
cast in accordance with the wishes of the company's senior 
management.[Footnote 8] In such cases, the company's management may not 
consider the best interest of plan participants and beneficiaries 
independently from management's opinion of what is best for the 
company. The Enron case provides an example of how management's own 
concerns may come before that of participants and 
beneficiaries.[Footnote 9]

In addition, some experts said that when proxies are internally 
managed, the proxy vote may be influenced by the fiduciary's own 
personal concerns, particularly in instances when casting a vote solely 
in the interests of plan participants and beneficiaries means voting 
against company management. Specifically, if the plan fiduciary is a 
lawyer, investment analyst, or a member of the management team for the 
company, their proxy vote on management proposals such as a merger and 
acquisition or for individuals they have chosen to serve on the board 
of directors could be influenced by concerns about their personal 
standing, or job security, in the company. A few experts said that a 
fiduciary in this situation is not likely to vote against a management 
proposal such as an executive compensation package because of their own 
personal concerns. Additionally, DOL officials said that conflicts for 
an internal fiduciary could arise when the company is experiencing 
problems, which, if publicly known, would cause stock value to decline. 
In order to protect participants, fiduciary duty might require the 
fiduciary to publicly disclose the information to participants and 
other shareholders and sell shares of the company stock. Insider 
trading rules would, however, prevent the fiduciary from taking action 
on nonpublic information.[Footnote 10] However, making this information 
public could cause a rapid decline in share value as investors sell off 
their shares of stock, thereby, potentially harming the company and the 
fiduciary's own personal standing in the firm.

Because company management could influence the fiduciary responsible 
for voting the proxies related to the company's own stock,[Footnote 11] 
management may have a significant amount of influence over the outcome 
of a proxy contest.[Footnote 12] In order to assess the influence 
management could have in a proxy contest, we conducted an analysis of 
Fortune 500 companies. (See appendix I for further information on our 
methodology.) In our analysis, we compared the number of voting shares 
of company stock held in a company's pension plans[Footnote 13] to the 
total voting shares held in the market. About 272 of the Fortune 500 
companies that reportedly had their own company stock in their pension 
plans and in separate accounts, such as master trust agreements held 
over $210 billion in employer securities in plan year 2001. Of those 
companies, 27 percent held at least 5 percent or more of company stock 
in their company's pension and benefit plans, while another 26 percent 
held between 2 and 5 percent. None of the Fortune 500 firms we analyzed 
held more than 21 percent of the total voting power of their company's 
stock in their pension and welfare benefit plans, while 47 percent held 
less than 2 percent of company stock in their company's pension and 
benefit plans.

While the results showed that the pension and welfare benefit plans of 
the Fortune 500 companies we analyzed were not holding large 
percentages of the total voting power of a company's shares, these 
findings may still be significant. For example, in a contentious proxy 
contest such as a merger and acquisition where 51 percent of 
outstanding shares is needed to complete the merger, a company whose 
pension assets comprise just 2 percent of the total stock issued by a 
company might act as the deciding vote if the proxy contest is close. 
In this case, how the plan fiduciary or proxy voter casts its vote 
could make the difference between 49 percent and 51 percent--that is, 
the difference between the merger being approved or rejected. Some of 
the largest and most influential pension plans typically hold no more 
than 1 to 2 percent of any one company's shares in their plan's 
investment portfolios. As such, a Fortune 500 company whose pension 
plans holds more than 1 or 2 percent of its own company stock could 
give them an advantage in a proxy contest.

When the fiduciary is not an employee of the plan sponsor--that is, he 
or she is external to the company---experts explained that a variety of 
different types of conflicts might also arise because of business 
associations. For example, when the proxy voter is an investment 
manager that is part of a larger corporation that provides a variety of 
services, experts said that business relationships between the 
company's other branches and the plan sponsor might influence the 
investment manager's voting decisions. These relationships may 
influence the proxy voter to vote with the plan sponsor's management, 
particularly if the proxy voter wishes to maintain business 
relationships with the plan sponsor or create an opportunity for future 
business relationships. For instance, some experts we interviewed 
contend that DeAM division--the proxy voter in this case--was 
influenced by a business relationship between DeIB division and their 
mutual client, HP. SEC records reveal that DeAM reversed its vote to 
vote in favor of HP's merger after the investment banking division set 
up a meeting between the proxy voter and HP management. SEC found that, 
unbeknownst to DeAM's advisory clients, DeIB was working for HP on the 
merger and had intervened in DeAM's proxy process on behalf of HP. This 
created a material conflict of interest for DeAM, which has a fiduciary 
duty to act solely in the interests of its advisory clients. The SEC 
action found that DeAM violated this duty by voting the proxies on the 
HP stock owned by its advisory clients without first disclosing the 
conflict.[Footnote 14]

While some experts we interviewed said that they believe most plan 
fiduciaries vote solely in the interest of participants and 
beneficiaries, others said that some fiduciaries might prioritize other 
interests when casting their votes. For example, a few experts said 
that fiduciaries are taking their proxy voting responsibility seriously 
and voting appropriately. Other experts we interviewed said that the 
proxy voting decisions of some external asset managers are often 
influenced by short-term quarterly returns on assets rather than on 
voting patterns that support long-term goals that benefit shareholders 
and participants. Some experts we interviewed also said that some 
external asset managers believe that they are retained and compensated 
because of superior investment performance and not because of how they 
vote proxies. Last, some experts said that there are only downsides to 
devoting resources to proxy voting.

Limited Disclosure May Make Proxy Voting Vulnerable to Conflicts of 
Interest:

Experts we interviewed said that the limited disclosure might create 
inappropriate incentives and result in inadequate accountability, which 
may make proxy voting especially vulnerable to conflicts of interest. 
Proxy votes, in some cases, may not be monitored by the plan fiduciary 
and are not routinely disclosed to the public, two actions that could 
help ensure that fiduciaries cast votes solely in the interest of 
pension participants.

Limited disclosure and lack of adequate monitoring of proxy voting 
practices by plans hinders accountability for how votes are cast. 
Consistent with current DOL requirements, votes are disclosed to the 
appropriate plan fiduciaries.[Footnote 15] Fiduciaries are not required 
to publicly disclose proxy voting guidelines and votes, though the plan 
would be required to make any written proxy voting guidelines available 
to participants upon request.[Footnote 16] Hence, only plans have easy 
access to the information that allows them to monitor how proxy voters 
are voting. However, not all plans have the resources to devote to such 
monitoring; therefore, the attention given to the proxy voting 
responsibility can vary greatly by plan. Some large plans devote a 
significant amount of expertise and resources to proxy voting while 
other plans may not. Furthermore, a few experts said that in many cases 
where the proxy voting responsibility is delegated externally, the plan 
provides limited to no review of how the proxies were voted.

Experts we interviewed said that limited disclosure might provide 
incentives for fiduciaries to cast their votes according to their own 
interests. These experts also said that publicly disclosing proxy votes 
could help discourage voting that is inconsistent with participants' 
interests. For example, a few experts believed that the economic 
incentives for fiduciaries to vote with management could be significant 
enough, and the potential for penalties as a fiduciary weak enough, to 
make voting with management hard to resist.[Footnote 17] Several 
experts explained that since breaches of fiduciary duty are very 
difficult to uncover, limited transparency prevents participants and 
others from raising questions regarding whether votes were made solely 
in the interest of participants. They also contend that increased 
transparency provided by public disclosure may provide participants, 
regulators, and others with more comprehensive information needed to 
hold fiduciaries and corporations accountable for their actions. In 
this regard, SEC concluded that shedding light on mutual fund proxy 
voting could illuminate potential conflicts of interest and discourage 
voting that is inconsistent with fund shareholders' best interests.

SEC's new disclosure rules for mutual funds and investment advisers may 
provide a limited benefit to some pension plan participants, while the 
new rule for investment advisers may also benefit pension plans whose 
proxies are voted externally. In 2003, SEC issued a final rule 
requiring mutual funds to publicly disclose their proxy votes on an 
annual basis and to adopt and disclose proxy voting policies and 
procedures to shareholders. However, this rule may provide some benefit 
for pension plan participants in defined contribution plans. 
Specifically, pension plan participants who invest their defined 
contribution dollars in mutual funds might find proxy voting results 
cast by investment managers of their funds on the web site of the 
mutual fund provider. On the other hand, defined benefit plan 
participants may receive little benefit from this rule if defined 
benefit plans invest few assets in mutual funds.[Footnote 18] 
Furthermore, SEC's new disclosure rule for investment advisers requires 
investment advisers to inform their clients how they can obtain 
information on how the clients' securities were voted. However, this 
rule may provide little benefit to plan participants in defined 
contribution and defined benefit plans since this ruling requires 
disclosure to the plan as the client and not to plan participants.

SEC's new disclosure rule for investment advisers may also provide 
protections beyond those provided by ERISA for private pension plans 
whose proxies are voted externally. SEC's new disclosure rule for 
investment advisers may provide requirements that are either not 
specifically stated or covered in DOL interpretations of ERISA. For 
example, SEC requires, in part, that investment advisers[Footnote 19] 
exercising proxy voting authority over client securities adopt and 
implement proxy voting policies and procedures for voting clients' 
proxies.[Footnote 20] ERISA, on the other hand, does not require 
fiduciaries to maintain statements of investment policy, which includes 
statements of proxy voting policy. Also, SEC requires that voting 
policies and procedures must describe how the adviser addresses 
material conflicts between its interests and those of its clients with 
respect to proxy voting, while ERISA does not. SEC's investment adviser 
rule may provide no benefit to plans that retain voting responsibility 
because it covers only investment advisers that exercise proxy voting 
authority over client securities.

Certain changes in the retirement savings environment are making the 
need for enhanced transparency more important. For example, the shift 
from defined benefit plans to defined contribution plans increases the 
need for disclosure to plan participants.[Footnote 21] Because under a 
defined contribution plan participants bear the investment risk, as 
with shareholders, participants need information to be more active in 
protecting their retirement assets. SEC reported that the proposal 
generated significant comment and public interest. Of the approximately 
8,000 comment letters, the overwhelming majority supported the 
proposals and urged SEC to adopt the proposed amendments. Many 
commenters, including individual investors, fund groups that currently 
provide proxy-voting information to their shareholders, labor unions, 
and pension and retirement plan trustees, supported the 
proposals.[Footnote 22] Furthermore, one expert said that pension plans 
should be required to disclose votes and guidelines to participants 
because participants cannot switch plans the way shareholders can 
switch their money from one investment company to another. This expert 
further said that having policies such as these in place makes ERISA 
stronger especially given the impact that having their money tied up in 
a retirement portfolio could potentially have on a participant's 
retirement assets. Additionally, the expert said that the differences 
between disclosures provided to shareholders and pension plan 
participants should be eliminated.

Some Plan Fiduciaries Have Taken Actions to Manage Conflicts:

To manage conflicts, some plan fiduciaries have taken special actions, 
some of which are similar to SEC requirements for mutual funds. One 
such action is the maintenance by fiduciaries of detailed proxy voting 
guidelines that give proxy voters clear direction, reducing ambiguity 
and vulnerabilities related to conflicts that may influence the voter. 
Additionally, some fiduciaries include in their guidelines information 
on what the plan does when a conflict of interest exists on a proxy 
vote; they also publicly disclose their guidelines. Some plans also 
disclose a record of all their votes cast to participants and the 
public. Some pension plans also put additional procedures and 
structural protections in place to help manage conflicts.

Some Fiduciaries Have Developed Detailed Proxy-Voting Guidelines to 
Manage Conflicts:

To help manage conflicts, some fiduciaries use detailed proxy voting 
guidelines that they make public. However, such guidelines are not 
required by ERISA, nor does DOL give guidance to fiduciaries as to the 
level of detail and specificity that guidelines should contain. Hence, 
some plan guidelines vary widely in their level of detail and 
specificity and some provide only minimal guidance. For example, some 
plan officials we interviewed said that their guidelines instruct proxy 
voters to always vote in the best economic interest of participants, 
while other experts said that some guidelines only instruct proxy 
voters to vote with management but offer no guidance beyond this broad 
statement. Other plans, on the other hand, create detailed, up-to-date 
guidelines. Some plans that we reviewed, for example, maintain 
guideline documents that direct proxy voters which way to vote, or 
factors to consider in deciding which way to vote, on a wide range of 
routine and non-routine proxy issues. The issues include, but are not 
limited to, board of director elections, auditor selections, executive 
compensation, reincorporation, capital issues (such as stock issuance), 
environmental and social concerns, and mergers and acquisitions. In 
addition, some plans, according to plan officials we spoke with, review 
their guidelines on a regular basis, and update them if needed. This 
allows the guidelines to reflect new issues in corporate governance. 
For example, in 2002, one plan updated its guidelines twice to reflect 
new corporate governance issues arising from the Sarbanes-Oxley 
Act.[Footnote 23]

Detailed guidelines reduce ambiguity in the proxy voting process by 
providing direction to help fiduciaries determine how to vote. For 
example, detailed guidelines may instruct a voter how to analyze an 
executive compensation vote based on a number of factors, so that the 
vote is made in what the fiduciary believes is solely in the interest 
of participants. As a result, proxy voters have clear direction on how 
to vote on a specific voting issue. For example, one plan official said 
that because their guidelines are clear, there is no confusion about 
how to vote on any proxy issue. Furthermore, a plan fiduciary or proxy 
voter may use detailed guidelines to defend against complaints about 
votes by demonstrating that a given vote was based on their guidelines 
and was not influenced by a conflict of interest.

Some guidelines include what steps a proxy voter should take to prevent 
a fiduciary breach and ensure that the vote is made solely in the 
interest of participants when a conflict of interest exists. Similar to 
the recent SEC rule requiring mutual funds and investment advisers to 
disclose "the procedures that a mutual fund company/complex and 
investment advisers use when a vote presents a conflict…." some pension 
plan fiduciaries include such a discussion in their guidelines. For 
example, the guidelines of one plan fiduciary we examined indicate 
that, in the case of a conflict of interest, the issue is to be 
reported to the president and general counsel of the plan sponsor who 
decide how to proceed and ensure that a record of the conflict and the 
related vote is maintained. In addition, some fiduciaries provide 
further detail about what constitutes a conflict of interest. For 
example, one plan's guidelines define a conflict of interest as being 
"a situation where the Proxy Analyst or Proxy Committee member, if 
voting the proxy, has knowledge of a situation where either" the plan 
fiduciary "or one of its affiliates would enjoy a substantial or 
significant benefit from casting its vote in a particular way."

In addition to developing detailed guidelines, some plan fiduciaries 
voluntarily make their guidelines/policies and procedures available to 
the public, as SEC has required mutual funds to do. Some public pension 
plans disclose their guidelines on their Web sites, making them 
available not only for participants and beneficiaries but also the 
general public. The officials of some private plans indicated to us 
that they would probably produce a copy of their guidelines if 
explicitly requested by a participant, though they admitted that such a 
request is rarely, if ever, made. SEC addressed the issue of 
disclosure, when, in 2003, it began to require mutual funds to disclose 
their voting policies and procedures in their registration statement. 
Mutual fund policies and procedures are required to be available at no 
charge to shareholders upon request. Also, mutual funds must inform 
shareholders that the policies and procedures and votes are available 
through SEC's Web site, and, if applicable, on the fund's Web site. SEC 
made the case for guideline disclosure by stating that, "shareholders 
have a right to know the policies and procedures that are being used by 
a fund to vote proxies on their behalf." Many fund industry members 
publicly supported SEC's disclosure rule through comment letters sent 
to SEC after the rule proposal was released. Officials for one mutual 
fund company, for example, supported guideline disclosure because the 
transparency resulting from disclosure would encourage mutual funds to 
make better proxy voting decisions, which in turn could enhance fund 
performance. Also, they believed that guideline disclosure would deter 
casting proxy votes that are not in the best interest of shareholders.

Some Fiduciaries Disclose Proxy Votes, Providing Greater Incentive to 
Vote Appropriately:

Some plan fiduciaries also publicly disclose their proxy votes in an 
attempt to manage conflicts of interest. We met with officials of some 
public pension plans that disclose proxy votes on their Web sites, 
making them available not only to participants and beneficiaries, but 
also to the public.[Footnote 24] While some public plans disclose only 
the votes of a few hundred different equities, other plans disclose all 
their votes. These funds present a list of companies and how relevant 
proxies for that company have been voted during a specified timeframe. 
In addition, one plan sometimes includes a note that briefly explains 
the rationale for their vote (e.g., why they withheld their vote for a 
certain director). Two plans, whose officials we met with, also 
disclose the number of shares that were voted on each proxy.

In April 2003, a SEC rule went into effect requiring mutual funds to 
disclose, on an annual basis, a record of all proxy votes cast during 
the previous year. Mutual fund votes are required to be available on 
the fund's Web site or provided at no charge to shareholders upon 
request. Also, mutual funds must inform shareholders that the votes are 
available through SEC's Web site. SEC, in its rule release on mutual 
fund proxy vote disclosure, stated that the overall costs of disclosure 
are reasonable.[Footnote 25] The experience of the plans we examined 
that disclose their votes indicates that their costs are not 
substantial and not a serious burden because proxy voting is done 
electronically, and voting records are required to be maintained.

Some experts we interviewed argue that proxy vote disclosure can 
benefit participants by giving them information on how the plan votes 
proxies and providing an incentive to the plan fiduciary or proxy voter 
to vote appropriately. Disclosure would allow plan participants to 
review votes and raise questions as to whether votes were made 
appropriately. The knowledge that participants and beneficiaries might 
complain to the plan and to others if they believe a breach of its 
fiduciary duty has taken place may encourage fiduciaries to vote 
appropriately to avoid such problems. Some experts said that 
participants would be overwhelmed by the information and would not 
understand what to do with it. In addition, a few experts have said 
that it is possible that, while participants might not have the time or 
the knowledge to analyze proxy votes, an investigative journalist might 
look at votes of a certain pension plan and publicly discuss any 
possible breaches they have uncovered or notify the appropriate 
authorities if any breaches are found or are suspected.

Proxy voting disclosure may also influence the voting behavior of 
fiduciaries, as seen in the example of one large mutual fund. As 
reported in the news, one large mutual fund voted in favor of the full 
slate of directors nominated to serve on the board of directors on 29 
percent of proxy contests in which they voted in 2003, while in 2002 
the fund had voted in favor of the full slate in 90 percent of the 
contests.[Footnote 26] And while the fund had voted for 100 percent of 
auditor approvals in 2002, in 2003 it had voted for only 79 percent. 
Experts we interviewed said that SEC's disclosure rules might have 
contributed to that change in behavior. Nine of 12 respondents to our 
written interview support proxy vote disclosure by pension plan 
fiduciaries and many experts we spoke with also support proxy vote 
disclosure by plans. Very few respondents and experts we interviewed 
believed that disclosure of votes would not benefit pension plan 
participants. Specifically, they cited as reasons that: (1) the costs 
of disclosure outweigh any benefits to participants; (2) there is the 
potential for politicizing proxy voting; (3) disclosure may serve as a 
detriment to the investment manager's investment strategy; and (4) 
participants lack interest in proxy voting.

Some Fiduciaries Have Voluntarily Taken Additional Steps to Manage 
Conflicts of Interest:

Some plan fiduciaries have voluntarily taken additional steps to help 
manage conflicts of interest that may lead to breaches of fiduciary 
duty, including implementing structural protections and special proxy 
voting procedures. For example, a few plans we reviewed structure their 
organization to separate those who cast votes from executives who make 
policy decisions about the plan. Some plans delegate the responsibility 
for proxy voting in a way that protects against fiduciary breaches. One 
public plan, for example, had external asset managers cast proxy votes, 
but decided to bring the proxy voting process in house to avoid having 
the plan's proxies voted on both sides of an issue. By doing all voting 
internally, plan fiduciaries can provide better safeguards ensuring 
that votes are cast solely in the interest of participants and provide 
consistency to how votes were cast.

In order to address concerns about conflicts of interests related to 
employer stock in pension plans, a few pension plan officials we 
interviewed said that their company stock is managed and proxies are 
voted by an independent fiduciary outside of the company. In other 
cases, some fiduciaries use independent proxy-voting firms for research 
and analysis or to cast proxy votes on their behalf. For example, 
officials from one plan that we met with told us that they use an 
outside proxy-voting firm to make the vote decision when a conflict 
exists. One asset manager, for example, did so during a contentious 
merger in which their Chief Executive Officer was a director of the 
acquiring company. Some fiduciaries we met with have an outside proxy-
voter execute proxy votes based on their plan's own guidelines. Other 
fiduciaries simply use outside proxy-voter firms to provide analysis 
and research, which the fiduciary may then use to help determine how to 
vote.

Outside proxy voting firms are not without their own conflicts of 
interest, however. Some proxy-voting firms have expanded to other 
services. One firm, for example, provides a service to corporations in 
helping design proxies to improve the chances that proxy issues will 
succeed. A conflict of interest would exist when the proxy-voting firm 
has to vote on a proxy that it helped create or when it must vote a 
proxy for the same company from which it received revenue for some 
other service.

In addition to the structural protections some fiduciaries have put 
into place, some fiduciaries have implemented special procedures that 
are used when a conflict exists. For example, according to officials at 
one company we interviewed, if a proxy vote is to be cast not in 
accordance with the plan's guidelines, then the vote is decided by the 
plan's proxy committee, which is also required to note why the vote was 
inconsistent with plan guidelines. At other plans we reviewed, in the 
event that an attempt is made to influence a proxy vote, the plan's 
executive committee makes the vote decision. Additionally, officials 
from one private plan said that when a material conflict of interest 
exists an independent third-party proxy voter is given the 
responsibility to determine how to vote, based on the plan's 
guidelines. Furthermore, this plan has a "Material Conflict of Interest 
Form" which is filled out and signed by the voting analyst and a member 
of the plan sponsor's proxy committee. This form includes information 
on the stock being voted, the issue being voted on, what the plan's 
proxy voting guidelines indicate about that issue, details on the 
conflict of interest, and certification from the third-party proxy 
voter on how the vote was cast. In addition, at another plan, when a 
material conflict of interest exists during a proxy vote, the vote is 
reported to the president and general counsel of the plan sponsor. They 
decide how to address the situation, such as getting an outside vote 
recommendation or disclosing the existence of the conflict. A record of 
meeting notes and issues surrounding conflicts are maintained by the 
plan in case any questions arise.

The Department of Labor's Related Enforcement Efforts Have Been 
Limited:

The Department of Labor's enforcement of proxy voting requirements has 
been limited for several reasons. First, participant complaints about 
voting conflicts are infrequent, at least in part, because votes cast 
by a fiduciary or proxy voter generally are not disclosed; therefore, 
participants and others are not likely to raise questions regarding 
whether a vote may not have been cast solely in their interest. In 
addition, for the department, ERISA presents legal challenges for 
bringing proxy voting cases.[Footnote 27] Specifically, because of the 
subjective nature of fiduciary votes, it is difficult to obtain 
evidence that would prove the plan fiduciary was influenced by 
something other than the interests of participants. Furthermore, even 
if such evidence could be obtained, monetary damages are difficult to 
value and, because the department has no statutory authority to impose 
a penalty without assessing damages, fiduciary penalties are difficult 
to impose. In part, because of these challenges, but also because of 
its limited resources, DOL's reviews of proxy voting in recent years 
have been limited. As a result, some experts we interviewed do not view 
the department as a strong enforcement agent.

Identifying and Proving Breaches in the Proxy Voting System Is 
Difficult:

Challenges exist in the proxy voting system that limit DOL's ability to 
identify breaches and to prove that a fiduciary was influenced to act 
contrary to the interests of plan participants. In March 2002, we 
reported that DOL enforces ERISA primarily through targeted 
investigations. DOL determines what issues it will investigate using a 
multifaceted enforcement strategy, which ranges from responding to 
participant and others' concerns to developing large-scale projects 
involving a specific industry, plan type, or type of 
violation.[Footnote 28] DOL also uses the Annual Returns/Reports of 
Employee Benefit Plans (Form 5500 Returns) to identify potential issues 
for investigation.[Footnote 29] In addition, its regional outreach 
activities, while aimed primarily at educating both plan participants 
and sponsors, are used to gain participants' help in identifying 
potential violations.

Although DOL's strategy includes a number of ways to target 
investigations, DOL officials consider information provided by plan 
participants and beneficiaries an integral starting point to developing 
many of its investigations. For instance, through information provided 
in summary annual reports (SARs), summary plan descriptions (SPDs), 
individual benefit statements, and other related reports, participants 
have access to financial and operational information regarding their 
pension plan and their accrued benefits. The information provided in 
these reports can help participants and beneficiaries monitor their 
plans and identify some warning signs that might alert them that 
possibly there is a problem warranting DOL's attention.

While participant complaints might be useful in targeting some DOL 
investigations, relying on participant complaints may not currently be 
the most effective way to identify potential proxy voting cases. 
Because of the current limited level of disclosure, DOL receives few 
complaints related to proxy voting. For instance, as previously 
mentioned, the SARs and other related reports provide plan financial 
and operational information; however, they do not contain proxy voting 
information such as voting guidelines and a record of how votes were 
cast. In addition, DOL officials told us that proxy votes and 
guidelines are disclosed to the plan and guidelines must be made 
available to participants and beneficiaries when requested. However, 
one expert explained that participants generally do not know to ask for 
this information. As such, they are not likely to raise questions about 
whether or not a vote was cast solely in their interest. Likewise, 
because proxy votes are not publicly disclosed, complaints to DOL from 
those outside of plan participants and beneficiaries are less likely to 
occur.

In addition to difficulties identifying potential breaches in the proxy 
voting system, difficulties proving under ERISA that a fiduciary was 
influenced to act contrary to the interests of plan participants are 
also a challenge for DOL. Because a plan fiduciary's vote requires 
judgment, determining what influenced his or her vote can be difficult. 
If a plan fiduciary can provide his or her rationale for voting a 
certain way--proving that, in his or her opinion, proxies were voted 
solely in the interest of plan participants--it is very difficult for 
DOL or others to prove otherwise. Proving a fiduciary breach requires 
evidence that the plan fiduciary was influenced in the voting by 
something other than the interests of plan participants. Certain 
information--such as existing conflicts of interest between the plan 
fiduciary and some other influential party, the plan fiduciary's own 
self-interest, or the potential impact of certain votes, for instance-
-are important when trying to establish that such influence was acted 
upon. Absent this or similar information, leaks by informed parties--
whistleblowers--are likely to be the only way one might prove a breach 
actually occurred.

Monetary Damages Are Difficult to Value and Penalties Are Difficult to 
Impose:

Another challenge that DOL faces is that monetary damages are difficult 
to value and, therefore, penalties and other sanctions are difficult to 
impose. According to DOL, it is difficult to link a single proxy vote 
to damages to the plan participants. This is often the case because 
there are many economic variables that have an impact on share value. 
That is, underlying economic factors such as fiscal policy, monetary 
policy, unemployment, the threat of inflation, the global economy, and 
currency valuations are all major determinants of share value. 
Therefore, it is difficult to isolate the effect a single proxy vote 
may have had. Also, because of the potential for a vote to have a long-
term rather than a short-term effect on share value, damages may not be 
immediately evident.

In addition, while the research community and others have differing 
opinions about whether proxy votes have economic value, where it is 
believed that these votes do have a value, the determination of this 
value can be complicated. For example, in response to our written 
interview, most experts who responded to this question indicated that 
valuing proxy votes is a complex task, its difficulty dependent upon 
variables such as the issue being voted on and an entities' governance 
structure. One respondent said that a case could possibly be made if a 
decline in the value of a company could be tied to the specific point 
in time when the plan fiduciary voted for a self-serving measure. 
However, the fiduciary's vote would have to be significant enough to 
affect the outcome of the proxy contest. Using the Hewlett-Packard 
situation as an example, the respondent added that one cannot know what 
the value of Hewlett-Packard shares would have been if the merger had 
not gone through and thus one cannot calculate the difference between 
that value and the current value of the merged Hewlett-Packard/Compaq 
shares. Additionally, others commented that, in the end, DeAM's vote 
might not have affected the outcome of the proxy contest.

With respect to penalties, unlike SEC, which has the authority to 
impose a penalty without first assessing and then securing monetary 
damages, DOL does not have such statutory authority and, as such, must 
assess penalties based on damages or, more specifically, the 
restoration of plan assets.[Footnote 30] Under Section 502(l), ERISA 
provides for a mandatory penalty (1) against a fiduciary who breaches a 
fiduciary duty under, or commits a violation of, Part 4 of Title I of 
ERISA or (2) against any other person who knowingly participates in 
such a breach or violation. This penalty is equal to 20 percent of the 
"applicable recovery amount," or any settlement agreed upon by the 
Secretary or ordered by a court to be paid in a judicial proceeding 
instituted by the Secretary. However, the applicable recovery amount 
cannot be determined if damages have not been valued. As we reported in 
1994, this penalty can be assessed only against fiduciaries or knowing 
participants in a breach who, by court order or settlement agreement, 
restore plan assets.[Footnote 31] Therefore, if (1) there is no 
settlement agreement or court order or (2) someone other than a 
fiduciary or knowing participant returns plan assets, the penalty may 
not be assessed. Because DOL has never found a violation that resulted 
in monetary damages, it has never assessed a penalty or removed a 
fiduciary as a result of a proxy voting investigation.

As a Result of Challenges, DOL Has Devoted Few Resources to Proxy 
Voting Issues:

As a result of challenges in the proxy voting system, DOL has devoted 
few resources to proxy voting over the last several years. Between 1988 
and 1996, DOL conducted three enforcement studies to determine the 
level of compliance with proxy voting requirements among select 
fiduciaries (see table 1). The first of these projects was initiated in 
May 1988,[Footnote 32] when the department looked at the management of 
plan votes from a broad range of investment managers, with a particular 
focus on certain contested issues considered at annual shareholders' 
meetings in that year. Then in 1991, DOL started its second project to 
determine how banks were fulfilling their responsibilities with respect 
to proxy voting practice. DOL looked at proxy voting procedures at 75 
banks, covering the application of procedures during the 1989 or 1990 
proxy season. Finally, during its last project, the department once 
again reviewed the practices of investment managers--12 in total--
alongside 44 pension plans, with respect to corporate governance 
issues. It reviewed certain proxy votes at five annual shareholders' 
meetings held in 1994 and general proxy voting polices and practices. 
According to DOL, overall the enforcement studies found that there were 
improvements in proxy voting practices as virtually all plans and 
investment managers in the studies voted their proxies. The enforcement 
studies also found that additional improvement is needed in the plans' 
monitoring of investment managers to ensure that proxies are voted in 
accordance with stated policies. Furthermore, they found that although 
investment managers appear to have the records to enable clients to 
review managers' decisions on proxy voting, few plan clients actually 
review the reports that are automatically provided to them. In the 
situations in which reports are available upon request, few plans 
request a copy. Given these findings, the department has not conducted 
similar reviews in recent years to determine current levels of 
compliance. DOL officials told us that they believe that proxy voters 
are generally in compliance, that they receive few complaints in this 
area, and that they focus most of their limited resources on other 
priority areas, which may result in identifying violations that can be 
corrected.

Table 1: Summary of the Department of Labor's Proxy Projects:

Years: 1988 -1989; 
Project: No. 1; 
Scope: General fiduciary compliance review of investment managers (IMs) 
with control over employee benefit plan assets subject to ERISA; 
Focused on certain contested issues considered at annual shareholders' 
meetings in 1988; 
Summary of findings: Not all investment managers who voted on behalf 
of employee benefit plans were delegated the authority to vote 
proxies. Instead, many managers assumed the duty of voting as part of 
their overall responsibilities; Not all managers had internal decision 
making procedures or written proxy voting guidelines in place when they 
voted proxies, and those that did often had a policy to simply vote 
with management; Managers often lacked accurate recordkeeping with 
regard to whether proxies had been received and voted.

Years: 1991 - 1992[A]; 
Project: No. 2; 
Scope: Review of 75 banks' proxy voting practices (covering the 
application of procedures during the 1989 or 1990 proxy season only); 
Summary of findings: Many banks lacked a policy that addressed the 
maintenance and retention of proxy voting records or related 
materials'; Several banks had policies to abstain from voting or not 
vote on certain issues; Many banks followed the "Wall Street Rule," 
giving the proxy to management of the company or selling the shares of 
stock.

Years: 1994 - 1996; 
Project: No. 3; 
Scope: Review of practices of 12 IMs and 44 pension plans with respect 
to corporate governance issues covered by Interpretive Bulletin 94-2; 
Focused on certain proxy votes at five annual shareholders' meetings 
held in 1994 and the general polices and practices with respect to 
proxy voting; 
Summary of findings: Most plans delegated the authority to vote 
proxies to an IMs via written agreement; Most IMs received written 
proxy voting policies from their clients, but on an irregularly basis; 
Fourteen of 44 plans reviewed submitted proxy voting guidelines to 
their IMs; over half had no proxy guidelines; and 7 retained the 
authority to vote proxies; The content of the guidelines were mixed--
some general, some quite detailed; All IMs tracked proxy-related items 
and kept written documentation justifying votes cast; most had written 
procedures to report votes to clients, but few did so automatically; 
Most plans did not monitor proxy voting by their IMs, about 35 percent 
appeared to have performed substantive monitoring of IMs. 

Source: DOL Proxy Project Report, March 2, 1989; Speech by David George 
Ball, Assistant Secretary, Pension and Welfare Benefits Administration, 
February 17, 1992; Proxy Project Report, February 23, 1996.

[A] Results of the second proxy project were not released in a formal 
report.

[End of table]

DOL officials said that they typically do not conduct specific 
investigations focused on proxy voting, and they allocate few resources 
to this issue. They, instead, focus its limited resources according to 
their Strategic Enforcement Plan.[Footnote 33] However, proxy voting 
practices may be examined during their investigations of investment 
managers. DOL said that its investment management investigative guide 
has steps for reviewing proxy voting, but the investigators have 
discretion whether to review proxy voting practices. According to DOL 
officials, investigators receive training on the general fiduciary 
obligations of named fiduciaries and investment managers with respect 
to the voting of proxies on plan-owned stock. When asked how often 
these reviews included the examination of proxy voting, DOL officials 
responded that this information is not tracked.

Some plan fiduciaries and industry experts that we interviewed have 
indicated that DOL lacks visibility as an enforcement agent in this 
area. For example, some experts said that DOL's examination of proxy 
voting practices does not seem to occur routinely and that it is not 
clear what enforcement action DOL has taken in recent years related to 
proxy voting. Additionally, others have described an environment that 
provides little incentive to do what is best for participants, 
indicating that fiduciaries have no expectation that DOL will take 
action should they breach their proxy voting responsibilities. One DOL 
official said that the department has made its position on proxy voting 
known and issued clear guidance on what is required of fiduciaries. 
Also, given its limited statutory authority and resources, the 
department has a strategic enforcement plan, and based on this plan, 
they place their limited resources in areas that will result in 
identifying violations that can be corrected.[Footnote 34]

Conclusions:

The retirement security of pension plan participants is dependent on 
decisions made each day in the market place by pension plan 
fiduciaries. DOL guidance requires fiduciaries to cast proxy votes 
solely in the interest of plan participants and beneficiaries. While 
ERISA requires that voting guidelines be made available to participants 
upon request, ERISA does not require disclosure of proxy votes to 
participants and the public. Increased transparency of both proxy 
guidelines and votes could provide participants and others with 
information needed to monitor actions that affect retirement assets. 
Nor does ERISA require, as current SEC regulations do for mutual fund 
investment companies and investment advisers, that plans include in 
their guidelines language regarding what actions fiduciaries will take 
to respond to conflicts of interest. However, some plan fiduciaries 
have taken actions to manage conflicts of interest, including 
maintaining proxy voting guidelines and disclosing votes. Likewise, a 
few plan sponsors have hired independent fiduciaries to manage company 
stock in their pension plans.

DOL's role in enforcing ERISA's fiduciary provisions, including proxy 
voting requirements, is essential to ensuring that plan fiduciaries are 
voting solely in the interest of plan participants and beneficiaries. 
Yet, DOL has faced a number of enforcement challenges, including legal 
requirements restricting its ability to assess penalties under ERISA. 
Furthermore, DOL officials said that the agency does not have the 
statutory authority to require plan fiduciaries to periodically and 
publicly disclose proxy votes and guidelines. SEC, because of its role 
in protecting all investors, including those in participant-directed 
retirement savings plans, has taken steps to increase transparency in 
the mutual fund industry. DOL's inability to take similar steps with 
respect to pension plan fiduciaries may provide inappropriate 
incentives for fiduciaries not to act solely in the interest of plan 
participants when voting proxies. Furthermore, given both DOL and SEC 
goals to protect plan participants as investors, coordination of their 
efforts to achieve this goal is important.

Matters for Congressional Consideration:

If the Congress wishes to better protect the interest of plan 
participants and increase the transparency of proxy voting practices by 
plan fiduciaries, it should amend ERISA to require that plan 
fiduciaries:

* develop and maintain written proxy-voting guidelines;

* include language in voting guidelines on what actions the fiduciaries 
will take in the event of a conflict of interest; and:

* given SEC's proxy vote disclosure requirements for mutual funds, 
annually disclose votes as well as voting guidelines to plan 
participants, beneficiaries, and possibly also to the public. From a 
practical perspective, this disclosure could apply to all votes, but at 
a minimum, it should include those votes that may affect the value of 
the shares in the plan's portfolio. Such disclosures could be made 
electronically on the applicable Website. Since many plans often use 
multiple fiduciaries for voting proxies, the plan also could provide 
participants and others directions on how voting records by the various 
fiduciaries could be obtained. We believe that Congress should assure 
that participants have the right to request proxy voting records at 
least annually, consistent with their current right to request other 
plan documents.

Congress should also consider amending ERISA to give the Secretary of 
Labor the authority to assess monetary penalties against fiduciaries 
for failure to comply with applicable requirements.

Finally, Congress should consider amending ERISA to require that, at a 
minimum, an independent fiduciary be used when the fiduciary is 
required to cast a proxy vote on contested issues or make tender offer 
decisions in connection with company stock held in the company's own 
pension plan. In our view, this independent fiduciary requirement would 
not affect votes by a participant in an eligible individual account 
plan.

Recommendations for Executive Action:

To improve oversight and enforcement of proxy voting, we recommend that 
the Secretary of Labor direct the Assistant Secretary of EBSA to 
increase the Department's visibility in this area by:

* conducting another enforcement study and/or taking other appropriate 
action to more regularly assess the level of compliance by plan 
fiduciaries and external asset managers with proxy voting requirements. 
Such action should include examining votes, supporting analysis, and 
guidelines to determine whether fiduciaries are voting solely in the 
interest of participants and beneficiaries, and:

* enhancing coordination of enforcement strategies in this area with 
SEC.

Agency Comments and Our Evaluation:

We provided a draft of this report to DOL and SEC for their review and 
comment. DOL's comments are included in appendix II; SEC did not 
provide written comments. Both agencies provided technical comments, 
which we have incorporated as appropriate. In its response to our draft 
report, DOL generally disagreed with our matters for congressional 
consideration and recommendations, saying that conflicts of interest 
affecting pension plans are not unique to proxy voting and that 
requiring independent fiduciaries and increased disclosures would 
increase costs and discourage plan formation. DOL also said that the 
enforcement studies of proxy voting practices undertaken previously by 
the department provide an adequate measure of compliance in this area 
and, therefore, to undertake new such studies, with an expectation of 
finding no significant level of noncompliance, would be an 
inappropriate use of resources.

Our recommendations and matters for congressional consideration are 
predicated on two principles: additional transparency and enhanced 
enforcement presence. We believe that disclosing pension plans' proxy 
voting guidelines and votes makes it more likely that votes will be 
cast solely in the interest of plan participants, and that a visible 
enforcement presence by DOL helps to reinforce the public interest in 
this result. So although we agree with certain of DOL's points, we 
cannot agree that additional transparency and an enhanced enforcement 
presence would not be beneficial. Furthermore, because DOL believes 
that it does not have the authority to require proxy voting guidelines 
and disclosure of votes, and, in our view, it is important to shed more 
light on events such as proxy voting---particularly contested proxy 
votes---we believe Congress should consider amending ERISA to include 
such requirements.

We acknowledge that plan fiduciaries face conflicts beyond proxy voting 
and that conflicts associated with casting a proxy vote may be no 
greater than the potential for conflicts in making other fiduciary 
decisions. However, our work and, therefore, our recommendations are 
focused on issues related to proxy voting. Furthermore, we found that 
DOL's enforcement in this area has been limited, which may not be the 
case in its oversight of other fiduciary actions. For example, tender 
offer decisions made by fiduciaries may suffer from similar conflicts. 
DOL, however, has been able to develop investigative cases and secure 
positive results for plan participants and beneficiaries in connection 
with this area. However, DOL has not been similarly successful in 
developing proxy voting cases. Given that plan participants may be 
particularly vulnerable when internal fiduciaries vote employer stock 
held in the plan sponsor's s own pension plan, we believe it is an 
appropriate safeguard to require an independent fiduciary be appointed 
to vote these proxies. We are recommending independent fiduciaries for 
certain circumstances. Furthermore, in our view, this independent 
fiduciary requirement would not affect votes by a participant in an 
eligible individual account plan.

In disagreeing with our recommendation that Congress consider amending 
ERISA to require that an independent fiduciary be used to vote proxies 
for employer stock held in a plan sponsor's own pension plan, DOL said 
that the Congress already considered, but did not include, an 
independence requirement for plan fiduciaries when it passed ERISA in 
1974. We acknowledge that Congress did not require independent 
fiduciaries when it originally enacted ERISA. However, the conflicts of 
interest associated with plan holdings of company stock have received 
increased public attention in the last several years, and we believe 
the Congress should reconsider ERISA's current legal requirements in 
connection with company stock.

In response to our recommendation that DOL conduct another enforcement 
study to determine the level of compliance with proxy voting 
requirements, DOL said that it has seen no evidence of a negative 
change in the level of compliance and that another proxy enforcement 
study would absorb a considerable amount of resources. Rather than 
conducting another proxy enforcement study, DOL said that it would 
evaluate proxy voting information during its investigations in the 
financial services area. As we discuss in our report, limited statutory 
authority and other challenges are obstacles to effective DOL 
enforcement in this area. Furthermore, we understand that DOL must 
balance efforts in this area with other enforcement priorities. The 
statutory changes we have suggested, if enacted, may help DOL's 
enforcement efforts in the future. Nonetheless, even with such changes, 
we believe that conducting reviews of proxy voting issues on a periodic 
basis is important to ensure compliance and increase DOL's presence and 
visibility in this area. We acknowledge that conducting another 
enforcement study is just one of various options available to DOL to 
accomplish these goals and have altered our recommendation to be 
explicit on this point. However, in our view, any review in this area 
should go beyond simply determining whether fiduciaries cast proxy 
votes, and should include assessing whether plans are monitoring proxy 
voting practices by external investment managers and evaluating whether 
fiduciaries voted solely in the interest of plan participants and 
beneficiaries.

Regarding our matter for congressional consideration that plan 
fiduciaries be required to disclose proxy voting guidelines and votes, 
at a minimum, to plan participants, DOL noted that appropriate plan 
fiduciaries are required to monitor proxy voting information and that 
proxy voting guidelines are available to participants upon request. DOL 
further said that requiring disclosure to the general public or even to 
all participants would significantly increase costs to plans. 
Recognizing that ERISA's disclosure requirements are focused on plan 
participants and beneficiaries, not the general public, we modified our 
matter for congressional consideration to state that proxy guidelines 
and votes should at a minimum be disclosed to participants and 
beneficiaries. Our report addressed concerns about the potential costs 
of disclosing proxy voting guidelines and votes by suggesting that such 
information could be made available electronically.

Unless you publicly announce its contents earlier, we plan no further 
distribution until 30 days after the date of this report. At that time, 
we will send copies of this report to the Secretary of Labor, the 
Chairman of the Securities and Exchange Commission, appropriate 
congressional committees, and other interested parties. We will also 
make copies available to others on request. In addition, the report 
will be available at no charge on GAO's Web site at http://www.gao.gov.

If you have any questions concerning this report, please contact me at 
(202) 512-7215 or George Scott at (202) 512-5932. See appendix III for 
other contributors to this report.

Sincerely yours,

Signed by: 

Barbara D. Bovbjerg: 
Director, Education, Workforce, and Income Security Issues:

[End of section]

Appendix I: Scope and Methodology:

To determine what conflicts exist in the proxy voting system and the 
extent to which fiduciary breaches occur as a result of these 
conflicts, we interviewed officials at the Department of Labor's 
Employee Benefits and Security Administration (DOL) and at the 
Securities and Exchange Commission (SEC). Using a standard set of 
questions, we conducted interviews with proxy voting experts, 
academics, economists, and Employee Retirement Income Security Act 
(ERISA) attorneys. We also interviewed various proxy voting experts 
which include academics, ERISA lawyers, industry experts, pension plan 
sponsors, asset managers, proxy voting firm representatives, proxy 
soliciting companies, and plan practitioners. These experts were, in 
part, selected from news articles involving abuses in the mutual fund 
industry, from news reports regarding corporate scandals such as Enron, 
from reported highly contested proxy contests, from historical articles 
dated back to the proxy scandals in the 1980s and 1990s, and from 
recent reports in the news and SEC's Web site pertaining to SEC's proxy 
voting disclosure proposals. Experts were also selected based on 
published research on proxy voting, based on discussions with plan 
sponsors and industry experts, congressional testimony, and 
Congressional Research Service reports.

To determine what safeguards fiduciaries have put in place to protect 
against breaches, we interviewed a number of public and private pension 
plan sponsors, asset managers, proxy voting firm representatives, and 
other experts. These public and private pension plans were selected for 
their promising practices based on discussions with industry experts, 
from pension industry publications and other published reports of the 
corporate governance practices of these plans. To explore the practices 
of internally managed plans, we interviewed various proxy voting 
experts and interviewed officials of the plans listed in the Pensions 
and Investments with internally managed assets.

To determine DOL's enforcement of proxy voting requirements, we 
interviewed officials at EBSA and reviewed DOL enforcement material and 
previously issued GAO reports on DOL's enforcement program.

Obtaining Total Number of Employer Securities Held in the Company's Own 
Pension and Welfare Benefit Plans:

To determine the extent to which private pension plans invested in 
their own employer securities, we obtained the total value of the 
employer stock in the company's pension and welfare benefit plans. To 
do so, we analyzed plan financial information filed annually (Form 
5500s) with the Internal Revenue Service and EBSA. The Form 5500 report 
is required to be submitted annually by the administrator or sponsor 
for any employee benefit plan subject to ERISA as well as for certain 
employers maintaining a fringe benefit plan. The report contains 
various schedules with information on the financial condition and 
operation of the plan. The total value of employer shares information 
is provided on either schedule H or schedule I depending on the number 
of participants covered by the plan. EBSA provided us with a copy of 
the 2001 electronic Form 5500 database for our analysis.[Footnote 35] 
We assessed the reliability of these data for our purposes by 
evaluating the electronic records selected for analysis for outliers, 
duplicate records, and otherwise inappropriate values. Form 5500 
records that did not meet our review standards were eliminated from our 
analysis.

We decided to focus our analysis of companies with Form 5500 data to 
those corporations listed in the Fortune 500.[Footnote 36] To do so, we 
matched each Fortune 500[Footnote 37] company to their pension plans on 
the basis of their Employer Identification Numbers (EINs).[Footnote 38]

We used several methods to identify EINs associated with each 
corporation. We started with a list of EINs for Fortune 500 companies 
that was purchased from Compustat (a database from Standard & Poors). 
To identify the EINs for the remaining companies, we searched the 10K 
annual filing statement for each relevant company. We then searched 
those companies whose Form 5500s reported that they held their own 
employer securities at the year's plan end year date.[Footnote 39] This 
resulted in a database for filing year 2001 containing the information 
of 490 Form 5500 returns filed by 272 of the Fortune 500 companies.

Obtaining the Total Number of Shares Outstanding for Selected Fortune 
500 Companies:

To analyze the total voting power of those 272 Fortune 500 companies on 
our list for plan year 2001, we obtained the proxy statements filed 
with SEC as form 14-A DEF for those companies. Form 14-A DEF statements 
are the final annual proxy statements sent to all shareholders of a 
corporation that detail all the issues that are to be voted on. The 
statements also list the number of shares entitled to vote on the proxy 
issues and, where applicable, the number of votes per share (e.g., some 
companies might issue different classes of preferred stock which 
entitle the owner to more than one vote per share). For each company, 
we multiplied the number of shares outstanding for each class of share 
by the number of votes entitled to that class and added up those 
figures for all classes of shares to get a reflection of total number 
of shareholder votes. We used data from the 14-A DEF statements filed 
as soon after the end of calendar year 2001, which was typically in the 
spring of 2002.

Obtaining the Closing Price for Our Fortune 500 Companies:

We also obtained share price data from the New York Stock Exchange's 
(NYSE) Trade and Quote (TAQ) database. We used that database to obtain 
the closing price (the price of the last transaction of the day) on the 
day indicated as the plan end of year date from the Form 5500 for each 
company. The TAQ database contains a listing of intraday transactions 
(including shares involved and the price) for all companies listed on 
the NYSE, the National Securities Dealers Stock Exchange (NASDAQ) and 
the American Stock Exchange (AMEX). To ensure the reliability of the 
TAQ price date, GAO economists previously conducted a random crosscheck 
of the TAQ data with data provided by NADAQ, Yahoo! Finance, and other 
publicly available stock data sources.

Computing the Number of Voting Shares Held in Fortune 500 Company 
Pension and Welfare Benefit Plans:

From the 5500 data, we obtained the total value at yearend for company 
stock holdings by corporations in their pension and welfare benefit 
plans. From the TAQ database, we obtained the closing price of the 
stock on the plan yearend date. We then divided the closing price of 
the stock into the total value at yearend to get a number of voting 
shares held in the company's pension and welfare benefit 
plans.[Footnote 40]

We then divided the total votes outstanding (i.e., total number of 
votes based on available classes of stock for each of our Fortune 500 
companies) by the number of votes controlled by the pension plan to 
obtain the voting power, or the percentage of votes controlled by the 
company's pension and welfare benefit plans.

[End of section]

Appendix II: Comments from the Department of Labor:

U.S. Department of Labor: 
Assistant Secretary for Employee Benefits Security Administration: 

Washington, D.C. 20210:

July 9, 2004:

Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States General Accounting Office: 
Washington, DC 20548:

Dear Ms. Bovbjerg:

Thank you for giving the Department of Labor (DOL) the opportunity to 
offer remarks regard the General Accounting Office's (GAO) draft report 
entitled "Pension Plans: Additional Transparency and Other Actions 
Needed in Connection with Proxy Voting" (GAO-04-749). This letter 
provides comments on the recommendations contained in the draft report; 
we have already provided technical comments directly to you and your 
staff.

The GAO report recommends that Congress amend ERISA to require 
fiduciaries to implement proxy voting guidelines, to disclose these 
guidelines and proxy votes cast on an annual basis, and to require the 
appointment of an independent fiduciary to cast proxy votes. These 
recommendations appear to be predicated on the notion that proxy-voting 
issues present unique conflict of interest concerns for ERISA 
fiduciaries, and that these potential conflicts expose plan 
participants and beneficiaries to significant risks.

The report concludes legislative action is necessary as "conflicts of 
interest in proxy voting can occur because various business and 
personal relationships exist, which can influence a fiduciary's vote." 
In so concluding, however, the report overlooks the fact that Congress 
did not include an independence requirement for plan fiduciaries when 
it passed ERISA in 1974, and instead expressly allowed corporate 
officers and other persons to "wear two hats." While Congress 
recognized that this created the possibility of conflicts of interest, 
it addressed these possible conflicts through the high standards of 
fiduciary duty, the personal liability of fiduciaries for their 
decisions, the creation of prohibited transactions and similar 
provisions. Requiring wholly independent fiduciaries would increase 
costs and discourage the formation of voluntary employee benefit plans. 
The potential for a conflict of interest in casting a proxy vote is no 
greater than the potential for a conflict of interest in making dozens 
of other fiduciary decisions in an ERISA plan. As in those other 
decisions, the issue is whether the fiduciary acted in the best 
interests of the participants and beneficiaries.

Part of the Department's duty to oversee ERISA plans is to monitor the 
exercise of fiduciary duties, including how fiduciaries manage 
potential conflicts. With respect to proxy voting, the Department has 
examined the issue on a regular basis, issued several forms of guidance 
on ERISA's requirements, and filed amicus briefs in several key court 
cases. In addition, the Department has conducted three specific 
enforcement studies of 
proxy voting practices that determined fiduciaries generally comply 
with ERISA and, since the completion of the last study, has seen no 
evidence of a negative change in the level of compliance-indeed, 
industry best practices embrace proxy guidelines. The Department now 
includes steps for reviewing proxy voting in its investment management 
investigative guide and, when such reviews have taken place, few, if 
any, violations have been uncovered.

The three proxy enforcement studies absorbed a considerable amount of 
resources, as would any new proxy enforcement study. Given the DOL's 
other pressing enforcement priorities, the diversion of needed 
resources to an enforcement study that we have no reason to believe 
will find significant non-compliance with ERISA would be an 
inappropriate use of resources. Understanding proxy voting practices is 
very important, but rather than undertaking another study, the DOL will 
capture for further evaluation additional proxy voting information 
during our investigations in the financial services area.

The report also concludes that proxy votes and voting guidelines should 
be distributed to all participants and be released to the general 
public. Proxy voting information is required to be monitored by 
appropriate plan fiduciaries and proxy guidelines are available to 
participants upon request. Requiring disclosures of proxy voting to all 
participants would significantly increase printing, mailing and 
administrative costs to the plan. Current law strikes the proper 
balance between cost and access by guaranteeing that fiduciaries 
monitor compliance with proxy guidelines and any participant who wishes 
to may receive copies of any guidelines upon request.

We appreciate having had the opportunity to review and comment on this 
draft report.

Sincerely,

Signed by: 

Ann L. Combs: 

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments:

Contacts:

George A. Scott, Assistant Director (202) 512-5932 Kimberley M. 
Granger, Senior Economist and Analyst-in-Charge (202) 512-3708:

Staff Acknowledgments:

Other major contributors include Gwendolyn Adelekun, Matthew Rosenberg, 
Gene Kuehneman, Lawrance Evans, Alison Bonebrake, Derald Seid, Corinna 
Nicolaou, Michael Maslowski, Roger J. Thomas, Richard Burkard, and 
Kenneth J. Bombara.

FOOTNOTES

[1] A defined benefit plan promises to provide a benefit that is 
generally based on an employee's salary and years of service. Defined 
benefit plans use a formula to determine the ultimate pension benefit 
that participants are entitled to receive. The employer, as plan 
sponsor, is responsible for making contributions that are sufficient 
for funding the promised benefit, investing and managing the plan 
assets, and bearing the investment risk.

[2] Under defined contribution plans, employees have individual 
accounts to which the employee, employees, or both make periodic 
contributions. Defined contribution plan benefits are based on the 
contributions to and investment returns (gains and losses) on 
individual accounts. In a defined contribution plan, the employee bears 
the risk and often controls, at least in part, how his or her 
individual account assets are invested.

[3] These data are according to the flow of funds data issued on March 
2004 from the Federal Reserve Board. Mutual funds own about 18 percent 
of total corporate equity, while households directly own about 39 
percent.

[4] A plan fiduciary includes a person who has discretionary control or 
authority over the management or administration of the plan, including 
the management of plan assets. Any person who makes investment 
decisions with respect to a qualified employee benefit plan's assets is 
generally a fiduciary. The duties the person performs for the plan 
rather than their title or office determines whether that person is a 
plan fiduciary. Unless otherwise indicated, in this report we use the 
term fiduciary or plan fiduciary as those persons who have the 
responsibility for voting proxies. Plan fiduciaries have a 
responsibility to vote proxies on issues, including those that may 
affect the value of the shares in the plan's portfolio. 

[5] SEC brought an enforcement action against Deutsche Bank Asset 
Management in connection with its voting of client proxies for the HP-
Compaq merger transaction and imposed a $750,000 penalty. The fine was 
imposed for not disclosing a conflict. SEC action found that DeAM 
violated its fiduciary duty to act solely in the best interests of its 
advisory clients by voting the proxies on the HP stock owned by its 
advisory clients without first disclosing the conflict.

[6] The Deputy Assistant Secretary of the Pension Welfare Benefits 
Administration (PWBA now known as EBSA) issued the Avon letter to Mr. 
Helmuth Fandl, Chairman of the Retirement Board of Avon Products, Inc., 
on February 23, 1988. Current U.S. Comptroller General David M. Walker 
was the Assistant Secretary of Labor for the PWBA from 1987 to 1989.

[7] The named fiduciary could also delegate the proxy voting 
responsibility to a trustee bank, third-party proxy voting firm, or an 
independent fiduciary.

[8] Defined benefit plans may not acquire any qualifying employer 
security or qualifying employer real property in excess of 10 percent 
of fair market value of the plan's assets. Defined contribution plans 
are generally exempt from the 10 percent limitation. 

[9] The DOL sued Enron, corporate directors, and the administrative 
committee on June 26, 2003, for violating ERISA. The suit alleges that 
certain company and plan officials failed to consider the prudence of 
Enron stock as an appropriate investment for the retirement plans and 
did nothing to protect the workers and retirees from extensive losses. 
The former corporate executive was also charged with misrepresenting 
Enron's financial condition to employees and plan officials and 
encouraging them to buy the stock.

[10] Insider trading rules state that a person or entity may not sell 
or buy stock based on information that is not publicly available.

[11] Management also has access to other proxy voters--employees who 
participate in the company's pension plan which has company stock as an 
investment choice in their 401(k) plan or if the plan sponsor offers an 
Employee Stock Ownership Plan (ESOP). The plan fiduciary is responsible 
for voting unallocated stock and stock allocated to pension plan 
participants that has not been voted. Unallocated shares of stock are 
those that have not been distributed and are held by the company in a 
suspense account. Allocated shares of stock are those shares that have 
been both distributed to the employees of the company's pension plan 
and to outside investors (e.g., by institutional investors such as 
other pension plans and mutual funds, or individual investors). How the 
fiduciary must vote those stock is outlined in the plan documents. The 
directions provided in the plan documents may include voting by the 
trustee in accordance with fiduciary principles, voting by the trustee 
to mirror the vote for directed shares, and refraining from voting the 
shares on the assumption that the employee intended to cast a no vote.

[12] For defined benefit plans, plan assets are typically 
institutionally managed by an external asset manager. The external 
asset manager also has the responsibility to vote the proxies unless 
that responsibility is retained by the plan trustees. For defined 
contribution plans, pension plan participants may have the 
responsibility to vote the proxies for the shares of their own 
company's stock in their 401(k) plan account. This called pass through 
voting, which is required for a plan to receive Section 404(c) relief 
with respect to the investment in company stock. It is at the plan's 
discretion to permit pass thru voting to participants, though most 
defined contribution plans are designed to comply with Section 404(c).

[13] This includes company stock held in defined contribution plans 
(including ESOPs) and defined benefit plans, or indirectly through 
certain trusts, accounts, and other investment arrangements. This also 
includes allocated and unallocated stock.

[14] SEC found that DeAM violated Section 206(a) of the Investment 
Advisers Act of 1940 by failing to disclose to its clients any material 
fact about a potential or actual conflict of interest that may affect 
its unbiased service to its clients. 

[15] According to the January 1990 interpretive letter to the 
Institutional Shareholder Services Inc., DOL advised that the named 
fiduciary must be able to comprehensively monitor proxy voting 
activities of the investment (or asset) manager so as to make an 
informed determination as to whether the investment manager has met its 
fiduciary obligations. Thus, the named fiduciary must have access to, 
and the investment manager must maintain accurate records of, the 
investment manager's voting procedure and actions taken in specific 
cases.

[16] See DOL Interpretive Bulletin 94-2 and a March 20, 1997 
interpretive letter to Kirkland & Ellis with respect to the scope of 
the disclosure requirements of Section 104(b)(4).

[17] Voting with management is not necessarily against the interests of 
participants and beneficiaries. In some cases, voting in favor of a 
management proposal would benefit participants. As with any proxy 
decision, the vote should be based on analysis and should be made 
solely in the interest of participants.

[18] Under defined benefit plans, the employer, as the plan sponsor, 
bears the investment risk as well as those risks associated with voting 
proxies. 

[19] This rule applies to all investment advisers registered with SEC 
that exercise proxy voting authority over client securities. 

[20] This new rule also requires that the written policies and 
procedures for voting client proxies must be reasonably designed to 
ensure that the adviser votes client securities in the best interests 
of the clients, to disclose to clients how they may obtain information 
about those policies and procedures, and to disclose to clients how 
they may obtain information on how the adviser has voted their proxies. 
The rule amendments also require advisers to maintain certain records 
relating to proxy voting. The rule and rule amendments are designed to 
ensure that advisers vote proxies in the best interest of their clients 
and provide clients with information about how their proxies are voted. 
This new rule also requires investment advisers to furnish a copy of 
written policies and procedures to clients upon request.

[21] DOL statistics show that the number of single employer and 
multiemployer defined benefit plans are on the decline, while the 
number of defined contribution plans being adopted is on the rise. The 
decline in defined benefit plans is attributed to the fact that fewer 
plans are being adopted, some employers are replacing defined benefit 
plans with defined contribution plans, and some defined benefit plans 
have been terminated.

[22] Many fund industry members supported the proposed amendments 
regarding the disclosure of policies and procedures. However, most fund 
industry members opposed the proposed amendments that would require 
disclosure of a fund's complete proxy voting record and disclosure of 
votes that are inconsistent with fund policies and procedures.

[23] The Sarbanes-Oxley Act was passed in 2002 and contained a number 
of corporate governance and accounting provisions in response to recent 
corporate scandals.

[24] A public pension plan is a pension, annuity, retirement, or 
similar fund or system maintained by a state or local government that 
provides a retirement benefit to the state or local government 
employee. Some of the largest pension plans in the United States such 
as the California Public Employees Retirement System and the New York 
City Employees Retirement System are public pension plans. These public 
plans are not governed by ERISA.

[25] Opponents to vote disclosure argued against the rules largely by 
arguing that disclosure would be prohibitively costly. However, in its 
final rule, SEC noted that several fund groups that currently provide 
disclosure of their complete proxy voting records to their shareholders 
commented that although there are start-up costs for compliance 
systems, this cost decreases over time, and that the overall costs of 
the disclosure are minimal. SEC found arguments made by funds that are 
providing this disclosure to be particularly persuasive and continue to 
believe that the costs of disclosure are reasonable.

[26] Ken Brown, "Vanguard Gives Corporate Chiefs A Report Card," Wall 
Street Journal, November 10, 2003. pg. C.1.

[27] DOL noted, however, that it filed amicus briefs in three proxy 
voting cases. In O'Neill v. Davis, 721 F.Supp. 1013, 1015 (N.D.I11. 
1989), a DOL amicus brief was instrumental in obtaining a holding that 
"the voting of Plan-owned shares by the Plan's trustees was a fiduciary 
act under ERISA, and one which the trustees were bound to exercise in 
the sole interest of the Plan participants." DOL also filed two amicus 
briefs in Grindstaff v. Green, 133 F.3d 416 (6TH Cir. 1998), where, 
over a strong dissent, the court rejected DOL's views on the extent to 
which ERISA's fiduciary duties attach to plan fiduciaries' voting of 
plan shares. DOL officials said that they also filed a brief on the 
voting of plan shares and exercise of other shareholder rights on 
plans' behalf in district court in Krause v. Columbia Quarry Co., 4:98 
CV 01373 ERW (E.D. Mo.), although that case wound up being decided on 
other grounds.

[28] Throughout this report, references to DOL's regular investigations 
refer to those investigations that are not specifically aimed at 
detailed reviews of proxy voting practices.

[29] The Form 5500 Returns are forms that most qualified retirement 
plans must file annually with the Internal Revenue Service.

[30] DOL can also seek removal of a fiduciary for breaches of fiduciary 
duty or seek other sanctions.

[31] See U.S. General Accounting Office, Pension Plans: Stronger Labor 
ERISA Enforcement Should Better Protect Plan Participants, GAO/
HEHS-94-157 (Washington, D.C.: August 8, 1994).

[32] Current U.S. Comptroller General David M. Walker was the Assistant 
Secretary of Labor for the PWBA from 1987 to 1989. The report was 
issued in March 1989. 

[33] The primary purpose of the Strategic Enforcement Plan is to 
establish a general framework through which EBSA's enforcement 
resources may be efficiently and effectively focused to achieve the 
agency's policy and operational objectives. 

[34] For example, in the area of tender offers, the Polaroid ESOP (or 
NationsBank) case was a major enforcement action brought by DOL in a 
case where DOL was able to show losses to the plan for fiduciary breach 
involving a failure properly to exercise shareholder rights (in that 
case, a failure to tender shares). See Harman v. NationsBank Trust Co. 
(Georgia) N.A., 126 F.3d 1354 (11TH Cir. 1997), reh'g denied, 135 F.3d 
1409 (11TH Cir.), cert. denied, 525 U.S. 816 (1998). Another 
enforcement action involving fiduciaries' misuse of shareholder powers 
was Martin v. Feilen, 965 F.2d 660 (8TH Cir. 1992), cert. denied, 506 
U.S.1054 (1993) (involving, in part, failure of plan fiduciaries to 
bring a shareholder derivative action).

[35] Plan year 2001 is the most recent year for which plan-specific 
Form 5500 data were available for our review.

[36] Fortune 500 companies are those representing the 500 largest 
corporations that are based in the United States, ranked in order of 
revenues. The Fortune 500 list is released annually in April. The 
rankings are based on reported revenues in corporate annual reports 
(10Ks) filed in the year leading up to January 31. Therefore, only 
public corporations and private corporations that voluntarily release a 
10K are included. For example, the April 2004 Fortune 500 list is based 
on revenues reported between February 1, 2003, and January 31, 2004.

[37] Not all 500 companies were included in our analysis. For example, 
some companies on the Fortune 500 are privately owned and, therefore, 
don't have publicly traded stock. Furthermore, there are a handful of 
companies that were on the Fortune 500 in 2001 but have since gone 
bankrupt, or are no longer public. This often made it difficult to find 
the appropriate data for those companies and when that was the case, 
they were eliminated from the analysis.

[38] An EIN, known as a federal tax identification number, is a nine-
digit number that the Internal Revenue Service assigns to 
organizations.

[39] Additionally, we included the employer securities held by master 
trust investment accounts associated with Fortune 500 benefit plans. A 
''master trust'' is a trust in which assets of more than one plan 
sponsored by a single employer or by a group of employers under common 
control are held. In such cases, a benefit plan reports the value of 
its interest in the master trust account and not any employer 
securities held by the master trust. Accordingly, we included employer 
securities reported by master trusts accounts held by Fortune 500 
benefit plans.

[40] We assumed that those shares held by the company and its pension 
plan(s) are common stock with one vote per share for computation of 
voting power. To the extent that assumption is inaccurate, our 
estimates for the voting power of plans in their own company might also 
be inaccurate.

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